What’s Behind Small Cap, Externally Advised REITs?

chart01.pngAmong the much-hyped apartments REITS, externally advised small caps have caught the attention of investors, thanks to their high yield and greater upside. For example, NexPoint Residential (NXRT) spiked by 29% last month, reaching a 51% year to date return. Independence Realty Trust (IRT), Bluerock Residential Growth REIT (BRG), and Preferred Apartment Communities (APTS) are averaging a 11% year to date return. However, if you are investing in these companies, you should be prepared for some distortions.

First, there is a reason that small caps are high risk, high return. The management is essentially fighting for survival or their place in the sun. Trading volume is thinner so stocks may not fluctuate in the smoothest manner. Moreover, they are often much less followed by the Street, meaning discussions over management moves and strategic planning tends to be little and less scrutinized by the market. Finally, they have fewer borrowing options and worse terms. Some strive for aggressive growth is an effort to be on better footing with bigger peers.

Second, externally managed REITs present a conflict of interest. Bluerock Residential went further and disclosed a long list of common situations where shareholders’ interest could be hurt when the REIT makes decisions. As a way to mitigate the conflicts, some external managers own a portion of the REIT. In Bluerock’s case, they own approximately 12% of the class A common stocks.

The following was extracted from their Risk Factors section in their last 10-k.

  • The external manager is under no obligation to dedicate specific personnel to the REIT. This means the REIT might not receive the same level of support it would if it were internally managed.
  • Some of the REIT’s officers work for the manager. This means that agreements between the REIT and the manager (for example, their management agreement) might not be favorable to the REIT and the REIT may choose not to enforce their rights.
  • As the result of conflicts of interests with their managers, the REIT could end up making decisions that are not in the best interest of their stockholders.
  • The incentive fee the REIT pays their manager may cause it to make riskier investments.
  • If they purchase properties from their manager, the price may be higher than it would have been had it been negotiated at arm’s length.
  • Regardless of the portfolio’s performance, the manager will receive a base management fee.

In a recent article, Hoya Real Estate questions the legality of Bluerock’s arrangements with external management and its private funds. Sounds like that this disclosure works as a blank check for the manager to do whatever they want without the fear of legal repercussions (click here). Nevertheless, other REITs also disclose potential conflicts of interest and whether they are disclosed or not, they are observable in all externally managed REITs. Bluerock simply had the courage to be thorough.

In conclusion, small caps were already high risk investments. The introduction of external management simply adds a new twist.

Source: Bluerock Residential Growth RE(AMEX:BRG), Preferred Apartment Communitie(NYSE:APTS),Independence Realty Trust, Inc(AMEX:IRT),NexPoint Residential Trust, In(NYSE:NXRT)

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.

Time to Bail out of Apartments REITs?

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The apartments REITs invested in the west coast were negatively affected last week. Ten out of the fifteen apartments found themselves among the lowest performing REIT stocks. Essex Property Trust was the most affected with its stock falling by 6%. The episode was targeted towards a group of stocks as it happened in a week where most REIT boats have risen. Are investors going to bail out of apartments?

Investors have gotten worried about the Northern California real estate market as signs that the same growth rates will not remain. In a recent publication, Essex, which has heavily invested in the region, mentioned that Northern California’s growth rate has slowed down from Q1 figures. Revenue growth decreased from 9.1% (Q1) to 7.7 % (April/May), which was enough to set a brief selloff last Friday and yesterday.

Equity Residential, which has invested in both New York and San Francisco, announced last week that it had lowered its guidance for same property revenue growth. The company has noticed underperformance in its San Francisco portfolio. The company’s stocks fell by almost 6%, making it the second worst underperformer last week.

Multifamily have been darlings of the apartment markets especially on the west coast. San Francisco and Silicon Valley has caught investors’ attention for its higher average income and higher percentage of families earning six figures. High employment rate has also been a highlight, especially for millennials that are interested in paying off their school loans and delaying their plans to buy their first home right now.

Since both REITs (Essex and Equity Residential) have been in the chopping block, it is not shocking that they have had poor performance this year. What is stunning is that a stronger sentiment against multifamily has been forming. We believe that this is going to become more common as some subsectors (such as multifamily) have been overvalued.

Source: Equity Residential (NYSE: EQR), Essex Property Trust Inc. (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.

This Growth REIT Hasn’t Seen Share Price Growth

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Different from several multifamily REITs, Bluerock Residential Growth REIT hasn’t seen its share price soar in 2016. It also has a noticeably higher yield than its peers. Eventually, the company has faced the challenges typical of other similar, small cap REITs, including higher leverage, frequent public offerings, and building a long-term investor base.

Even with the steep growth over the past quarters, it has been eye-catching that the share hasn’t managed to make up some ground. In fact, its share price has fallen by 14% over the past year, while the company doubled its net operating income. Today, the stock is trading with a dividend yield close to 10%, which always tops our dividend yield ranking for the sector.

In order to fuel its expansion, the company hasn’t been shy, opting to capitalize on several funding fronts. In 2015, they performed three public offerings. In addition, they have diversified their sources of funding by issuing preferred shares. They also pushed the debt levels up higher and closed Q1 with a total debt to total enterprise value of 58%.

With a market cap just under $300 million, the company is looking to form a solid institutional investor base that can support its continued growth. Currently, less than 50% of the shares are held by institutional and mutual fund owners. As a result, it appears that the company still has a long way to go to complete its task compared to established REITs.

chart02.pngThere are reasons to believe this REIT might struggle to get more support, primarily because it is externally advised and it makes distributions beyond its adjusted funds from operations. On the other hand, the company has made its presence known in sunbelt markets, where job growth has been prominent.

To summarize, Bluerock Residential is hungry to grow and seems to be hitting the right nails. However, due to its shortcomings, it hasn’t managed to convince enough investors to back its aggressive growth plans yet. The stock is a patient buy.

Source: Bluerock Residential Growth RE(AMEX:BRG), 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.

This Manufactured Homes REIT Continues to Impress

chart01Running Equity LifeStyle Properties can be quite appealing, especially when all you have to do is manage the growth. This comes easy since manufactured homes REITs have experienced tailwinds from demographics change. The company was in the leading list in announcing results for the first quarter this year, and, from what I can tell, it had an upper hand as far as the REIT stocks are concerned.

The aging population has been a factor

Apart from the stock, something more interesting cannot be overlooked when it comes to manufactured home REITs. The percentage of aging population goes a long way in determining possible success in this type of property. This is why investors are keen on considering this factor.

With the increasing rate in the percentage of the aging population, the prospect has been positive for manufactures homes, whose average age of new residents is in the upper 50s. With an estimated 10,000 people turning 65 daily, investors are counting on more opportunities out of this shift.

Enterprise achievements

Equity LifeStyle continues to impress on some fundamental aspects, with increase in several fields in a year over year comparison. Normalized FFO has risen by 10%, with normalized FFO per share shooting up 11%; not to forget the dividends, which have stricken a whole 13% increase. Moreover, a consistent decrease in the total debt compared to the total investment has come down to 24%. These come at a time the interest rate has been satisfactorily on high 4’s and a debt maturity schedule well laddered.

Leading the sector

Just to be clear, I’m not recommending the purchase of Equity LifeStyle stocks. With a total market capitalization of $8 billion, there is no doubt this is a leader in the sector. However, the share price has hiked over recent years. Multiples have been sky high, and dividend yield has been one of the lowest among equity REITs.

Multifamily

Multifamily, a sector close to manufactured home, have shown signs of weakness lately. Although asking rents have displayed a significant rise over the past year, vacancies advanced in the fourth quarter of 2015. This has led investors to think that rents reached a peak and any further increases will go overboard.

In fact, there are concerns supply will catch up with demand soon. If this is true in 2016, it will be the end of a six-year period of expansion in which rents have been pushed to new heights in high coveted cities, such as San Francisco, New York, Denver and Houston. This year, more landlords in these cities have increased rental concessions.

Apartment REITs’ share prices have fallen in recent weeks, showing a negative investor sentiment. With the release of Q1, we will see if those suspicions will strengthen or fail.

Source: Equity LifeStyle Properties, I(NYSE:ELS), Fast Graphs, Reis, Wall Street Journal

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.

Is Canada Your Best Path To Invest In U.S. Multifamily REITs?

chart03Multifamily rentals in the United States have been one of the most compelling investment thesis topics in U.S. real estate. It certainly is not news that the great recession led many hard working Americans to live a renter’s lifestyle. The fact that large portions of homeowners were quote unquote under water made some people challenge the sense of stability in the housing market. In addition, many saw the risks that are associated with owning a property. Many millennials, who were faced with large college loan debt and stringent borrowing requirements could not take on any additional debt that is required to purchase homes. Instead, they chose to either rent or stay home with their parents. These situations result in the fact that, after homeownership peaked at seventy percent in 2005, it has greatly declined without any signs of stabilization in the near future. We can only guess if homeownership levels will revert back to where they were, or if we will see an entirely new normal moving forward.

chart04Another consequence is that multifamily REITs have become expensive on an AFFO multiple basis. It was just a few weeks ago that I indicated that small caps might have the best entry point for stocks that dwell in this REIT sector. Thanks to a reader’s comment, I also did research on Canadian REITs that invest in U.S. multifamily properties.

Pure Multi-Family REIT

chart01Pure Multi-Family REIT is a small cap business that is listed on the TSX-Venture, a Canadian electronic exchange for emerging companies. The company’s market capitalization is approximately US$230 million. They own fifteen properties that are located within three metropolitan areas of Texas including Dallas, Houston, and San Antonio, along with Phoenix, AZ. Pure Multi-Family stocks are traded under the symbol RUF.U in US dollars, and RUF.UN in Canadian dollars.

Much like many real estate investment companies Pure Multi incorporates a complex investment structure. Raising equity in Canada and owning properties in the United States certainly adds an additional layer of entities. The Canadian entity was formed as a limited partnership; however, they own a Maryland based U.S. REIT under which the properties operate.

chart02Pure Multi has issued two types of units, including Class A and Class B. The Class A units are available to investors and have rights over 95 percent of all distributions and all net assets. The company’s financials are reported in U.S. dollars, however they can be viewed in the SEDAR website which is the Canadian version of EDGAR. Their financials are reported under International Financial Reporting Standards (IFRS), so it is certainly possible to gain a better aspect of the stock’s net asset value. IFRS requires an estimate of the fair market value of a REIT’s investment properties. Pure Multi-Family’s management reported that, for the nine-month period ended September 30, 2015, they took into consideration independent appraisals on ten of their investment properties, which represented 67% of the properties that the company owns.

From a valuation standpoint, Pure Multi is trading on par with small cap multifamily REITs in the United States (Bluerock Residential, Independence Realty Trust, NexPoint Residential, Preferred Apartment Communities). The company’s dividend yield is at 8.2 percent, and the price-to-AFFO is at 12x. On average, its U.S. peers’ dividend yield is at 8.8 percent, and the price-to-AFFO is at 12x.

Source: Preferred Apartment Communities (NYSE:APTS), Bluerock Residential Growth RE(AMEX:BRG), Independence Realty Trust, Inc (AMEX:IRT), NexPoint Residential Trust, Inc (NYSE:NXRT), Pure Multi-Family REIT LP (TSXV:RUF.U), census.gov, 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.

Differences Between Single Family and Multifamily Home Investments

san-francisco-210230_1280Investing in residential real estate is always a good way to diversify your investment portfolio. The proper real estate investment option for you certainly depends on the time you can dedicate to managing and maintaining the properties along with your long-term financial goals. A good place to start is with either single family or multifamily properties. They have their own pros and cons, and are appealing to investors based on personal finances and investing preferences.

Single Family Investment Properties

There are many advantages to investing in single family properties over multifamily properties. The first being that many single family homes can be purchased below the fair market value. This is an important investment strategy because profits are made and lost at the time the property is purchased. When an investor purchases a property at a percentage below market value, they gain that percentage in equity from day one.

For example, a single family property is worth $100,000. An investor purchases it for $90,000 or ninety percent of the current market value. The investor gains a $10,000 or ten percent equity stake in the property as soon as it is purchased.

That being said, many multifamily properties are sold above their present market value due to the fact that they are less available in many areas. It all comes down to the law of supply and demand. In addition, the prospect that future improvements will result in higher rents tends to keep multifamily sales prices above current market value.

Property management expenses vary depending on the logistics of managing the properties, along with tenant population. It is certainly true that higher end single family properties with qualified tenants have less turnover on average than their multifamily counterparts. Renters of these homes tend to view their living conditions as more permanent, and have a far greater sense of pride in maintaining the property themselves. This results in less maintenance costs and repairs for the investor. Tenants of single-family properties typically do not outgrow the space nearly as quickly because there is usually a backyard, additional bedrooms, and, in most cases, a basement.

Multifamily Investment Properties

There are many benefits to investing in multifamily homes over single family properties. Multifamily presents a more reliable source of income. A vacant single family property generates absolutely zero income, while a multifamily commercial real estate property will rarely sit one hundred percent unoccupied. The units tend to be less expensive than a single family and therefore fill up faster. Many first-time real estate investors purchase multifamily properties so they can save money by living in one of the units. Living on the property also helps reduce the time and costs associated with management and maintenance.

Another huge benefit of multifamily properties is the fact that investors can own multiple units with less mortgage loans. For example, if an investor purchases ten single family homes, they are required to obtain ten separate mortgages. They are required to make ten separate monthly payments, along with ten quarterly property tax payments, and ten property insurance payments. Applying for ten loans can be frustrating, and, once obtained, all of the payments and paperwork is very time-consuming. On the other hand, if an investor purchases a ten-unit apartment building instead, they have the benefit of the same ten rental incomes with only one mortgage, one property tax, and one property insurance to deal with.

As you can see there certainly are differences between single family and multifamily residential property investments. If purchasing residential real estate is a good fit to your personality and investment strategy, then a combination of single-family, and multi-family units will help build a balanced portfolio.

Written by GilverBook Team

Who Purchased Preferred Apartment Shares Before Christmas?

chart01In the middle of last year’s December holiday season, something major happened to the small cap REIT Preferred Apartments Communities. The Multifamily REIT that had only approximately $300 million in market cap came out under everybody’s radar. It’s worth noting that its stocks have been going below the sector’s median valuation and yielding more than it should.

The stock’s share price had an increase of 12 percent in the month of December. Between the 15th and 22rd of the month, the stock began to soar to higher than normal prices. The peak of this increase came on Dec. 18, when the stock was traded at seven times the stock’s average volume. The rally was unannounced, but there are reasons for this trend.

The fall-out of this came threefold:

First: The increase of the stock put Preferred Apartments at the top of the pack. More specifically, in the top three REIT stocks for 2015. The returns for the company came at 44 percent during the past year. It only trails the stars Extra Space Storage and CoreSite Realty. Even in the top three, Preferred Apartments showed some weak numbers such as their flat AFFO per share and leverage higher than the sector’s average.

Second: This puts a multifamily representative in the top three, which was deserved. This sector itself has seen a boom in recent years. Multifamily units are especially profitable in areas with good job prospects. Preferred Apartments competition, namely Mid-America Apartment Communities, UDR, and Essex Property Trust made their mark in a specific portion of the country, whether it be the U.S. South or West Coast. By contrast, Preferred Apartments invests all across the board, giving them a unique rise to fame. Another difference is their investments in shopping centers with grocery stores.

Third: The AFFO multiple had an increase from 12.3x to 13.5x. It looks good, but it’s still far below the sector’s best performing stocks. Mid-American Apartment Communities trades at 19x, UDR at 25x, and Essex Property at 27x.

It is possible for Preferred Apartments to rally yet again, but not without its possible setbacks. Still, the REIT is smaller than most and has been in the race the least amount of time. There is a chance to catch up.

Source: Preferred Apartment Communities (NYSE:APTS), Mid-America Apartment Communities Inc. (NYSE:MAA), Essex Property Trust, Inc. (NYSE:ESS), UDR, Inc. (NYSE:UDR).

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.