Net Lease Retail REITs Have Also Been Affected

chart01The recent drop in equities, which was prompted by the possibility of an imminent interest rate hike, might help us explain certain rallies among REIT stocks. Just as some group of stocks went up over the course of a year, they dropped just as quickly, losing a significant portion of that appreciation. Net lease retail REITs have been one of the most affected groups.

After the Federal Reserve announced in its April meeting minutes that it was open to an interest rate hike in June, financial markets quickly reacted and the S&P 500 dropped slightly. Overall, REIT stocks have seen even steeper falls. However, some REIT sectors have reacted even more dramatically.

For instance, the net lease retail REITs, which have been the darlings of the market, plummeted by an average of 4% in the middle of last week. O and NNN dropped north of 5%. While they did manage to gain some ground by the end of the week, both stocks were still down by 6%. During their April meeting, the Fed decided to maintain the target range for interest rates at ¼ to ½ percent.

The recent fall only serves to reinforce how highly hyped the net lease retail REIT rally has been. For dividend investors, net lease REITs have been a source of high interest. Advantages include a lower operating leverage (tenant covers most, if not all, of the real estate expenses) and the availability of long paying dividend stocks. The lack of a clear change in fundamentals has raised questions about how sustainable this rally is.

On the other hand, data center REITs, which have been our best REIT sector this year, haven’t had the same reaction. Although there was a slight drop, it was not nearly as significant as the one felt by net lease REITs. An explanation can be found in the strong fundamentals, particularly the increasing need to store digital information has served as a catalyst to the industry.

Another noticeable drop occurred in the low productivity mall REITs, which have been affected by prior negative news on the retail space. While low productivity mall REITs have fallen an average of 7%, they closed the week down by almost 5%. This group includes CBL & Associates, WP Glimcher, and PREIT. High productivity mall REITs have fared much better, falling an average of less than 2%.

Source: Realty Income Corporation(NYSE:O),National Retail Properties, In(NYSE:NNN)

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.

Middle-of-the-Pack Net Lease REIT Enjoys the Ride

chart01.pngWhile it isn’t necessarily “news-news” the net lease REITs have enjoyed a good ride lately. These REITs, which run with less operating leverage, have attracted many investors, affecting all subgroups. The high interest has influenced much hyped companies, such as O and NNN, as well as stocks with a bit of baggage, such as Spirit Realty and Getty Realty. As expected, it has also affected STORE Capital Corporation, a middle of the pack REIT in regards to valuation multiple and market size.

So far this year, STORE Capital has already gone through four public offerings. Oaktree Capital Management, LP., a former major shareholder, promoted three offerings in order to exit its position. STORE Capital will not receive any of the proceeds. In turn, STORE has recently promoted another offering, which was upsized and demonstrated a good bit of interest from investors.

Like its freestanding peers, STORE Capital’s share price has rallied over the past few months. The stock return has exceeded 10%. Currently, the share price is hovering around $26. The company has achieved high marks for its occupancy of 99.9% and its diversified tenant base. STORE is a net release REIT that serves middle market and larger non-rated tenants. A significant portion of STORE’s tenants are restaurants, movie theaters, health clubs, and early childhood education centers.

Something unique to STORE Capital is that it has developed its own methodology to rate lease income, primarily relying on profitability metrics of its properties. Rather than only assessing the tenant credit, they also evaluate the business unit operating at the leased site. This is referred to as its STORE Score.

The signs that the stock has already been priced correctly include that it is trading at the average dividend yield for the sector (4.2%) and its multiple is just north of 16 times AFFO.

In summary, the stock has demonstrated several signs that it is correctly valued or overvalued, most notably by the several offerings, including the three from its former shareholder.

Source: STORE Capital Corporation(NYSE:STOR), 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.

Who Doesn’t Like a Plot Twist? See this Net Lease REIT.

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  1. Improvements to the debt position of Spirit Realty Capital, a net lease retail REIT, led Standard & Poor’s to raise the company’s credit rating to investment grade (from ‘BB +’ to ‘BBB-‘) last Friday.
  2. Spirit is coming from a bad experience with a major tenant that filed for Chapter 11.
  3. Spirit has underperformed in the last twelve months and for the last two years. Also, multiples have been one of the lowest among retail net lease REITs.
  4. The upgrade might be the catalyst that Spirit needs.

Who doesn’t like a plot twist? I do, and Spirit Realty Capital’s turning out to be one. Last week, Spirit received an important seal of Standard & Poor’s, which validated the management’s long-term effort to strengthen balance sheet, increase number of unencumbered properties, and reduce tenant concentration.

S&P granted Spirit an investment grade corporate credit rating (from ‘BB +’ to ‘BBB-‘). This external validation may be what Spirit needed to address years of poor stock performance and brush off last year’s blunder.

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Spirit is coming from a bad experience with a major tenant. Haggen, an up and coming grocery store retailer in the Pacific Northwest, filed for bankruptcy relief last September, less than a year after Spirit closed with them on 20 properties via a $224 million sale leaseback transaction. Their rental income represented 2.4% of total revenues. This was a blow to the company’s portfolio and further caused investors to doubt its underwriting process.

Over the months, the situation with Haggen has cleared up and, although it hasn’t run out of its course till to the end, the company seems to have a better control of the properties. Out of the twenty properties involved in the sale leaseback, nine were immediately leased to new tenants in equivalent terms, five were kept by Haggen whose operations will be sold to a new operator, and six were vacated/sold. In conclusion, the situation hasn’t been completely resolved yet, but Spirit was able to reduce the size of the problem.

chart02In addition, over time the company has focused on reducing its Shopkco concentration. Shopkco once represented 16% of Spirit’s rental income, but that figure has now been reduced to around 9%. And with additional asset sales, the company expects it to be around 5%. The result has been a less concentrated portfolio than Realty Income and National Retail Properties.

Spirit also improved leverage indicators. For example, the percentage of unencumbered assets has increased significantly, adjusted debt to the enterprise value has been reduced and fixed rate coverage ratio is now above its target of 2.5x.

However, little progress in the financial market front has been seen over the past years. Compared with Realty Income and National Retail, the stock has underperformed, especially in the last twelve months as well as the last two years. This year, however, the stock performance has been at par with their peers. The difference is that there has been a positive sentiment in favor of net lease retail.

chart03In summary, Spirit’s situation has improved. The external validation might finally help the stock catch up with their peers. With high dividend yield and low FFO multiple, this could be a buying opportunity.

Source: Spirit Realty Capital, Inc.(NYSE:SRC),Realty Income Corporation(NYSE:O),National Retail Properties, In(NYSE:NNN)

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.

 

More Developments from Hotel and Net Lease Retail REITs

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  1. Hotel REITs has occupied the bottom portion of our weekly performance chart, after topping the chart the prior week.
  2. Hotel REITs will be subjected to a higher volatility in function for a lack of a catalyst.
  3. Also, threats such as having a narrowing gap between supply and demand and being able to quickly adjust rates do not help the sector.
  4. Overpriced stocks in the net lease retail and self-storage have also dropped.
  5. Whatever caused the stock to drop appears to have been limited to just equity REITs.

Two weeks ago, hotel REITs has monopolized our headlines for occupying the top position of our weekly performance chart. However, last week they were at the bottom. Yet at the same time, hotel REITs continues to be an attractive option with their lower multiples and high dividends yields. They continue to be very sensitive to market fluctuations. People who buy Hotel REIT should take into consideration that they will be exposed to higher levels of volatility.

I have not observed any changes in the lodging fundamentals that makes me think that a sector’s share appreciation will happen anytime soon. While it is true that demand has been greater than supply; demand growth has decreased and hotel pipeline has increased. This has led to a narrow gap between supply and demand, which shows that supply will soon catch up to demand.

Although some people seem to favor hotels in a rising interest rate environment, the Fed has already signaled that it should be a slow process. Hotels are quick to adjust their daily rates if inflation kicks in. However, remember that this a double-edged sword, since they might also have to reduce their rates. This is not unlikely in an environment where people keep saying that a recession is right around the corner. Alternatively, you might try some individual stocks and look for more robust portfolios.

Overpriced stocks in a net lease retail and self-storage have dropped as well. Popular REITs, such as Realty Income and National Retail Properties have also been at the bottom of our weekly performance chart. According to Seeking Alpha, a slight increase in the 10-year yield has prompted a selloff of REITs (click here).

The fact the Reality Incomes has been overpriced has been propagated among REIT investors which fueled all sorts of opinions. I have seen arguments that are defending this is a good moment to short the stock, or that the stock could be reaching new highs, much like the heights that the Federal Realty Investment and Public Storage enjoy.

Whatever has caused the stock drop last week appears to have been limited to equity REITs, where more than 3/4 of the stocks returned negative. In comparison, the S&P 500 was slightly up and several dividend ETFs were positive. If the cause is really interest rate uptick, this is just a sample of what will happen in the short term when the Fed raises interest rates again.

Source: Realty Income Corporation(NYSE:O), National Retail Properties, In(NYSE:NNN), 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.

Massive cash-out reinforces good momentum of net lease retail REITs

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Oaktree Capital, a major shareholder of Store Capital Corporation (a net lease retail REIT), cashed out Store shares at their highest price since it became publicly traded in November 2014. Until recently, the shares had not suffered significant appreciation, but they are now about a third higher than their initial price.

Oaktree put up for sale more than 33 million shares, almost a quarter of Store’s outstanding shares. However, Store is not pocketing any of the proceeds–all are going to the selling shareholder Oaktree. One main concern was a significant drop in the share price, but it didn’t happen. Prices held up well, demonstrating that interest in this kind of REIT has attracted investors’ interest.

During a period of greater volatility in the first weeks of 2016, we observed that many investors flocked to net lease retail REITs. Companies such as Realty Income and National Retail Properties have appreciated by more than 15% this year, compressing yields to the lower four percent. Store, a net lease retail REIT, has accompanied that trend, as well.

Last December, Oaktree gave signs that Store could fly more freely when their ownership was below 50%. The company ceased to have “controlled status” and was obliged to comply with tighter requirements related to independent directors.

Oaktree is a global investment management firm, specializing in alternative investments with approximately $97 billion in assets under management as of December 31, 2015.

Seritage also benefits from the good momentum.

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Perhaps the good momentum of net lease retail has positively affected Seritage Growth Properties. The company, which is a spinoff of select stores of Sears Holdings, has caught investors’ attention for its shareholders. Many like the company because Warren Buffett and Bruce Berkowitz have invested in it; the rationale is that they must have access to information other people don’t so it’s a good buy, even though the company is concentrated on a failing tenant and its yield is a meager 2.0%.

Despite finding it a risky strategy, I’ve read a lot of theories why one should invest in Seritage. The most common idea is that there should be upside once the properties are leased to other tenants. Some investors have indicated that by looking at the property level the company is undervalued. The conversion to other tenants should take time and capital so I’d only invest if I knew the company was deeply discounted. Also, there’s a cap of 50% conversion of the properties, so Sears’ concentration should continue in the long haul.

Source: Seritage Growth Properties(NYSE:SRG), STORE Capital Corporation(NYSE:STOR)

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. Equity REITs Return 7%

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Click here to download exclusive dividend yield report for free.

U.S. equity REITs continue to excel and, on average, have returned an average of 7% so far this month. This should not change. This Wednesday, the Federal Reserve laid out a more conservative scenario for interest rate hikes in 2016 (two rather than four rate increases). Although the Fed has been optimistic about the US economy, they will slow the pace of rising interest rates due to concerns over weaker global growth. Because interest rate hikes have been the source of several REIT selloffs in 2015, we expect a smooth field for REITs to run for the coming months.

Highlights of the Week

This has been another consecutive positive week. We continue to see high interest in net lease retail, which continues to be going well. Seritage Growth Properties, a spinoff of Sears stores, have surprised investors and returned by almost 9% last week. Other stocks such as Realty Income and National Realty Properties have seen valuation multiples get higher over the last weeks and now they seem overvalued. Their dividend yield has been below equity REIT average.

UMH Properties, a small cap in the manufactured home industry, fell by more than 6% this Friday. There was no visible reason for such a sharp drop, which occurred after 2 pm. However, we know that, despite their good dividend history, UMH has not covered their dividends and they seem far from covering them. We believe that the company should have cut their dividends to a reasonable level rather than finance it with debt and equity.

Pebblebrook Hotel Trust

Pebblebrook Hotel Trust surprised many investors and increased its dividend by 23%. Last year we elected Pebblebrook as one of the strongest growth lodging REITs. They have grown AFFO per share more than most REITs have and rewarded shareholders with dividends growing at equivalent rates. So for us, it was not really surprising.

This is a chance for Pebblebrook to react. The Fed decision may be what investors were expecting to invest in lodging again. Without much government interference, we could finally see a robust recovery from undervalued lodging REIT stocks. We have always put the company as part of a group of REITs that enjoy ‘premium’ valuation because of strong quarterly results, experienced management, and its good size in terms of market capitalization.

When we last looked at Pebblebrook on October 23, 2015, its AFFO multiple was about 17x. This week, it was hovering around 11x. Although the stock has room for growth, we do not believe that it will achieve the same multiple of October.

The company will slow growth due to weaker financial markets. Their AFFO per share growth for 2016 is expected to be around 10%, as opposed to last year’s 28%. Moreover, they just approved share repurchase plans.

In terms of dividend yield, the dividend increase puts the company above the average among equity REITs.

In short, if you were looking for an undervalued, well-managed, high yield stock, Pebblebrook could be it.

Click here to download exclusive dividend yield report for free.

Source: Pebblebrook Hotel Trust(NYSE:PEB),UMH Properties Inc.(NYSE:UMH),Realty Income Corporation(NYSE:O),National Retail Properties, In(NYSE:NNN), Seritage Growth Properties(NYSE:SRG)

Disclaimer: This is not a recommendation to buy or sell stocks. The highest-yield stocks are not necessarily the best portfolio investment choice. The purpose of this report — which is essentially a snapshot of information available on March 18, 2016 — is to reduce your stock analysis by enabling you to compare stock and sector performance. Please do your own due diligence before making any investment decision.

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

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

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

 

U.S. REITs: Flight to Quality

 

net leaseThis year so far net lease retail has gotten a head start on being the best performing REIT sector. Realty Income, National Retail Properties, and Agree Realty have been the companies with top returns, ranging between 9% and 14%. Their rally, however, has decreased dividend yields, generating discontent from dividend investors who do not appreciate reduced yields.

Investors are turning to net lease because they tend to be less volatile than the financial markets. Realty Income, for instance, has a beta of 0.12 for the last 36 months. That is, when the S&P500 varies by 1%, the stock only varies by 0.12% on average.

Also, net lease retail has a good record of paying dividends year after year. Realty Income, National Retail Properties and Agree Realty have been distributing similar or increasing dividends for many consecutive years (18, 26 and 5 years, respectively).

In addition, landlords love net leases because they push costs of maintenance, taxes and insurance to the tenant. Landlords like the convenience of not having to spend time and money maintaining the property. In the end, they benefit from a leaner cost structure and more stable funds from operations.

For all the reasons that I mentioned above, the increasing demand for net leases can be interpreted as a flight to quality.

Single Family Homes

At the same time net lease retail is experiencing a thriving performance, single family homes have been the worst performing sector so far this year. Last year’s announcement of the merger between American Homes 4 Rent (AMH) and American Residential Properties (ARPI) didn’t seem to help their stock performance in 2016. Since January, both AMH and ARPI stocks have dropped by almost 15%.

During the fourth quarter, activist Land and Buildings have tripled their position on ARPI.  On 31 December 2015, ARPI represented Land and Buildings’ second largest investment and Land and Buildings were one of ARPI’s largest shareholders. We don’t know yet if the drop is associated with a potential exit of Land and Buildings, which have applauded the merger decision.

As to the newly formed Colony Starwood Homes, the stock has been holding up better. Their 2016 return has been virtually flat. They will release Q4 results this Monday.

This week’s performance

This past week was another good week for REITs. We saw some familiar faces as top performing stocks. For instance, NorthStar Realty (NRF) has climbed to the top after the company has announced the sale of various investments, as well as the creation of a special committee to explore the possibility of recombining with its external manager NorthStar Asset Management. NRF stocks went up by 23%.

NRF rally must have been a relief for shareholders following weeks of poor performance. Nonetheless, there is still a long way to go if the company really wants to regain its November prices.

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

Source: Realty Income Corporation(NYSE:O), National Retail Properties, In(NYSE:NNN), Agree Realty Corp.(NYSE:ADC), NorthStar Realty Finance Corp.(NYSE:NRF), Northstar Asset Management Gro(NYSE:NSAM), American Residential Propertie(NYSE:ARPI), American Homes 4 Rent(NYSE:AMH), Colony Starwood Homes(NYSE:SFR), Yahoo!Finance, SEC, Fast Graphs, Land and Buildings

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 February 26, 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 January 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.

Has A Major Tenant Bankruptcy Diminished Spirit? (Part 2 of 2)

Click here if you have not read part 1.

chart06Despite their size, which is almost as large as National Retail Properties, Spirit has yet to achieve valuation multiples that compare with National Retail. A major issue is that Spirit has struggled with concentration by Shopko, their major tenant. Since they have merged with Cole Credit Property Trust II, Inc. in mid-2013, Spirit has certainly come a long way in reducing Shopko’s representation down from sixteen percent to ten percent, but it is still relatively high. Also, the short public history with modest dividend increases may have contributed additional risks to the company.

In addition, the Haggen event certainly does not help to improve the company’s profile, especially a large company by REIT standards that has far more resources to make better decisions. Spirit relayed in late November that they have agreed with Haggen about the future of the master lease for the twenty properties they have acquired. Nine will be sold to other companies, Haggen will keep five stores as part of a thirty-two-store portfolio (that will be marketed), and six stores have been rejected and will be leased by Spirit. Of course this is all contingent on approval from the bankruptcy court.

chart07Spirit Realty shares plummeted to their lowest levels of 2015 on September 10, which happens to be the same week in which Haggen announced their bankruptcy filing. Since that time there has not been much of a rebound, and the stock continues to have the lowest AFFO multiple when compared with their sector peers. Given the current risks and circumstances the company’s share price drop is completely justifiable. That being said, it very may well continue for a long time to come, or at least until the resolution of the Haggen situation is completely taken care of.

In conclusion, we are not sure whether the Haggen bankruptcy has significantly diminished Spirit’s management team. It certainly has thrown some great uncertainties to the manner in which they operate. You do not need to be a real estate expert in order to see that Haggen was a risky tenant. If Spirit is keen on make-or-break transactions, shareholders should most definitely be aware of this fact.

Source: Spirit Realty Capital (NYSE:SRC), Seeking Alpha, National Retail Properties, Inc. (NYSE:NNN), Realty Income Corporation (NYSE:O), Haggen

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.

Has A Major Tenant Bankruptcy Diminished Spirit?

chart01Spirit Realty Capital, a freestanding net lease real estate investment trust that competes with Realty Income and National Retail Properties, has experienced some head-scratching problems lately. They signed a sale-leaseback agreement with a major tenant that filed for bankruptcy just a few months after initiating the contract. The question for Spirit shareholders or potential shareholders remains: How should they view this situation?

During the first half of 2015, Spirit purchased the properties from Haggen Inc., which is a large regional food and pharmacy retailer in the Northwest. It just so happens that Haggen filed for bankruptcy in early September. By the end of November, Spirit negotiated the restructuring of a major portion of the master lease agreement in order to stem the tide and minimize revenue losses. You’ll be able to see the outcome by property below.

chart04Should this be considered a major event? Is there a major flaw with their due diligence process that emerged from this acquisition? Did the management act recklessly? Although we do not have a straightforward answer to any of these questions, we can certainly provide you with a few thoughts in order to flesh them out and avoid getting personal with their management team.

  1. Despite being a top tenant, Haggen Properties encompasses a minor percentage of Spirit’s square footage space that is available for rent. In fact, Haggen leased 1.0 million square feet out of the available 55 million square feet that Spirit owns. These figures equal 20 out of the 2,600 Spirit controlled properties with a 2.4 percent normalized revenues.chart05
  2. Haggen’s explosive rate of growth in 2014 should have raised some red flags. The company was once a small player in the industry, but grew their number of stores by a staggering 800 percent from only 18 to 164 in December 2014. This rapid growth came as a consequence of an agreement that occurred between the U.S. Federal Trade Commission (FTC) and grocery chains Albertsons and Safeway. The FTC approved the merger between both grocery store chains Albertsons and Safeway as long as they sold dozens of stores to their rivals, including Haggen. Spirit ended up purchasing 20 Haggen properties.chart02
  3. During the Q2 results conference call in August, when Spirit was questioned about the risk that Haggen posed, the company defended the acquisition by stating that they were able to ‘cherry pick the best assets that they wanted to keep long-term.’ In addition, they said that the assets not even cost 60 percent of the replacement cost.chart03
  4. Spirit brushed off the concerns regarding Haggen a month before they filed for bankruptcy. The company said that they were confident about Haggen’s ability to absorb the Albertsons stores. This would explain why they had signed a twenty-year master lease.
  5. Spirit disclosed the information in August that Haggen became a top tenant, although the agreement was signed in December 2014, on top of the fact that the properties rolled in during the first half of 2015. It is interesting that Spirit announced Haggen as a top four tenant during the second quarter results without providing any explanation in their Q2 10-Q. The word ‘Haggen’ was mentioned once.

To be continued tomorrow…

Source: Spirit Realty Capital (NYSE:SRC), Seeking Alpha, National Retail Properties, Inc. (NYSE:NNN), Realty Income Corporation (NYSE:O), Haggen

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 Retail REIT Can Grow Dividends

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It is difficult to avoid getting excited with Agree Realty, whose stock, as we agreed last month, is a high-potential dividend growth stock. In a sector featuring both National Retail Properties and Realty Income, it is refreshing to see a bold, but riskier, alternative to both options. Our ranking for best-performing Q2 equity REITs showed Agree to be a leading stock, and can probably be on the top of our Q3 ranking as well.

Strategy

Agree invests in net lease retail properties (with tenants covering most property costs), on which they have focused completely over the past years. The business has virtually become a pure play in the sector. Besides, the tenant roster is 54 percent investment grade. Except for Walgreens (19 percent of annualized base rent), its portfolio has no major tenants, nor any major lease expiration percentages in the upcoming years.

Moving from concentration

Though total market capitalization has not reached $1 billion, Agree has been composing as diverse a portfolio as possible. A hard-learned lesson from Borders, which filed for Chapter 11 bankruptcy protection in 2011 and represented 20 percent of the total annualized base rent, has influenced them. Agree has over 260 properties spread over the country. This year’s acquisitions are spread across 21 states, leased to 35 tenants operating in 19 diverse retail sectors. The underwritten average capitalization rate on the company’s acquisitions was about 8%.

Q3 results

Highlights have included almost 100 percent occupancy and 8 percent dividend-per-share increase year over year. Total revenues have increased 30 percent, while total debt-to-capitalization has been stable (mid-thirties). The one “disappointment” has been Adjusted FFO per share, whose growth from Q2 fell from 13 to 7 percent.

In conclusion, applying the same rules as those for Q2 ranking, Agree’s results have been as good as those of National Properties.

Companies: Agree Realty Corporation (NYSE:ADC), National Retail Properties (NYSE:NNN), Realty Income Corporation (NYSE:O)

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.