Our Attitude Toward REITs

  1. After an average share price appreciation of 25% over the last twelve months, U.S. equity REITs now seem to be fairly valued or even overvalued.
  2. In anticipation of creating a real estate group within the S&P 500, there’s discussion as to whether REITs will reach a new multiple level.
  3. However, there is a chance Janet Yellen will increase interest rates by a quarter of a percentage point again, prompting new selloffs.
  4. If there is enough of a dip to make this a buying opportunity, we will open a position.

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We are definitely in any different a situation than we were at this time last year. In August 2015, the market was debating whether or not the Fed would initiate the interest hike, which have prompted a selloff later in the month. Following an average share price appreciation of 25% over the last twelve months, U.S. equity REITs now seem to be fairly valued or even overvalued.

In anticipation of creating a real estate sector within the S&P 500, there’s discussion as to whether REITs will reach a new multiple level. Some argue that the inclusion will make fund managers and institutions inch up their REIT stake in portfolios benchmarked by S&P 500. However, the more we look at it, the more we are convinced that this is a moment to evaluate positions and possibly take profits or hold.

However, there’s always the chance Janet Yellen will increase interest rates by a quarter of a percentage point again, competing with REIT yields and prompting new selloffs. REIT specialists might complain that REITs offer more than the yield, but this is how a significant portion of investors see REITs. While it’s not possible to go against the market reaction, we might take advantage of a potential selloff to buy new positions.

So, here’s what we are doing right now. We’re examining Q2 results, checking prospects and multiples, and if there is enough of a dip to make this a buying opportunity, we will open a position.

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, and PEB.

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.

Yellow Flag on Hotel REITs

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During the release of Q2 results last week, several lodging stocks relayed the weakening of corporate transient demand. This has led some management teams to be more cautious while several have decided to review their 2016 guidance figures. Hotel REITs are not saying how long this will take, but they have confirmed that the second half of the year will suffer from the lingering effect.

The main cause has been the macro environment. Many uncertainties have led many companies, regardless of their size, to spend less and also cut travel expenses. Plus, the geopolitical tensions and fears of terrorism have discouraged travelers. With domestic and global events such as Brexit, China economy, oil prices, and U.S. elections, companies are lacking a clear horizon.

Hilton Worldwide, which is planning to spin off to create ‘Park Hotels & Resorts REIT,’ has mentioned on their Q2 call that, because of corporate transient, they remain on the lower end of their guidance range. While the corporate transient segment is slowing down, the group business is still doing well.

FelCor Lodging Trust, which is significantly exposed to the business traveler customer base, has also reported they are expecting group business to remain solid. While the group business partially offsets the decline in business transient performance, they are still continuing to expect negative effects on hotel metrics.

The Dow Jones U.S. Hotel & Lodging index has dropped by 4% by Wednesday, in tandem with most hotel REITs, but it has quickly recovered. Regarding last week’s worst performers, FelCor went down by 8%, Pebblebrook fell by 5%, and Hersha dropped by 3%.

Although the softness was detected a couple of months ago, a stronger impact has recently thrown down a yellow flag on hotels, whose operational results have been doing well. While on the other hand, the softening has made a low to moderate impact on the results. Many management teams have reported that there are ways to mitigate the impact.

In conclusion, the softening is not all bad, but it still will require some monitoring.

Source: Dow Jones U.S. Hotel & Lodging (^DJUSHL), Hilton Worldwide Holdings Inc.(NYSE:HLT), FelCor Lodging Trust Incorporated (NYSE:FCH), Pebblebrook Hotel Trust(NYSE:PEB), Hersha Hospitality Trust(NYSE:HT)

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 July 29, 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 May 31, 2016, the equity REITs are constituent companies of the FTSE NAREIT All REITs Index. Companies whose equity market capitalization is lower than $100 million have been disregarded.

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

Disclosure: The author 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.

Despite Management’s Bearish Views, This Hotel REIT Gained 10%

chart01Hotel REITs shone brightly last week. It was by far the best performing sector with an average 1-week return of nearly 5%, as opposed to a REIT average of 1.7%. One of the reasons was LaSalle Hotel Properties, which released Q2 results. The stock was the best performing stock of the week, reaching 10% appreciation.

LaSalle Hotel Properties grossed $245 million in proceeds from the sale of its hotels, but the hotel REIT doesn’t plan to put it to work. Instead of investing in new properties or redevelopment, the company is planning on reducing leverage and improving its already good debt profile. Why is the company not taking advantage of opportunities and spending less in capital expenditures?

LaSalle’s lack of activity is a major letdown in an industry that has likely passed its cycle peak. This means, since the lodging industry itself lacks strong catalysts, the lack of internal action will not help LaSalle stock either. The management has a bearish view on the market and has repeatedly said that demand is decelerating, while supply is increasing. In the end, they wanted to see property prices come down, which isn’t happening.

Having been granted investment grade credit rating, the company is improving its already enviable debt metrics in the industry. Net debt to EBITDA is one of the lowest at 2.7 times, net debt to total market capitalization is around 26%, and the debt maturity profile is staggered, without any meaningful payments in the next three years. I want to think, that by doing this, the company is getting ready for a major transaction, but it’s probably just wishful thinking.

With significant exposure on the West Coast, the company is on track to capitalize on the region’s tailwinds. In Q2, its Los Angeles RevPAR increased by 17%, whereas most of the remaining regions were relatively okay. The company also has significant exposure to Boston, San Francisco, and San Diego. On the other hand, its New York RevPAR has decreased by 7%. In the end, the portfolio’s positives outweigh the negatives.

LaSalle is a midcap hotel with one of the highest multiples among its peers. The multiple is 14 times its estimated 2016 AFFO, while the average for hotels is about 10 times. It’s worth mentioning that this is still lower than the whole U.S. equity hotel average and its share price is 19% lower than its 52-week high. For that reason, the stock should have some room to grow.

In conclusion, we are monitoring LaSalle stock, but like the management, we decided to step aside and watch. Instead, we are prioritizing hotels that are actually in action.

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 July 22, 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.

Source:LaSalle Hotel Properties(NYSE:LHO)

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

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

Disclosure: The author is long FCH, XHR, CLDT.

Data Center REITs Gained Attention Again

chart01This week U.S. equity REIT stocks have been slightly up, with a 0.8% average increase. The S&P500 also saw a similar trend. This time we noticed that the market was holding stronger opinions towards sectors. Generally, the more popular sectors suffered losses while underappreciated sectors experienced gains.

Data center gained attention because all data center REITs lost ground, with a median share price decline of -3.2%. Most stocks dropped between 2% and 4%, but that was not the case for CoreSite Realty.

CoreSite share price plummeted by 8.1%, the worst among all U.S. equity REITs last week. The most dramatic drops occurred on Wednesday and Thursday, just two weeks before the company releases their Q2 results. Hopefully their results will be on par.

Despite the drop, CoreSite remains the most successful data center REIT in 2016. They have returned with 48% percent to date. The stock has remained one of the top five best performing stock among U.S. equity REITs. It is also important to mention that CoreSite is a midcap REIT with 17 data centers across the United States. They also have the second highest multiple when compared to peers.

Data center, the best performing REIT sector of 2016 so far, has definitely been the center of several online publications. Fundamentals have been spectacular leading the average multiple to surpass 20 times AFFO. For that particular reason, investors have been very cautious in adding new positions; some have done the opposite and realized profits. Manufactured homes and self-storage were among the other sectors who did poorly last week.

Lodging and timber saw quite a bit of gains. Several lodging stocks were among the weekly top twenty returns. Pebblebrook Hotel Trust and Chatham Lodging Trust returned around 6%-7%. Their portfolios are skewed toward the west coast, where the lodging industry should demonstrate much better results.

We are approaching the start of Q2 results season, so this could very well tell us how things will unfold.

Source: Chatham Lodging Trust(NYSE:CLDT), Pebblebrook Hotel Trust(NYSE:PEB), CoreSite Realty Corporation(NYSE:COR)

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 July 15, 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 May 31, 2016, the equity REITs are constituent companies of the FTSE NAREIT All REITs Index. Companies whose equity market capitalization is lower than $100 million have been disregarded.

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

Disclosure: The author is long FCH.

This REIT Might Be Your Best Chance in Self-Storage

chart01It was a quiet week for US equity REITs, which were on average slightly up 1.1%. It appears as though investors are waiting for the Q2 season results release. Stock performance was down slightly in specialty REITs, but positive for the remaining sectors. One of the week’s best-performing sectors was self-storage, led by National Storage Affiliates, which was up by 5.2%.

Keeping up the good news, National Storage Affiliates reported raising $238 million in proceeds from the offering of common shares. They were able to issue an amount of stock equivalent to half of the total outstanding shares. The company plans to use the proceeds to expand debt capacity in anticipation of new acquisitions.

National Storage operates under an affiliate system which is referred to as PRO, or participating regional operators. Each PRO contributes properties in exchange for operating partnerships (OP) and subordinated performance units (SP). Each PRO manages the properties it contributed to the company. The affiliates are the major owners of the company via OPs and SPs. The most recent addition to the PRO network was Hide-Away. They became the seventh PRO to join the company last April.

In self-storage, National Storage has one of the lowest multiples at 22 times AFFO (despite high). This may be a result of becoming publicly traded last year. In comparison, Public Storage, which is the largest company in the sector, is trading at 29 times. Amidst speculations that the sector is losing strength, National Storage Affiliates has maintained strong stock returns this year whereas its peers showed overall weak performance.

The sector appears to be becoming more concentrated. For example, last May, Sovran Storage acquired LifeStorage for $1.4 billion. The affiliate strategy of National Storage also acts as a consolidation mechanism. National storage appears to be the best bet in self-storage as far as overall outlook.

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 July 08, 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 May 31, 2016, the equity REITs are constituent companies of the FTSE NAREIT All REITs Index. Companies whose equity market capitalization is lower than $100 million have been disregarded.

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

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