U.S. REITs: Flight to Quality

 

net leaseThis year so far net lease retail has gotten a head start on being the best performing REIT sector. Realty Income, National Retail Properties, and Agree Realty have been the companies with top returns, ranging between 9% and 14%. Their rally, however, has decreased dividend yields, generating discontent from dividend investors who do not appreciate reduced yields.

Investors are turning to net lease because they tend to be less volatile than the financial markets. Realty Income, for instance, has a beta of 0.12 for the last 36 months. That is, when the S&P500 varies by 1%, the stock only varies by 0.12% on average.

Also, net lease retail has a good record of paying dividends year after year. Realty Income, National Retail Properties and Agree Realty have been distributing similar or increasing dividends for many consecutive years (18, 26 and 5 years, respectively).

In addition, landlords love net leases because they push costs of maintenance, taxes and insurance to the tenant. Landlords like the convenience of not having to spend time and money maintaining the property. In the end, they benefit from a leaner cost structure and more stable funds from operations.

For all the reasons that I mentioned above, the increasing demand for net leases can be interpreted as a flight to quality.

Single Family Homes

At the same time net lease retail is experiencing a thriving performance, single family homes have been the worst performing sector so far this year. Last year’s announcement of the merger between American Homes 4 Rent (AMH) and American Residential Properties (ARPI) didn’t seem to help their stock performance in 2016. Since January, both AMH and ARPI stocks have dropped by almost 15%.

During the fourth quarter, activist Land and Buildings have tripled their position on ARPI.  On 31 December 2015, ARPI represented Land and Buildings’ second largest investment and Land and Buildings were one of ARPI’s largest shareholders. We don’t know yet if the drop is associated with a potential exit of Land and Buildings, which have applauded the merger decision.

As to the newly formed Colony Starwood Homes, the stock has been holding up better. Their 2016 return has been virtually flat. They will release Q4 results this Monday.

This week’s performance

This past week was another good week for REITs. We saw some familiar faces as top performing stocks. For instance, NorthStar Realty (NRF) has climbed to the top after the company has announced the sale of various investments, as well as the creation of a special committee to explore the possibility of recombining with its external manager NorthStar Asset Management. NRF stocks went up by 23%.

NRF rally must have been a relief for shareholders following weeks of poor performance. Nonetheless, there is still a long way to go if the company really wants to regain its November prices.

Check the reports for Dividend Yield by Sector and Weekly Returns.

Source: Realty Income Corporation(NYSE:O), National Retail Properties, In(NYSE:NNN), Agree Realty Corp.(NYSE:ADC), NorthStar Realty Finance Corp.(NYSE:NRF), Northstar Asset Management Gro(NYSE:NSAM), American Residential Propertie(NYSE:ARPI), American Homes 4 Rent(NYSE:AMH), Colony Starwood Homes(NYSE:SFR), Yahoo!Finance, SEC, Fast Graphs, Land and Buildings

Disclaimer: This is not a recommendation to buy or sell stocks. The highest-yield stocks are not necessarily the best portfolio investment choice. The purpose of this report — which is essentially a snapshot of information available on February 26, 2016 — is to reduce your stock analysis by enabling you to compare stock and sector performance. Please do your own due diligence before making any investment decision.

As of January 31, 2016, the equity REITs are constituent companies of the FTSE NAREIT All REITs Index. Companies whose equity market capitalization is lower than $100 million have been disregarded.

This report is not engaged in rendering tax, accounting, or other professional advice through this publication. No statement in this issue is to be construed as a recommendation to buy or sell any security or other investment. Some information presented in this publication has been obtained from third-party sources considered to be reliable. Sources are not required to make representations as to the accuracy of the information, however, and consequently the publisher cannot guarantee accuracy.

Disclosure: The author has no positions in any shares mentioned, and no plans to initiate any positions within the next 72 hours.

The Truth Must Be Told: Industrial REITs Have Not Been a Breeding Ground to Harvest Hefty Dividends

chart01Last November, we asked ourselves why First Industrial had not been generous enough with its shareholders. Although the dividend has grown at a double digit every year since it was reinstated in 2013, the dividend yield was way below its peers; in fact, it is one of the lowest among equity REITs. For the fourth quarter, the company decided to correct this situation and its dividend has gone up by almost 50%.

The company’s quarterly dividend rate went up from $0.13 to 0.19, equalizing an annualized yield of 3.7% with the sector median. Its previous yield was on par with the 10-year U.S. Treasury yield, likely the most obvious reason why management decided to bump it up. Also, the AFFO payout was below 60%, which made room for aggressive increases.

chart02.png The truth must be told: Industrial REITs have not been a breeding ground to harvest hefty dividends. Except for STAG Industrial, Liberty Property Trust, and Monmouth Real Estate Investment Corporation, all others have yielded below the equity REIT average. STAG Industrial has been the most popular for investing in secondary and tertiary markets. First Industrial, in turn, invests in the top industrial real estate markets in the U.S.

First Industrial went through tough times during the great recession, turning itself very stringent about dividend distributions. Its share price reached the bottom at $1.91 on March 03, 2009, after reaching its all-time peak of $50.52 in November 2006. On March 31, 2009, its total debt to total market capitalization reached 84%. Its FFO per share plummeted in 2008 and went negative in 2010. For that reason, liquidity has become an important component of its strategy. In 2009, they announced that they would distribute the minimum amount of dividends required to maintain the REIT status.

chart03.png Fast forward to December 31, 2015, and the situation had completely changed. Its share price had surpassed $20. Its total debt to total market capitalization had plummeted to 36% and last September the company was granted investment grade status by Standard & Poor’s. That recognition must have also encouraged the company’s decision to make the dividend policy less stringent.

Last year, First Industrial stock performed well. Its total return was just under 10%, which was better than most of its peers. Only PS Business Parks and Terreno did better than First. Since management expects its FFO per share will increase by 15% in 2016, there’s a good chance that the company can continue its stock performance in 2016. In terms of AFFO multiple, the company is comparatively cheap. While the peer average is 18x, First has been trading at 16x. It is not as blatantly cheap as STAG (which is trading at 11x), but there’s certainly room for appreciation.

The only caveat is that First shares tend to be as volatile as the market. In 2016, we’ve seen a significant drop of 5%, a bit more than S&P500’s drop of 7%. Given that the Q4 results last Friday were strong, this could be a good entry point.

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Source: First Industrial Realty Trust(NYSE:FR), Fast Graphs

Disclaimer: This newsletter is not engaged in rendering tax, accounting, or other professional advice through this publication. No statement in this issue is to be construed as a recommendation to buy or sell any security or other investment. Please do your own due diligence before making any investment decision. Some information presented in this publication has been obtained from third-party sources considered to be reliable. Sources are not required to make representations as to the accuracy of the information, however, and consequently the publisher cannot guarantee accuracy.

Disclosure: The author has no positions in any shares mentioned, and no plans to initiate any positions within the next 72 hours.

What Can We Learn From HCP?

chart01In 2015, HCP recorded a $1.3 billion impairment related to their HCR ManorCare investments. HCR ManorCare, their biggest tenant in the post-acute/skilled nursing segment, has experienced deteriorating operational performance due to changes in reimbursement rules. Also, the U.S. Department of Justice has sued HCR ManorCare on the grounds that they had filed claims to Medicare for services not needed by their patients.

Although the litigation is at an early stage, this is nonetheless a reminder to investors who invest in skilled nursing facilities (SNFs) through healthcare REITs that their investments tend to be reliant on Medicare and Medicaid reimbursement. As a result, changes in Medicare and Medicaid reimbursement can have enormous consequences for their investments, which can catch them by surprise.

How Can You Evaluate Healthcare REITs Investing in SNFs?

Before evaluating healthcare REITs that invest in SNFs, it is important to mention some of the background. In brief, Medicare and Medicaid reimbursement rates tend to increase over time, as shown by how average Medicare reimbursement rates rose from $408 per day in 2008 to $484 per day in 2014 while average Medicaid reimbursement rates rose from $164 per day to $186 per day across the same period of time according to Eljay LLC and CMS. This means that SNFs possess potential in the long run, though the same cannot be said in all periods of time.

If you are interested in investing in SNFs through healthcare REITs, there are some simple ways to evaluate your potential investments:

* The Centers for Medicare and Medicaid Services post updates such as the payment rates for 2016, meaning that it can be worthwhile for investors to monitor their website. While its updates can have a wide range of effects on SNFs, most may not prove pleasing to investors because it has an unsurprising interest in ensuring that the costs of Medicare and Medicaid are as low as possible.

* Some SNFs have slimmer margins than others, meaning that a negative occurrence can hurt them and thus their investors more than competitors. One way to avoid such SNFs is to examine their EBITDAR coverage ratio, which is their earnings before interest, taxes, depreciation, amortization, and rent divided by rent costs. A higher coverage ratio means that a SNF is more resilient in the face of negative occurrences because it has the earnings needed to tough them out.

* Occupancy is a useful figure for telling whether a SNF will be profitable or not because each occupied unit is a unit that is earning revenue for the SNF. There is a problem in that the occupancy at which a SNF becomes profitable is not the same from SNF to SNF. However, it is very much possible to compare occupancy from year to year for the same SNF, meaning that a rising occupancy is a positive sign for its profitability.

* Finally, check whether a healthcare REIT has all of its investments in the same state or has taken the proper precautions by spreading them out. You should avoid healthcare REITs that cannot be bothered with diversification because a statewide change for the worse can hammer their figures, which is particularly problematic because state governments can have significant influence over Medicaid spending.

Source: HCP, Inc.(NYSE:HCP), Ventas, Inc.(NYSE:VTR), CMS

Disclaimer: This newsletter is not engaged in rendering tax, accounting, or other professional advice through this publication. No statement in this issue is to be construed as a recommendation to buy or sell any security or other investment. Please do your own due diligence before making any investment decision. Some information presented in this publication has been obtained from third-party sources considered to be reliable. Sources are not required to make representations as to the accuracy of the information, however, and consequently the publisher cannot guarantee accuracy.

Disclosure: The author has no positions in any shares mentioned, and no plans to initiate any positions within the next 72 hours.

Something that we haven’t seen for quite a while

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Download our Dividend Yield Report. 

It’s been a very good week for equity REITs, something that we haven’t seen for quite a while. Virtually all stocks went positive. In fact, a mere 8 out of the 174 we track had a negative performance. On average, stocks saw a 4.2% increase, higher than the S&P500. We had several stocks that closed the week with a two-digit growth.

Last week, in anticipation of the release of the Q4 results, investors discovered some stocks that had been undervalued and went on a buying spree. Last week’s top three performers, Monogram Residential Trust (apartments), Pebblebrook Hotel Trust, and Sabra Health Care REIT, will soon be releasing results this week. Other top performers included lodging and timber REITs, as well as CorEnergy Infrastructure Trust, which had been one of the most volatile among equity REITs.

At the same time Monogram stock spiked by 6% on Friday, Madison International Realty, a global real estate investment company and current stockholder in the company, disclosed their potential interest in the acquisition of assets. I’m not sure how or even if they are related, but this stock has seen a lot of activity over the past week. Monogram stocks increased by 13%, topping the list as our best performing stock of the week. On the surface, their stock seems to be overpriced since AFFO multiple has reached 21x. As for Pebblebrook and Sabra, their stocks seem to be a bit underpriced.

The sectors that exceled last week were lodging, healthcare, and self-storage. The first two have certainly been battered this year, so it is understandable that there would be some type of reaction above the market average. The median return for both was between 6-7%, but they will still enjoy one of the highest dividend yields among REITs.

On the other hand, self-storage seems to be unstoppable, bordering on irrational exuberance. Public Storage released strong results last Tuesday and their stocks soared by 8%. Its AFFO multiple is very close to the 30s. Sovran Self Storage and CubeSmart also released the Q4 results and their guidance for AFFO growth has been strong. These two stocks have AFFO multiples in the 20s. The truth is that self-storage hasn’t been a sector to find yields. Stocks have fared well, but yields have been below the REIT industry average.

CubeSmart’s growth was spectacular in the fourth quarter. Their FFO share increased by 18% year over year and same-store net operating income growth reached 11%. The company will not be able to keep up this growth in 2016, but the guidance for next year’s growth rates is still very good. FFO per share growth should grow by 10% and same store NOI by 8%.

As for Public Storage, the largest in this sector, their Core FFO per share increased by 11% in the fourth quarter year over year. The company also touched upon market supply, which appears to be growing at 2-2.5%, and even more in highly populated states, including Texas and Florida, where we expect a decrease in rental rates at some point. However, the company wasn’t able to say when the sector as a whole would be affected by oversupply.

Check the reports for Dividend Yield by Sector and Weekly Returns.

Source: CubeSmart(NYSE:CUBE), Monogram Residential Trust, In(NYSE:MORE), Public Storage(NYSE:PSA), Sovran Self Storage Inc.(NYSE:SSS), Pebblebrook Hotel Trust(NYSE:PEB), Sabra Health Care REIT, Inc.(NasdaqGS:SBRA), SEC, Fast Graphs

Disclaimer: This is not a recommendation to buy or sell stocks. The highest-yield stocks are not necessarily the best portfolio investment choice. The purpose of this report — which is essentially a snapshot of information available on February 19, 2016 — is to reduce your stock analysis by enabling you to compare stock and sector performance. Please do your own due diligence before making any investment decision.

As of January 31, 2016, the equity REITs are constituent companies of the FTSE NAREIT All REITs Index. Companies whose equity market capitalization is lower than $100 million have been disregarded.

This report is not engaged in rendering tax, accounting, or other professional advice through this publication. No statement in this issue is to be construed as a recommendation to buy or sell any security or other investment. Some information presented in this publication has been obtained from third-party sources considered to be reliable. Sources are not required to make representations as to the accuracy of the information, however, and consequently the publisher cannot guarantee accuracy.

Disclosure: The author has no positions in any shares mentioned, and no plans to initiate any positions within the next 72 hours.

HCP needs a Hazard Control Plan

chart01Last week, the healthcare real estate investment trust (REIT), HCP, the only REIT in the S&P 500 Dividend Aristocrats index, scared the hell out of investors, when it dropped by 17%. Its fourth quarter results included an $817 million noncash impairment that led to a negative FFO per share of 0.99. In isolation, for a noncash impairment that represents less than 3% of its total capitalization value, it goes without saying the financial markets have overreacted. Yes, the market has been very unstable, but, in this case, investors may be showing signs that they are tired of the developments behind the impairment.

The cause of the impairment can be traced back to HCR ManorCare, a top tenant focused on post-acute/skilled nursing facilities (SNF) for those not requiring the more intensive treatment, has seen its operational performance deteriorate. In light of this situation, HCP decided to project reduced future lease payments, which decreased the fair value of the related direct financing leases (based on the present value of the future lease payments).

chart02  The fact that HCR ManorCare’s rental rates are under direct financing leases (DFL), rather than operating leases, is an important accounting aspect. Unlike DFLs, the reduction of future operating leases wouldn’t lead to impairments. Consequently, if HCR ManorCare had been operating leases, the impairment and negative FFO wouldn’t have occurred and perhaps, the market wouldn’t have been scared as much. Regardless of the accounting aspect, the main takeaway is that HCP’s cash flow will be decreased.

This isn’t the first time HCP has been hit by an impairment charge. In the first quarter 2015, they recorded an impairment charge of $478 million because HCP and HCR ManorCare amended the original lease, reducing the rental payments by more than 10%. There were also minor impairments associated with HCR ManorCare in the fourth quarter of 2014 and the third quarter of 2015.

The US Department of Justice (DOJ) has been severely scrutinizing Medicare reimbursements to HCR ManorCare, which relies heavily on government reimbursement programs. In April of 2015, the DOJ filed a complaint reporting that HCR ManorCare had requested Medicare reimbursements they were not eligible for. The complaint also reported that the company consciously increased Ultra High billing, the highest daily rate for Medicare, from 39% in October 2006 to 81% in February 2010 (percent of all days that it billed for rehabilitation therapy). The complaint is still under investigation.

chart03 HCP is well aware of its dependency on top tenants. HCR ManorCare accounts for 23% of HCP’s total revenue. HCP has been working with HCR ManorCare to sell 50 non-strategic assets and have managed to sell 21 facilities so far. In addition to HCR ManorCare in SNFs, Brookdale is also a major tenant in senior living whose revenues represent 10% of the total.

The main thing to take away from this is that HCR ManorCare’s problems are far from over and new impairments could easily happen again, especially if the company has to make more adjustments to their billing. The worst outcome, of course, is bankruptcy. For HCP, the best thing to do now is focus on protecting itself even more.

Source: HCP, Inc.(NYSE:HCP), Yahoo!Finance, US Department of Justice (DOJ)

Disclaimer: This newsletter is not engaged in rendering tax, accounting, or other professional advice through this publication. No statement in this issue is to be construed as a recommendation to buy or sell any security or other investment. Please do your own due diligence before making any investment decision. Some information presented in this publication has been obtained from third-party sources considered to be reliable. Sources are not required to make representations as to the accuracy of the information, however, and consequently the publisher cannot guarantee accuracy.

Disclosure: The author has no positions in any shares mentioned, and no plans to initiate any positions within the next 72 hours.

Simon Spoiled Taubman’s Mall Project

Last Friday, some investors in the financial markets were disappointed at the Q4-2015 results of Simon Property Group, a huge regional mall REIT ($58 billion market cap), but in the world of brick and mortar, that may not be the case. Simon looks to have beaten Taubman Centers’ ($4 billion market cap regional mall REIT) plan to open an enclosed shopping mall in downtown Miami. Taubman is instead settling for a high end retail street.

chart03.pngAlong with Miami Worldcenter Associates and Forbes Company, Taubman intended to construct a 765,000 square foot mall which was fully enclosed. While retail, dining and entertainment were to be key, over 40% of the mall was set to be dedicated to Bloomingdale’s and Macy’s. Included in the plan was a pedestrian-only street which featured multiple restaurants and shops on 7th street, which led directly to the American Airlines Arena. A press release on Jan 11 stated that the mall project had been discarded, and in its place would be a high end retail street, positioned south to north between 7th and 10th streets.

chart04.pngSimon planned to construct an open-air shopping center simultaneously in downtown Miami. The luxury mall is to be 500,000 square feet, and complete with high-end retailers along with plenty of dining and entertainment facilities in the Brickell neighborhood. Part of the project has already been finished and is to open this year. Local developers have been developing the project with Simon. Both projects are mixed-use and also include offices, hotels and residences.

chart05.pngTaubman’s decision strikes many as yet another signal that the idea of a mall no longer works in America. Cities have become increasingly urbanized and, along with the growth of online shopping and the boost to high street shopping, malls have become marginalized. But while Taubman is looking to expand overseas, and in particular to Asia, it’s unlikely that they will scrap future mall projects in the U.S. This scenario appears to be just a downtown Miami battle between two competitors.

chart02Due to recent selloffs, some regional malls REIT stocks have returned poorly, whereas others have been holding better. Simon has been the latter. Following the release of its results on Friday, Simon stocks dropped, but they quickly rebounded. Simon’s Q4-15 funds from operations have fallen in comparison with Q4-14. Also, occupancy dropped by 100 basis points. Despite this result, vacancy levels for malls in general have trended downwards.

The regional malls REITS that have higher sales per square foot have been doing better. Macerich, Taubman, Simon and General Growth average an AFFO multiple of 24x. In contrast, Rouse Properties, Pennsylvania Real Estate, WP Glimcher and CBL & Associates are languishing badly with an AFFO multiple of just 11x.

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As a result of the project change, Taubman’s share price fell for days after the announcement was made. Taubman trades at 27x yield at 3.2%, which is the highest AFFO multiple among its peers.

chart06Source: Taubman Centers, Inc.(NYSE:TCO), Simon Property Group Inc.(NYSE:SPG), General Growth Properties, Inc(NYSE:GGP), WP GLIMCHER Inc.(NYSE:WPG), Pennsylvania Real Estate Inves(NYSE:PEI),The Macerich Company(NYSE:MAC), CBL & Associates Properties In(NYSE:CBL), Rouse Properties, Inc.(NYSE:RSE), Yahoo!Finance, Fast Graphs, Brickell City Centre, Miami Worldcenter, Reis

Disclaimer: This newsletter is not engaged in rendering tax, accounting, or other professional advice through this publication. No statement in this issue is to be construed as a recommendation to buy or sell any security or other investment. Please do your own due diligence before making any investment decision. Some information presented in this publication has been obtained from third-party sources considered to be reliable. Sources are not required to make representations as to the accuracy of the information, however, and consequently the publisher cannot guarantee accuracy.

Disclosure: The author has no positions in any shares mentioned, and no plans to initiate any positions within the next 72 hours.

Has Bluerock Been ‘Desperate’ to Grow?

chart01.pngIn addition to a 10 percent dividend yield, Bluerock Residential Growth, a $230 million market cap REIT, has favorable figures in both cash flow generation and profitability growth. When compared to the same quarter of last year, the company’s 2015 Q3 total revenue grew by an impressive 21 percent, property net operating income (NOI) increased 25 percent, same store NOI improved by 8.7 percent, and adjusted funds from operations (AFFO) grew 238 percent. That being said, upon analyzing the Q3 data further Bluerock certainly has been pushing the boundaries.

Bluerock’s distributions have either failed to been covered or are poorly covered depending on the metrics used. The dividend of $0.29 is larger than AFFO per share of $0.22. The company has stated that if they had previously invested the raised proceeds, the AFFO per share would have been $0.32 (pro forma AFFO). In this case, the dividend would be covered, but by not much. The information we would like to convey here is that, in order to sustain the high dividend yield, Bluerock must continue to grow and avoid raising dividends.

chart02.pngBluerock has also been aggressively diluting the shareholder base. For example, over the past twelve months the company has increased their number of common shares by nearly fourfold. Despite AFFO’s impressive growth, the share dilution has resulted in a 2015 Q3 AFFO per share equal to the prior year’s quarter. The bright side is that, if the company fulfills the entire growth potential (pro forma AFFO), the AFFO per share growth will be 45 percent. Not bad.

Bluerock enjoys a leverage ratio that is greater than most if its peers. The total debt to total enterprise figure has increased from 50 percent in Q2 to 56 percent in Q3. When compared to other Apartment REITs, with market capitalization between $200 and $400 million, 56 percent appears moderate since some peers are approaching 70 percent.

In conclusion, Bluerock’s growth does not seem very desperate when we analyze a step further into the numbers and look at it from other perspectives. The company is simply another small market cap REIT that is working hard to get their foot into the big leagues club’s door.

Source: Bluerock Residential Growth RE (AMEX:BRG), Fast Graphs

Disclaimer: This newsletter is not engaged in rendering tax, accounting, or other professional advice through this publication. No statement in this issue is to be construed as a recommendation to buy or sell any security or other investment. Please do your own due diligence before making any investment decision. Some information presented in this publication has been obtained from third-party sources considered to be reliable. Sources are not required to make representations as to the accuracy of the information, however, and consequently the publisher cannot guarantee accuracy.

Disclosure: The author has no positions in any shares mentioned, and no plans to initiate any positions within the next 72 hours.

U.S. REITs: Longest Dividend-Paying Stocks — Tanger Outlets

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Tanger Outlets has enjoyed an incredible combination of growth and track record. This shopping centers company has emerged as a top operational performing REIT in our US equity REIT ranking. In addition, shareholders have benefited from a 22 year history of either same or increased quarterly dividends. Although there are a plethora of experts that have recently predicted the demise of shopping centers, Tanger continues to not only survive, but also thrive by expanding their footprint. Just take a nice drive to a property and see it for yourself.

I have to say that shopping centers are not our preferred sector. The category is close to other retail sectors, including free standing, and regional malls, in terms of dividend growth potential. This refers to the potential of an average REIT, nothing more or less. Regardless, Tanger has an ideal profile for people that invest in dividend stocks.

chart02.pngSeveral long dividend-paying stocks have good records in our analysis. Many have accumulated twenty plus years of steady dividend payouts, however the benefits end there for several of them. Many of these same REIT stocks have an average or below average cash flow generation, or profitability. That being said it is fine to enjoy the benefits of a stock’s accomplishment, especially if they have durable dividends. Funding is less costly providing them with access to better deals, and management is more commitment to making the dividend payments. With Tanger Outlets investors can actually have both.

For example, the company’s Q3 performance has been on par with their Q2 figures. Funds from operations (FFO) per share have increased by 13 percent year over year versus 15 percent in Q2. The dividend is still 19 percent higher than it was last year, and the 2015 FFO per share is expected to gain 20 percent.

Although the stock appears to be fairly priced, (price to FFO 15.5x versus the sector median of 16.3x), and dividend yield is at 3.4 percent, which is on the low side for a REIT, it is actually down 16 percent from its peak last January.

Source: Tanger Factory Outlet Centers, Inc. (NYSE:SKT) 

Disclaimer: This newsletter is not engaged in rendering tax, accounting, or other professional advice through this publication. No statement in this issue is to be construed as a recommendation to buy or sell any security or other investment. Please do your own due diligence before making any investment decision. Some information presented in this publication has been obtained from third-party sources considered to be reliable. Sources are not required to make representations as to the accuracy of the information, however, and consequently the publisher cannot guarantee accuracy.

Disclosure: The author has no positions in any shares mentioned, and no plans to initiate any positions within the next 72 hours.

Multifamily REITs – Expensive Becomes More Expensive

chart01Whenever I hear news reports regarding the U.S. rental market, whether urban legend or not, I tend to remember stories about people sleeping in their cars and showering at companies based in the San Francisco Metro Area. Recently the world has learned that the same principles apply to Washington, D.C. Speaker of the House, Paul Ryan, admitted that he sleeps at his office, and showers at the gym. Well, the next thought that comes to mind is that of Essex Properties Trust.

chart03There are not many multifamily REITs that have the ability to enjoy tailwinds as well as Essex. This Palo Alto, California-based company primarily invests in the same state that it is based out of. Essex has surfed the wave of the housing rental industry with high-end apartments. The company’s success has been fueled by a combination of millennials postponing their first home purchase, shortage of supply, and a presence in housing markets that enjoy high levels of job creation. There is no wonder that Essex made it to the top in our Q2 US equity ranking amongst apartment REITs.

Q3 Performance

Year over year Q3 figures are once again proof as to why this company shines in the sector. Essex has shown a 15 percent increase in Core FFO per share, 10 percent growth in same property net operating income, 12 percent bump in total revenues, and an 11 percent rise in their dividend per share. In summary, these figures are extremely similar to the results in Q2 that catapulted the company to the top.

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Locations

Essex owns and operates 245 properties totaling 58,000 homes that are divided into three areas: Southern CA, Northern CA, and the Seattle, Washington Metro Area.

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Multifamily Fundamentals

The company’s multifamily fundamentals could not be any better for businesses that operate on the West Coast. There have been several recent reports that name Florida metro areas as the best place for job growth, however not all jobs are equal especially in salaries. That being said, San Jose, CA has emerged as a region with one of the highest paying job creation potential.

chart04The cities in which Essex operates have been flagged as areas where demand is greater than supply. There do not seem to be any signs that this will change anytime soon. For example, many of the most expensive single-family home prices are in San Francisco, San Jose, and Oakland. Coldwell Banker formulated a list of the most expensive housing markets in 2014, and an incredible 9 out of 10 were in California. Renting as opposed to purchasing homes in those areas simply makes sense at this time.

When compared with its peers, Essex enjoys the highest same store net operating growth. In Q2, the company shared that title with Trade Street Residential, however that company was acquired by Independence Trust Realty in Q3 this year.

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Debt Profile

In most cases higher levels of leverage are linked to larger levels of default, however this is not a problem for Essex. The company certainly has a great debt profile with a total debt to total capitalization of 26 percent, one of the lowest in the apartment sector. Essex maintains the majority of its debt fixed to in order to reduce interest rate sensitivity. In addition, a significant portion of the debt is unsecured. The company has received investment grade ratings by three credit agencies, and last June Standard & Poor’s reaffirmed their BBB rating, “The outlook is positive. We believe favorable multifamily fundamentals will persist over the near term, with steady demand and manageable new supply in most of Essex’s core markets.”

Threat

A potential tech bubble burst may pose a threat to multifamily properties in Northern California, an area that generates approximately 40 percent of Essex’s net operating income. At last week’s NAREIT conference, Essex made the case for themselves that consolidated industry giants such as Google, Apple, and Cisco create far more jobs than billion dollar startups. Following that thought, analysts that are concerned about the strength of the fundamentals should shift their focus away from the riskier tech companies and towards the more mature.

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Valuation

Essex’s stock yield is currently at 2.5 percent, which is below the sector median of 3.5 percent. The stock does not appear to be attractive, however it needs to be taken into consideration that its total return is close to 12 percent year to date. Having invested in a low yield stock is not necessarily a bad thing after all.

Essex’s price-to-FFO, a P/E for REITs is 24x, higher than most of the company’s peers. This is a sign that Essex has been able to weather the storm of the REIT selloffs.

Takeaway

The apartment sector has been a top performer in terms of cash flow and profitability. Essex Properties have been one of the sector’s most coveted representatives. What was an expensive stock has become more expensive. Despite a high valuation and low yield, the company has been able to deliver stellar performance to its shareholders.

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Source: Fast Graphs, Essex Properties Trust (NYSE:ESS)

Disclaimer: This newsletter is not engaged in rendering tax, accounting, or other professional advice through this publication. No statement in this issue is to be construed as a recommendation to buy or sell any security or other investment. Please do your own due diligence before making any investment decision. Some information presented in this publication has been obtained from third-party sources considered to be reliable. Sources are not required to make representations as to the accuracy of the information, however, and consequently the publisher cannot guarantee accuracy.

Disclosure: The author has no positions in any shares mentioned, and no plans to initiate any positions within the next 72 hours.

Which is Performing Better, First Industrial or Terreno Realty? (Part 2/2)

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Click here if you haven’t read Part 1.

First Industrial and Terreno Realty have been two of the few stocks in the industrial sector that performed in a positive manner year to date. For example, STAG Industrial has decreased by 22 percent this year, Terreno has returned a positive 6.4 percent and First Industrial has returned a positive 3.2 percent. Terreno’s total return is at 11 percent while First Industrial is at 7.1 percent, both strong figures.

Both companies have a strong debt profile. Although First Industrial’s total debt to total capitalization is greater than Terreno Realty’s (38 vs. 28 percent), they are within the sector range. Three credit agencies have rated First’s senior unsecured notes as investment grade.

This is what Standard & Poor’s said about First Industrial’s recent upgrade in September,

“We are raising our corporate credit rating on First Industrial to ‘BBB-‘ from ‘BB+’, driven by strong recent operating performance and improving credit metrics, which we believe are sustainable based on favorable industrial real estate demand.”

Also in September, Terreno closed a large private placement of $100 million in senior unsecured notes at average interest rates lower than First Industrial’s.

Investors have been underwhelmed by First Industrial’s lower dividend yield of 2.4 percent. This is not much greater than a ten-year yield, and is far below the sector median’s 3.7 percent.

On the other hand, First Industrial does have one of the most conservative dividend payouts in the segment. This translates into the fact that the company could easily position itself on par with their peers. First Industrial has kept their dividend payout to Adjusted FFO under 50 percent all along.

chart06In addition, First Industrial has shown generosity by increasing growth rates since it reinstated dividends in 2013. The Q3 dividend is 24 percent higher than the same quarter last year. Still, investors wonder whether management has failed to be generous enough. The company did not make any dividend distribution from 2009 to 2013.

In the end, we have yet to detect a clear winner, although our scorecard has shifted towards Terreno. If you are willing to take a larger risk for the potential reward of a higher yield, then Terreno may be the way to go.

Source: First Industrial Realty Trust (NYSE:FR), Terreno Realty Corporation (NYSE:TRNO), STAG Industrial (NYSE:STAG), Standard & Poor’s

Disclaimer: This newsletter is not engaged in rendering tax, accounting, or other professional advice through this publication. No statement in this issue is to be construed as a recommendation to buy or sell any security or other investment. Please do your own due diligence before making any investment decision. Some information presented in this publication has been obtained from third-party sources considered to be reliable. Sources are not required to make representations as to the accuracy of the information, however, and consequently the publisher cannot guarantee accuracy.

Disclosure: The author has no positions in any shares mentioned, and no plans to initiate any positions within the next 72 hours.