The Dividend Prospects of this Student Housing REIT

 

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A student housing REIT named American Campus Communities has experienced a recent fall in its funds from operations (FFO) per share, which is basically the cash flow from its operations calculated by adding both amortization and depreciation back to its earnings. As a result, it should come as no surprise to learn that some of its investors have become concerned about its dividends even though it has been paying either similar or higher dividends for 11 years straight now, which is an impressive record that most REITs cannot match.

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On the surface, it would seem that these investors are correct to be concerned about American Campus; however, the company is experiencing a period of significant appreciation, which can be seen through its metrics. Industry wise, student housing has seen a falling capitalization rate and a vanishing premium versus multifamily residences, which are significant on their own, but become much more when taken in at the same time.

chart03For starters, its adjusted funds from operations (AFFO) multiple is closing in on 20x, which suggests that it is one more in a long list of overvalued residential REITs. Furthermore, it has had a below-average dividend yield of 3.4%.

With that said, not all is lost, particularly since American Campus seems to have been putting its resources to excellent use in preparing for the future. For example, it has been selling older student housing that are situated further from the campuses in preference for focusing on newer and more convenient student housing, which is obviously more attractive from the customer’s point of view. Similarly, it has been using the cash raised from the recent issuance of 18 million shares to pay down its outstanding debt, so much so that its ratio of net debt to EBITDA has fallen from 7.4x to 5.6x, which is so impressive that S&P has upgraded its credit rating from BBB- to a much more respectable BBB.

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Although it is not guaranteed that American Campus will prosper in the future, their moves are nonetheless encouraging, particularly since the student housing market still retains enormous potential. After all, the successful management of student housing needs specialized expertise and experience from specialist REITs such as American Campus, meaning that investors are more interested in entrusting their investments to them than banking on new ventures. Combined with the fact that the student housing market is enormous as well as the fact that the REIT should be more than capable of covering its expected dividends (payout ratio is 58%), there are no signs that American Campus plans to break its streak anytime soon.

Source:American Campus Communities, I(NYSE:ACC)

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.

This Data Center REIT seems to have turned the page; is it time to buy?

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After saying last February that it was not raising equity, DuPont Fabros came back to the financial markets this year in mid-March to fund its development projects. The good news is that the company managed to raise about 10% of shares outstanding. Following last year’s events, the company has regained market confidence and is now on track to resume expansion. DuPont is not really a company for dividend chasers; although it is like any other REITs that distribute dividends, this is a company for those individual REIT investors who are looking for growth.

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At the beginning of last year, DuPont bumped into a major roadblock, leading its share price to drop by 20% from its 2015 peak. The drop was an exception in a thriving sector, where last year, peers enjoyed exuberant returns. One of DuPont’s top tenants filed bankruptcy in February, leaving the company to face possible vacancies. Vacancies dropped to the lowest percentage in any of their previous years; however, they were able to quickly reverse the problem and reached their highest occupancy rate at 96%.

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There are good things going on for DuPont. What I like about DuPont is that their new CEO, Christopher Eldredge, has demonstrated leadership to move the company out of their tumult. The company has shown signs that they have moved past last year’s issues; however, they still have conditions they need to catch up on in terms of peers’ share performance. Especially in the first years of his leadership, Eldredge does not wish the company to be left behind by its peers.

In fact, the company raised more than originally proposed. They have plans to retire some debt and invest in secondary markets (Portland, Phoenix) and internationally (Toronto). From a dividend point of view, DuPont has the second longest dividend-paying record after Digital Realty. It has paid similarly or increasing dividends for the past six years (versus 11 years for Digital). In late 2015, the company increased its quarterly dividend by 12%, still leaving a comfortable AFFO payout of 66%.

chart03Serving purely wholesale customers, DuPont benefits from higher margins (highest EBITDA margin) and low administrative costs (lowest percentage of S&A). They have made lower investments as opposed to retail and they see prices increasing. They see market growth exploding in wholesale, and for that reason, they remain committed to it. They put up for sale a data in New Jersey, which is not as on-demand for their clients are requiring lower cost markets.

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The other side of the coin is that their tenant base is highly concentrated. Microsoft, Facebook, and Rackspace account for more than one-half of its annualized-based rent. The company downplays this saying that, as a consequence, two-thirds of the revenue is from investment grade or equivalent customers. I would still say that tenant concentration is a delicate issue and still poses risks for them; it can bite them in the future just as it did in 2015. For that reason, I’d not expect their multiples to fly really high.

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Definitely, whoever invests in data center REITs is looking for upside, not only dividend yields. Not surprisingly, all data center REITs, including DuPont, have yielded below average. In fact, DuPont presents the highest yield in the sector, and given its strength, I find it hard to believe that they will cut dividends in the short, midterm. In terms of valuation metrics, DuPont has been one of the lowest, so certainly the share price has upside.

Source: DuPont Fabros Technology, Inc.(NYSE:DFT), 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.

 

Energy REIT Accused of Self Interest

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Amid an energy price nightmare, an interesting development occurred during CorEnergy Infrastructure Trust fourth quarter earnings call last week. An analyst from EverStream Capital told the company’s management team that they were acting irresponsibly in favor of themselves, and their actions were detrimental towards the interests of shareholders and bondholders alike.

The analyst was referring to the management team’s controversial strategy to allocate capital. Even though CorEnergy’s funding has been at a higher cost, the company plans to continue making new investments at lower returns. The company grows its total assets under management and consequently increases fees to its external manager Corridor.

This an excerpt of the call:

Analyst, “Looking at the press release you guys say that you are evaluating a broad set of acquisition opportunities in the $50 million to $250 million range. In the presentation you say CorEnergy historically targets acquisitions with returns of 8% to 10%. Right now you have got stockholders who are getting a 20% yield on their shares. You got bondholders who are at a 17% yield to maturity on your senior unsecured debt. So how could you justify a new investment that’s going to be at a higher cost and a lower return than either buying back your stock or buying back your debt?”

Management, “These are transitory times in the market for our capital instruments in our view and we don’t have a significant amount of liquidity available to us. So to shrink the company now rather than deploy the capital in accordance to our plans might be a short-term somewhat anti-dilutive event for the remaining shareholders. It also doesn’t help us diversify our asset base which the short we think is an important consideration in the long run.”

Investors that follow our weekly updates are well aware of the fact that their stock has been on a gigantic roller coaster since share prices plummeted in early December of 2015. The company’s AFFO multiple has gotten even worse. It is currently hovering in the high 4’s. At this time last year, the exact same multiple was at 11x. In addition, CorEnergy’s dividend yield, of 18%, has been amongst the highest in the equity REITs sector. This is by far one of the most distressed stocks in our entire REIT roster.

Although CorEnergy has continued to make dividend payments on a regular basis, the company is certainly in a world of trouble. The company’s two main tenants Ultra Petroleum and Energy XXI have struggled to stay in business due to lower energy prices. Both tenants have even publicly entertained the distinct possibility of seeking bankruptcy protection under Chapter 11.

CorEnergy’s management has argued multiple times that the potential bankruptcy of their tenants will not necessarily lead to an interruption of their leases.

They go on:

Management, “I think diversification that reduces risk across our portfolio is constructive. Small-cap stocks have trouble developing long-term shareholder followings and so to reduce our base of equity outstanding would be potentially detrimental in the long run and we only have availability under our stock repurchase program for $10 million in any event”

Analyst, “what you are laying out to the market is we don’t care, when we have 17% or 20% available to us, we would rather extend more leverage for the possibility of an 8% to 10% return. And we feel that that is irresponsible and we just don’t think it’s justified at all”

If the number of analyst on the Q4 earnings call is indicative of the company’s institutional investor support, then the company should be justifiably concerned about making new investments and getting bigger to attract more investors. There were a total of two analysts on that call. You also need to take in account that CorEnergy is a small cap REIT, a market cap south of $200 million.

We most definitely see this stock’s performance as a tossup that mostly relies on how the energy industry will fare in the future. Major industry forces have driven down CorEnergy’s performance. It is now the responsibility of the company to find a method of enduring these ups and downs for as long as they can.

Regarding management’s asset expansion in order to diversify their tenant base, diversification has been a solid strategy in the world of REITs. However, when shares are under stress, this may prove to be an enormous mistake.

Source: CorEnergy Infrastructure Trust(NYSE:CORR), Seeking Alpha, 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.

Are There Safe Dividends in Hotel REITs?

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Sometimes, people are more interested in receiving regular dividends from their investments than the other potential benefits of their investments. Unfortunately, if they are interested in receiving regular dividends from their investments, hotel REITs are probably not the best choices, as opposed to retail, healthcare or residence, though it should be mentioned that Hersha Hospitality Trust is an exception to this rule.

In short, hotel REITs don’t include many long dividend paying companies. Maybe because the short leases of hotel tenants (also known as ‘daily rates’) make hotels one of the most volatile REIT sectors. For example, hotel REITs such as FelCor Lodging Trust and Pebblebrook Hotel Trust tend to have betas that are higher than 1.0, meaning that their prices move more than the S&P500. This is particularly notable because REITs, especially the ones with safest dividends, tend to have betas lower than 1, meaning that their prices move less than the broad stock indexes.

chart02Furthermore, it should be mentioned that a lot of hotel REITs fall in extremely competitive segments, which include but are not limited to upper-upscale, upscale, and even midscale because new competitors are entering said segments all the time. Upper-upscale and upscale are particularly competitive as far as these segments go, as shown by how STR’s February stats revealed that two-thirds of the rooms under construction belonged to one of the two rather than the rest.

chart06.pngIn spite of these challenges, Hersha has managed to provide regular dividends for 16 years, which is particularly impressive because the majority managed a period of no longer than 7 years. Moreover, with a beta of 1.3, Hersha has managed to do this investing in a portfolio based in upper-upscale and upscale hotels, thus making its accomplishment that much more impressive.

Can Hersha Hospitality Trust’s Dividends Be Considered Safe Dividends?

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With that said, Hersha has suffered the same hammer blow as the other hotel REITs when it comes to its share price. For example, it has lost more than 40 percent of its share value in February compared to its 52-week peak. This is not a particularly unusual situation since investors currently believe that the peak in hotel REITs is in the past, which has caused sustained selling that has in turn, fueled further selling for fear of further losses.

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However, it is important to note that there are persuasive reasons to believe that Hersha will be able to maintain its record when it comes to its dividends. First, it is established in cities such as Boston, New York City, Philadelphia, San Diego, and Washington DC, which have high barriers to businesses that might be interested in entering the market. In fact, its holdings in Boston, New York City, and the West Coast represent more than half of its portfolio.

Second, Hersha’s occupancy rate, the average daily rate, and the revenue per available room have all increased in Q4 of 2015, which should come as welcoming news, particularly considering that its EBITDA margin has increased as well. Third, while Hersha has been paying a respectable average dividend yield of 5.3 percent, its dividend payout is at a low 42 percent, meaning that it has a sizable cushion in case something goes wrong with its revenue-earning operations.

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Finally, it should be mentioned that Hersha’s management has taken a very proactive approach to dealing with their falling share price. For example, they have reduced the number of outstanding shares via buybacks as well as a recent reverse split at a 1:4 ratio for issued and common shares. Similarly, they have been selling mature hotels and buying new hotels in new markets with better potential growth. Summed up, while there is no guarantee that Hersha will continue paying similar or increasing dividends, all signs suggest that it will have no problems doing so for the current year.

Source: Hersha Hospitality Trust(NYSE:HT)

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.

This Manufactured Home REIT Should Have Cut Dividend

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UMH Properties, a small cap REIT that owns and operates manufactured home communities, may be one of the most consistent dividend paying stocks in our REIT roster, but their dividends have not been covered by funds from operations (FFO) for the past six years. With the release of Q4 results last week, FFO figures have not been encouraging, prompting a discussion when they will cover their dividends. Nevertheless, hopes have been high and investors have been optimistic. Shares rose by 7% last week.

For the full year of 2015, UMH had a significant dividend shortfall of approximately 25%, since normalized FFO reached $0.55, as opposed to an annual dividend of $0.72. They have issued debt and equity to cover the deficit and have maintained a dividend yield of 7%, the highest in the sector of manufactured homes and top 20% among equity REITs.

I see advantages in a potential dividend cut. If they reduced the dividend to $0.55, the yield would be 5.3%, which is still above the equity REIT average. Also, they would finally stop financing distributions. But a dividend cut seems unlikely because they may be afraid to send investors a wrong message. Investors could interpret the cut as a sign of weak perspectives.

Manufactured home sector has proven to be a good sector to invest, and I don’t have doubts that the success of its peers has affected UMH positively. UMH’s larger peers, Equity LifeStyle Properties and Sun Communities had great results last year, with total returns north of 17%. Even UMH fared well, with a total return above 10%. FFO multiples have also been high, especially for Equity LifeStyle, which is trading at 24x.

The company’s Achilles’ heel is that their communities are concentrated in the Marcellus and Utica shale regions (Ohio and Pennsylvania).  Management has not been concerned, though. They argued that, despite low energy prices, pipeline construction to reach end-consumers and gas processing plant construction have driven industrial development in the regions.

In summary, although I see the manufactured home sector positively, I can’t disregard UMH’s uncovered dividend and its dependency on the energy industry, so I’d not invest in this stock right now.

Summary of the Week

As companies continue to release Q4 results, it has been another good week for equity REIT stocks, which returned an average of 1.1%. Most sectors have returned positively, with the exception of lodging. Several lodging stocks have occupied bottom positions in our weekly ranking. Data center and timber have been the highlights of the week.

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

Source:Equity LifeStyle Properties, I(NYSE:ELS), Sun Communities Inc.(NYSE:SUI), UMH Properties Inc.(NYSE:UMH), 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 March 11, 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 February 29, 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.

Will STAG Industrial Lose Steam Again?

chart01Excitement and disappointment can certainly help explain the ups and downs of STAG Industrial, a small cap industrial REIT. Since reaching its 52-week low on 11 February, STAG Industrial has rallied by 26%, exciting investors again and making them wonder if the company will eventually realize its full net asset value. This is not STAG’s first boom in recent months. Will it lose steam again like it did last December?

Despite releasing solid Q4 results this February, STAG did not demonstrate something significant enough to justify this rally. Core FFO increased by 8% and occupancy advanced by 70 basis points reaching 95.6%. Some good metrics remained, such as total debt to total enterprise value around 40% and AFFO dividend payout below ratio 90%. Rent change and retention percentages decreased, although it held up well throughout 2015.

chart02The truth most definitely hurts – STAG is not in the same class as Terreno Realty or Rexford Industrial. STAG’s AFFO multiple has been averaging 12x, while Terreno has enjoyed a 27x, and Rexford is at 18x. In comparison, STAG is relatively cheap. That being said, I would be completely surprised if STAG ever reaches that high level of AFFO multiple.

What bothers me the most is that many investors tend to paint a stock into something that it is not. As a matter of fact, whenever STAG is mentioned, the very first thing that I think about is the word “risk.”

Although it may sound good when the company states that they invest in unexplored secondary and tertiary markets, they simply are not as robust as the primary markets. Also, some investors argue that STAG has a diversified portfolio; however, their properties are still contained within those same secondary and tertiary markets. They are certainly riskier, and do not have the same level of liquidity.

chart03As a potential investor, you need to ask yourself why STAG mostly invests in one hundred percent occupied assets. The management knows that their investment strategy is risky. Their attempt to reduce that risk is to invest in one hundred percent vetted properties, especially single-tenant properties (that can be either 0% or 100% occupied). STAG is paying the extra money to invest in fully occupied units as a measure to ensure the attractiveness of the properties. In addition, this investment strategy explains why the company does not develop properties from scratch.

From my point of view, STAG’s investment strategy is the exact opposite of a famous real estate adage that states “buy the worst homes in the best neighborhoods.” Technically speaking, there is nothing wrong with buying the best properties in underdeveloped markets, it is simply a method to flee away from overcrowded markets and avoid fighting other investors over a few good deals. However, this means that they need to take additional precautions, which have certainly been visible in their strategy.

Although the company has a good dividend yield, they don’t have enough history of similar or increasing dividends to rate it as a consistent dividend stock (for us, at least five-year history). After periods of boom and bust and a slowdown in the company’s growth, I placed it as speculative.

Source: STAG Industrial, Inc.(NYSE:STAG), Terreno Realty Corp.(NYSE:TRNO), Rexford Industrial Realty, Inc(NYSE:REXR)

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.

Should You Be Investing in Mall REITs?

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Macy’s, J.C. Penney, and Wal-Mart are some of the retailers that are closing stores, prompting fears that now is not the time to invest in mall REITs. For example, Chris Versace, a writer for the Eagle Daily Investor, has stated that anchor store closings and the rising number of online sales are changing how retailers operate, meaning that people should not invest in mall REITs until the resulting wave of store closures have come to a conclusion.

Are These Concerns Warranted?

There are reasons to believe that fears about mall REITs are overblown. For starters, some stocks have been performing better than others, meaning that there is still hope in the form of REITs with high sales per square foot such as General Growth Properties, Macerich, and Simon Property Group. Also, REITs are still planning new malls, which they probably wouldn’t be if the prospects were really so bad. Mall vacancy rate has been trending downwards since the great recession.

In fact, these companies have been performing better than the average equity REIT. Their dividend yields have been lower, usually an indication that things are going in their favor. As another point of view, WP GLIMCHER and CBL & Associates Properties are offering higher-than-average dividend yields because they have suffered from tenant bankruptcies and store closures with corresponding consequences for their own financial states and share prices.

Also, Brookfield Asset Management bought mall REIT Rouse Properties last month, elevating Rouse’s share price by 25% in 2016. This transaction elevated mall profile, as well.

It is worth mentioning that the concerns over store closures have been exaggerated. For example, Macy’s opened 26 stores even as it closed 40 stores in 2015, suggesting that the problem wasn’t across the board but concentrated in particular locations. Similarly, both Macy’s and J.C. Penney have pointed out the positive correlation between brick-and-mortar stores and their online counterparts that exist because people are able to browse and return products that they buy online. In other words, the conclusion that the rising number of online sales is causing an industry-wide problem for mall REITs is suspect because the evidence shows that having both an online and offline store actually drives up sales rather than drive them down.

Further Considerations

Summed up, it is debatable that mall REITs should be avoided because of the rising number of online sales and stores closures. However, interested individuals should remember that successful investing is based on a lot of hard work, meaning that they should not take this as an endorsement to invest in mall REITs at random without putting in the necessary time and effort.

Source: CBL & Associates Properties In(NYSE:CBL), Rouse Properties, Inc.(NYSE:RSE), WP GLIMCHER Inc.(NYSE:WPG), Simon Property Group Inc.(NYSE:SPG), The Macerich Company(NYSE:MAC), General Growth Properties, Inc(NYSE:GGP)

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.