This is a REIT that Reached Multiple Above 30

chart01Terreno Realty is one of our favorite industrial REITs, which has hit greater and higher high after June’s REIT rally. The stocks that are a part of the industrial sector have advanced an average of 7% in July while also appreciating by more than 33% year to date. This is seen especially in Terreno, which has reached a multiple 37 times AFFO. This is one the highest, if not the highest multiple among the industrial REITs.

Despite Terreno’s minimalistic management reporting of results, we are able to pull up their 10-Q and July presentation. From this, we are able to see that both the REIT and the sector are still performing very well. In the Q2, the same store NOI grew by 3% on a GAAP basis and up to 5% on a cash basis. However, its funds from operations, which are equivalent to earnings for REITs, has decreased on absolute terms and on a share basis.

An increase in G&A expenses that are associated with long-term incentive plans explains a significant portion of the FFO drop. This company advocates for share award incentive for its executives. Over a pre-established performance measurement period, the total shareholder returns of the Company’s common stock are taken and compared to the total shareholder return of key indices. Which means that the June rally helped to boost their incentive compensation.

In summation, the new highs have had it almost impossible to consider this stock as a buying opportunity. But if you have some its shares already, it is a good idea to hold onto them, for a potential sell opportunity. You might consider cash in (like the management just did) if you think the Fed will negatively influence REITs this year. With the high institutional ownership of the stock, it is very unlikely that an investor will be able to make any sharp gains from any sharp dips. The most sensible action to take for this stock is to just sit back and monitor it.

Source: Terreno Realty Corp.(NYSE:TRNO), 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 is long FCH, XHR, CLDT, PEB.

An Industrial REIT Opens Q2 Season With Good News

chart01.pngLast Tuesday, Prologis, the largest industrial REIT with a market cap of $27 billion, officially opened the Q2 season for U.S. equity REITs with good news. Although the stock fell flat following the release, the results were better than expected, crowning a year-to-date return of about 21%. For us, one of the most important results were upping the same-store NOI midpoint growth for 2016 to 5%.

The 2016 increase of same-store NOI is an indication that industrials have not yet their reached saturation point. The 5% growth is just slightly lower than last year’s numbers. Same-store metrics allow investors to determine what portion of growth has come from existing properties and what portion can be attributed to the opening of new stores. Prologis, with its large number of properties, gives us a fairly clear indication that the industry growth is still coming from within.

Investors realized that the company’s exposure to the UK was minimal, a realization that was reinforced by CEO Hamid Moghadam during the Q2 release call. When the Brexit results were announced, the stock fell more than 5% in the following days before and then recovering to the current level of $51. 28% of Prologis’ square feet are located abroad, so initial concerns regarding the potential impact on the company were valid. However, it turns out that the UK actually makes up less than 3% of their portfolio.

You really cannot go wrong with Prologis. This is a global, large cap with lower volatility and a diversified portfolio that has experienced management and enjoys an investment grade credit rating. However, with the recent rally, it is becoming increasingly harder to extract any upside and stock appears to be in the right place.

In conclusion, we cannot say for sure that Prologis is right for your portfolio, but we definitely see Prologis as a good fit for anyone looking for a lower return, lower risk investment.

Source: Prologis, Inc.(NYSE:PLD)

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 is long FCH, XHR, and CLDT.

Another Industrial REIT Delivers Good Results

 

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  1. Industrial REITs has continuously delivered good results and it doesn’t appear that this is going to change in 2016.
  2. Like Prologis, EastGroup Properties reported a double digit rent releasing spread in Q1.
  3. EastGroup has been distributing the same or increased dividends for the last 24 years in a row, which is definitely a good record among industrial REITs.
  4. Despite its Texas concentration, conservatism has been a mark in the management.
  5. Multiples indicate the stock has been at least correctly priced or overpriced.

As we pointed out in last week’s Prologis article, industrial real estate has been delivering good results and it doesn’t appear that 2016 will be any different (click here). In this context, EastGroup Properties has positioned itself for moderate growth and a good track record. By the way, it is one of two industrial REITs that has been distributing same or increased dividends for 24 years. EastGroup’s dividend has accumulated a CAGR in the range of 3-4%.

Like Prologis, rental change for new leases and renewals has been strong in Q1. EastGroup reported a 16.5% GAAP releasing spread, which is their record. That translated into a mild same store property net operating income growth of 2.2%.

In fact, EastGroup is an entirely different kind of animal when compared to Prologis. It is a midsized market cap REIT (approximately $2 billion), focused on a couple of states in the southern part of the US. Their properties are multi-tenant business distribution buildings close to major transportation routes that cater to tenants who are in need of industrial properties in the 5-50k square feet range.

chart02Naturally, its Texas concentration, specifically in the Houston area (19% of portfolio), has been a concern due to the instability in the oil industry. Given that its occupancy has held steady, we cannot affirm they’ve been strongly impacted, but it has certainly called management’s attention to a broader diversification in their portfolio. EastGroup’s top ten tenants account for less than 10% of the portfolio. Being exposed to a single tenant isn’t a concern here.

This Jackson, MS based REIT has a tradition in development. 39% of its portfolio has been developed by the company, which has proudly been around since 1969 and whose most recent configuration dates backs to the 1980s. Home grown talent seems to be the rule here, as its newest CEO first joined the company as an intern. In addition, some of the senior executives have been with the company for a long time.

chart03Conservatism is definitely one of the company’s features that is also reflected in its dividend policies. Over the past 15 years, the company has maintained a dividend payout ratio in the 60s and 70s. Recently, the ratio has been around 66%.

Its debt profile could be better, since its debt to adjusted EBITDA has been above 6.0. Nonetheless, the company has a BBB credit rating from Fitch and Baa2 from Moody’s and its debt to total market capitalization around a third.

Like a large part of the REIT industrials, the fundamentals have been dependent on GDP performance so it comes as no surprise that the stock is correlated to S&P500. EastGroup has accompanied the market in its ups and downs. Most importantly, the stock has rebounded over and over. In addition, its AFFO multiple has been flying high at around 22x. In turn, its FFO multiple has been around 16x, still higher than historic norm. The stock is definitely not cheap.

For that reason, the company may revise its decision not to issue equity. The company minimized equity issuance in 2015 and their current position is that they don’t expect new issuances this year. They are planning to sell the least strategic properties (including some in Houston) and reinvest in the development.

Source: Prologis, Inc.(NYSE:PLD), EastGroup Properties Inc.(NYSE:EGP), 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.

Prologis Q1 Results Reinforce Logistics Strength

 

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  • Prologis’ recent Q1 results reinforce the thesis that industrials are still in the expansion phase of the cycle.
  • With a $24 billion market cap, Prologis is a reference point in the Logistics Real Estate sector.
  • By any standard, 2015 was a year of records for Prologis. The question, though, is if they will be able to top it in 2016.
  • So far, the REIT has been successful in accomplishing its goal of capitalizing rent growth.

Some analysts believe that a good way to vet a sector is by performing a bottoms-up analysis, looking at individual stocks. If you follow this logic and start browsing Prologis’ Q1 figures, the first REIT to release results among its peers, the sector of logistics real estate appears to be on a continuous rise. Focusing on the same property net operating income, a growth rate of 7.4% in Q1 is pretty solid compared to figures in the past.

With a $24 billion market cap, Prologis is a reference point in the sector and is, therefore, a good company to start with. The company has a well-diversified customer base of more than 5,000. What’s more is that their top 10 customers represent only 13% of net effective rent. Prologis also has an international component and it has sourced its growth from the expansion of e-commerce- both domestically and internationally.

Another key factor in the company’s success is that they have a high repeat clientele, demonstrating high customer retention in the mid-80s. For the sake of comparison, a growing logistics peer like STAG had a retention rate of 42% in Q1, even for a good size of expiring of square footage. Even if you compare their historical data, STAG’s retention rate has averaged around the high 60s. In analysis, Prologis has been able to maintain consistent and high levels of customer satisfaction.

Prologis’ management described 2015 as the best year ever. Indeed, almost 97% of the company’s real estate was occupied by the end of 2015. Nevertheless, the natural question is whether they will be able to keep up this momentum. The answer is yes! Well, at least in Q1.

Core FFO per share went up by 24%. Also, the company has a strong balance sheet with debt to adjusted EBITDA under 6x and debt to gross market capitalization of 34%. It is important to note that the debt is mostly unsecured and fixed. Furthermore, the company is well on its way to an A credit rating.

An important item in Prologis’ goals, which is also a sign of portfolio strength, is rent growth of the new lease compared to the prior lease for the same space. In Q1, they achieved a 20% increase, which is explained when you replace leases originated during low rent periods following the global financial crisis.

Although, I have been highlighting Prologis’ success throughout the article, there’s usually no success without defeat. In fact, last year, as well as early this year, the company suffered some misfortunes in the financial markets. Following an intense period of volatility, their share price tanked- reaching a low last February. However, the volatility reduction in the last two months have helped the share price reach an AFFO multiple of 20. Also, dividend yield is below equity REIT average.

In summary, Prologis is worth leaving in an investor’s watch list (as opposed to buying it) as this REIT has become overpriced.

Source: Prologis, Inc.(NYSE:PLD), STAG Industrial, Inc.(NYSE:STAG)

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: Like Father Like Son

 

chart01PS Business Parks (NYSE:PSB) is a mixed office and industrial REIT that has distributed same or growing dividends over the past eighteen years. PSB boasts a track record of a successful REIT and is part of our first tier group of REIT stocks, which is a handful that hasn’t cut dividends over long periods of time. It is the only investment grade ‘industrial’ REIT of the first tier group.

Forty two per cent of PSB’s shares are owned by Public Storage (NYSE:PSA). Both companies have a long history dating back to 1980s. PSB was formed in 1984 under the name Public Storage Properties XI, with PSA as its general partner. In a 1998 merger, the name was changed to PS Business Parks.

chart02Although PSB and PSA have a lot in common, both companies differ when it comes to REIT size. The former is a mid-sized company with a $2.7 billion market cap that invests in flex office/warehouse spaces, while the latter is one of the largest U.S. equity REITs that owns thousands of self storage stores across the country. However, despite the difference, PSB certainly capitalizes from its large REIT peer.

A recent example is that Standard & Poor’s granted PSB a corporate credit close to its major shareholder. Last year, the company was also upgraded from BBB to A- bringing it even closer to PSA’s ‘A’ credit rating.

PSB’s Portfolio Strength

chart03PSB is a fully integrated, self-advised and self-managed. The company has diverse tenant base, which consists of more than 5,000 customers. The top ten tenants account for 12% of the total annualized income, 6% of which is the U.S. Government. This is an excellent figure.

Half of the company’s rentable square footage is targeted at peculiar types of properties called flex. This type of investment is a combination of warehouse and office space, and has a variety of uses. Among them is the capacity for companies to have management and operations in the same physical space.

chart04The flexibility of this type of investment appeals to small and medium sized business tenants, which encompasses more than a third of rental income. Due to the tenant profile, PSB doesn’t usually compete with institutional buyers in acquisitions.

Geographically, although PSB is limited to six states, investments are well distributed within those states. Moreover, the company took advantage of high demand (and valuation) for flex, industrial and office assets and exited Portland, Phoenix, and Sacramento markets. The high demand explains why the company wasn’t active in terms of acquisition in 2015.

Valuation

Like PSA, PSB doesn’t come cheap compared to the broad REIT market. Since the share price has risen 23% over the past 12 months, it comes as no surprise that dividend yield is below equity REIT average and multiples are high. Yield is around 3% and stock is trading at 26 times AFFO.

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Source:PS Business Parks Inc.(NYSE:PSB), Public Storage(NYSE:PSA),Fast Graphs, Standard and 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.

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.

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.