Dividend Yields To Rule a Little Longer

chart01After preparing the financial markets for a potential interest rate hike in the middle of this month, Federal Reserve’s head Janet Yellen, elected by Forbes the third most powerful woman, decided to be on hold until the economic outlook clears. This Monday’s surprise announcement ignited a new wave of celebrations among dividend and emerging markets investors.

Yellen’s announcement came following the news that employers added a mere 38 thousand jobs in May. The figure was so low that she remained cautious and preferred to wait for more data. Remember that a couple of weeks ago she said an increase would be appropriate. As a result, some financial outlets say that this announcement effectively postpone a potential hike to September, opening a window of opportunity for speculative capital chasing certain types of stocks.

Until yesterday I was 100% confident that it was not worth considering emerging markets investments, such as the one I bumped into, Tierra XP Latin America Real Estate ETF, a new real estate ETF focused on Latin America (click here). Although their real estate investment trusts and real estate operating companies, especially in Brazil, have been underestimated, currency trend has been in favor of U.S. dollars. Currency exchange fluctuations caused by higher interest rates would likely trump any gains in the local currency. The announcement might interrupt the trend for now and favors gains in the short term, but it should resume in the long term.

Dividend stocks, including REITs, should also benefit from the announcement. Rather than interest rates, dividend yields will rule for a little longer, especially when equity REIT yields are on average 4.1%, as opposed to a 10-year treasury bond rate under 2%. This reminds me of what William Koldus said in a recent article. Back in 2009, he couldn’t imagine the current scenario of low interest rates (click here). This is what he said:

“In 2009, it was hard for me to imagine a robust recovery in the financial markets that extended for seven years, while economic growth struggled. It was hard to imagine seven years of zero interest rates, which would entice investors to keep reaching for income. After going through this low interest rate period, today, it is hard for investors to imagine a future that looks different from the current environment, as I could not do in 2009.”

Well, it appears that we’ll have more of the same. With this degree of uncertainty about the future, the status quo seems more likely.

Source: Tierra XP Latin America Real Estate ETF (NYSEArca:LARE), Seeking Alpha, Bloomberg

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 — Lexington Realty Trust

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Several reasons have led us to believe that Lexington Realty Trust, a net lease REIT mostly in Office/Industrial, has become a good, reliable purchase for dividend lovers. First, it is part of the group of most consistent dividend-paying REIT stocks (not many REITs have distributed dividends for 22 years in a row). Second, it has a dividend yield above the equity REIT average of 8.1%. Finally, it looks undervalued if compared to its closest peers, including office, industrial and net lease REITs.

From its first dividend in January 1994, Lexington never interrupted the distribution of quarterly dividends. Such consistency can be one of the most obvious signs that management has been committed to its shareholders. Since it went public in 1993, the company is the result of several mergers. Regardless, 22 years of consecutive dividends is a very good track record, even though they slashed dividends in 2008 to accelerate the deleveraging of the company and paid dividends mostly in shares in 2009.

chart02A potential risk to its dividend record is an ambitious plan to make over its portfolio. With between $600 – $700 million of dispositions planned for 2016, including a sale of New York City land, the FFO per share in 2016 will reduce to $1.05, as opposed to $1.10 in 2015. However, if everything works as planned, we doubt the company will have any issues in maintaining the current level of dividends. Its current payout ratio is conservative, just around 60%.

chart03The good thing about this plan is that management will mitigate another potential threat to dividends by reducing the leverage level. In Q4, they posted a higher than average debt level of 57% of the capital structure. Although some would argue that an environment of low interest rates is a good time to maximize debt levels, still you don’t want to threaten the company’s liquidity level. Since the dispositions’ proceeds will serve various purposes — to pay down debt, acquire properties that fit their objectives, and repurchase stocks — we believe that the new debt level will not go down beyond 50%.

chart04Lexington management has been skillful in maintaining a resilient portfolio. The company has been moving away from Office and has increased its exposure to Industrial properties. Also, a significant part of the revenues is now sourced from long-term leases, a likely consequence of investing in build-to-suit and sale-leaseback, single-tenant properties. In the end, they enjoy a portfolio that is diversified and well balanced in terms of expirations.

chart05The company valuation metrics indicate they are undervalued. In terms of dividend yield, the company tops any industrial REITs with its 8.1%. Compared with Office REITs, the company would have the third highest yield, after Government Properties and Select Income. Its AFFO multiple is lower than most peers.

It is natural that a non-pure play REIT such as Lexington usually looks undervalued because it is harder to compare. The dual nature of the company, especially during a transitional period, makes some investors step back; but during periods like this is when savvy investors make good purchases.

In summary, I’d buy Lexington for its dividend consistency and few threats to this record. The portfolio transition is long term and represents a potential upside to the stock.

Source: Lexington Realty Trust(NYSE:LXP)

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’s The Matter With NorthStar Realty Finance?

chart01NorthStar Realty Finance (NRF) has been our worst performing REIT stock this year. The company has shown a lousy return of negative 28 percent, along with a whopping forward dividend yield of 25 percent. It is puzzling to watch a REIT fall into such a severe downward spiral in such a short amount of time. NRF’s situation is critical, and I can only imagine the dead silence in the corridors of their headquarters in New York. Seriously, if I were CEO David Hamamoto, I wouldn’t be sleeping well, fearing the unknown. Just last week, NorthStar Asset Management (NSAM), NRF’s external advisor, hired Goldman Sachs in order to help find a way out of this mess.

NRF has focused so much on restructuring that operations were put on the back burner. This makes it more challenging to analyze the company. NRF intended to unlock asset value by spinning off their asset management team. NSAM was created to manage NRF and three separate non-traded REITs. Later on, NorthStar Realty Europe (NRE) has been spun off to hold NRF’s European holdings. On top of that, management fees and incentives brought up multiple concerns regarding their credibility as managers. During volatile times such as these, vulnerable companies, such as NRF tend to suffer the most.

chart02Last week, Standard and Poor’s stated that NSAM has been operating as a stable business and assigned investment grade rating. The rating took into consideration a twenty-year initial contract with NRF that is automatically renewable and may only be cancelled ‘under very stringent circumstances.’ A smart investor would consider investing in the manager instead of the company; however, NSAM share prices have dropped considerably as well.

I would much prefer speaking to the quality of NRF’s tenants, management team experience, and growth prospects. Operationally, the company has not been performing poorly. According to their Q3 2015 results, the occupancy levels have been strong. That being said, the most difficult aspect of the company’s operational side is the fact that their portfolio is diversified. This makes it difficult to put NorthStar into a specific bucket. In addition, their assets are mainly comprised of healthcare and lodging, which have been threatened by oversupply in some cities.

Activists enjoy cheap stocks so that their actions can drive stock appreciation and reduce the gap between NAV and share price. This is currently happening with NRF. Activist Land and Buildings from Jonathan Litt has already sent a letter to management approving the hire of Goldman and Sachs. He has also asked for more time to evaluate strategic alternatives and nominate board directors.

NorthStar Realty Finance is not alone in this mess. Ashford Hospitality Prime, which is externally managed by Ashford, Inc, has been experiencing similar issues. Their shares have also dropped by 23 percent in 2016. Two activist shareholders, Rambleside Holding, and Sessa Capital have targeted both Ashford REITs. The later has even proposed that the company change all board of directors. This has most defiantly been a difficult time for equity markets including equity REITs. That being said, NorthStar Realty Finance has been the epitome of what is not working in the REIT investment space.

Source: NorthStar Realty Finance Corp.(NYSE:NRF), Northstar Realty Europe Corp.(NYSE:NRE), Northstar Asset Management Group (NYSE:NSAM), Ashford, Inc.(AMEX:AINC), Ashford Hospitality Prime (NYSE:AHP), Ashford Hospitality Trust (NYSE:AHT), Fast Graphs, Yahoo!Finance.

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.

W.P. Carey – A Future Pure Play REIT?

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Since 1979, the history of W.P. Carey (NYSE: WPC) has been very transformative. In an effort to gain scale and become one of the largest net lease players, the company has merged the multiple funds under management (Corporate Property Associates – CPA). However, W.P. Carey has maintained the investment management branch that is responsible for raising capital, making investments, managing assets, and, when necessary, liquidating assets.

Recently, W.P. Carey changed their focus from investment management to an ownership strategy and, in September 2012, converted the company into a REIT. Given the company’s history and strategy, this transformation begs the following question:

Will W.P. Carey continue merging with the CPAs and become a pure play REIT, or remain as an investment management firm breeding real estate portfolios for future ownership?

Due to the potential conflict of interest between the real estate ownership and investment management groups, W.P. Carey’s stock performance would benefit more as a pure play REIT. Please click here to read additional thoughts on this issue regarding another REIT security.

The following details some of W.P. Carey’s latest developments:

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  • In September 2012, the merger with CPA 15 added a portfolio of 305 diversified net lease assets. As a result of the merger, W. P. Carey had a total market capitalization of approximately $5.0 billion.
  • In January 2014, the merger with CPA 16 added a portfolio of 333 net-leased properties. As a result of the merger, W. P. Carey had a total market capitalization of approximately $9.6 billion.
  • On December 31, 2014, W.P. Carey had an enterprise value of approximately $11.1 billion and managed a series of publicly registered, non-traded REITs, CPAs 17 and 18, and Carey Watermark Investors, with assets under management of approximately $9.2 billion. The managed REITs generate 29 percent of the company’s revenues through structuring and negotiating investments, conducting debt placement transactions, and managing real estate investment portfolios.

W.P. Carey is quite diversified by industry. The company has 783 net-leased properties across numerous industries with the largest concentration in the Retail sector at 20 percent of the annualized base rent. Two self-storage properties and two hotels are also included in the portfolio. With a total net-leased square footage of 87.3 million, W.P. Carey boasts a 98.6% occupancy rate.

The company takes great pride in their international footprint with a strong presence in Europe. As of December 31, 2014, approximately 65% of their contractual minimum annualized base rent was generated by their US properties. The balance was generated by non-US properties primarily located in Western and Northern Europe. The US market has been very competitive with a due to an influx of foreign sovereign capital. This has resulted in a compression of cap rates mostly felt in the retail space. Europe has less competition resulting in no cap rate compression.

The Board of Directors announced W.P. Carey’s 56th consecutive quarterly dividend increase to $0.9525 per share.

Despite the potential conflict of interest, the balance of the analysis has been positive. W.P. Carey sports an attractive dividend yield of 5.8% and a price-to-FFO that is on par with its peers.

Before making a final assessment, other net lease peers of W.P. Carey will be examined in future posts.

Summary

 Metrics 2011 2012 2013 2014 2015P
Revenues – Total, in percent 26 14 39 85
Dividends declared per common share, $ 2.19 2.44 3.50 3.69 3.81
Q4 Dividend, $ 0.56 0.66 0.98 0.95 0.95
Dividend payout ratio, in percent 46 65 83 77 78
Dividend yield, in percent 5.3 4.7 5.7 5.3
FFO per share, $ 4.56 2.47 2.78 4.56
FFO per share (Q4 only), $ 0.68 0.65 0.84 0.99
AFFO per share, $ 4.71 3.76 4.22 4.81 4.89
Debt to total capitalization, in percent 26.4 35.4 33.2 34.4
Weighted average interest rate, in percent 5.0 4.8 4.1 4.2
Occupancy – Net leased, in percent 97 99 98 99
Share Price on 31 December, $ 40.94 52.15 61.35 70.10
P/FFO on 31 December 9.0 21.1 22.1 15.4
 2015P =2015 Projections

Written by Heli Brecailo

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.​

Does CubeSmart suffer from middle child syndrome with reason? (Series 4 of 5)

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As a middle child, it can often be difficult to get attention, especially as the third in a family of four children. The first typically gets more attention as there were not any siblings around vying for attention and the last gets coddling.

Does it get better if it changes its name to a tricky one?

That’s how I feel about CubeSmart (NYSE:CUBE). As of March 31, 2015, the Company’s market capitalization is US$3.9 billion. This is slightly higher than Sovran Self Storage, but not as high as Extra Space’s and Public Storage’s. However, that doesn’t mean CubeSmart’s not a quality company. It is a solid company that has strategically grown, which is ideal for a dividend growth investor.

Previously known as U-Store-It Trust, it changed its name to CubeSmart in 2011 to enjoy the branding benefits of joining the “big names” club, especially in a highly fragmented industry where customer service is a big differentiator. Furthermore, it takes pride for having re-positioned the portfolio, moving away from slow growth and less population, into high growth and more populated core markets such as New York, Washington DC, and Philadelphia. The result is a high quality, urban-oriented portfolio, which tends towards millennials who live in tight blocks and boomers who downsize to smaller homes.

As the portfolio changed, average occupancy increased from mid-seventy to ninety percent. Currently it is at an all-time high. Additionally, it has positioned itself in the highest income household neighborhoods versus its peers.

Since 2011, CubeSmart has checked all the following boxes:

  • 2-digit total revenue growth
  • 2-digit FFO growth rate
  • 2-digit dividend growth
  • Conservative dividend payout ratio
  • 6 percent average same store revenue growth
  • 8 percent average net operating income growth

2015 Projected Growth Rates 

  • 7 percent net operating income growth
  • 6 percent same store revenue growth
  • 4 percent FFO growth
  • 6 percent dividend

CubeSmart’s debt profile has improved over time and is currently on par with its peers. Nonetheless, the average interest rate of 4.0 percent is relatively high; Sovran’s is 3.7 and Extra Storage’s is 3.4 percent. Public Storage’s debt is less than one percent of its total market capitalization. The average maturity is six years. Most debt is fixed-rate and unsecured. The Company has mid-tier, investment-grade credit ratings from both Standard & Poor’s and Moody’s.

Although CubeSmart has seen capitalization rates of quality acquisitions decrease to approximately five percent, it has kept a good pace of acquisitions. Over the last three years, it has added 3.9, 1.5, and 2.6 million square feet to existing properties (2014, 2013 and 2012 respectively). As of December 31, 2014, the 421 owned self-storage facilities encompassed an aggregate of approximately 28.6 million rentable square feet.

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Valuation wise, price-to-FFO is on par with the last four year’s year-end price-to-FFO mean, as well as the sector’s mean. The dividend yield is acceptable at 2.8 percent.

The Company will release Q1 2015 financials after the market close on Thursday, April 30, 2015.

Takeaway

Although I like the growth story, there doesn’t seem to be much appreciation upside and the dividend yield is just okay. The middle child will have to do more to excel.

Summary

2011 2012 2013 2014 2015P*
Dividends declared per common share, $ 0.29 0.35 0.46 0.55 0.64
Q4 Dividend, $ 0.08 0.11 0.13 0.16
Dividend payout ratio, in percent 45 47 51 51
Dividend yield, in percent 2.7 2.4 2.9 2.5
FFO per share, $ 0.56 0.71 0.87 1.03 1.17
FFO per share (Q4 only), $ 0.09 0.21 0.21 0.26
AFFO per share, $ 0.65 0.74 0.91 1.08
Debt to total capitalization, in percent 37.3 33.3 32.8 23.8
Revenues – Total, $ 000s 227,245 266,322 318,395 376,963
Revenues – Same Store, in percent 3.6 3.8 7.4 7.2 5.5
NOI – Same Store, in percent 5.7 6.0 9.3 9.6 6.5
Year End Occupancy – Same Store, in percent 79.1 85.1 88.8 90.0
Share Price on 31 December, $ 10.64 14.57 15.94 22.07 23.12
P/FFO on 31 December 19.0 20.5 18.3 21.4 19.8
 *2015P=2015 Projection

Written by Heli Brecailo

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.​