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.

Would An Apple Store REIT Spin-Off Make Sense?

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A REIT that includes Apple Inc. (NASDAQ: AAPL) retail stores seems like an excellent idea. Apple stores share an advantage that is seen in retail REITs with the most success — high sales per square footage. When one looks at regional mall REITs, this is very apparent. Those with higher sales per square footage also have higher valuation multiples.

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Whitestone Not As Attractive After All

Whitestone (NYSE:WSR; Diversified) has outperformed competitors with an impressive dividend yield of 9.8 percent. The company, with $314 million market capitalization, has definitely made the top 10 Dividend Yield REITs we track. A look at Whitestone’s year-to-date share performance tells a different story, however. That performance indicator shows a 23 percent downfall. Such a contradiction begs the question: Is this a great buy opportunity or is this company’s shares accurately priced?

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Although Whitestone has a portfolio resembling and performing like a regional mall company with a grocer anchor model of shopping centers, this REIT is categorized as Diversified. Whitestone considers itself to be a developer of community centers. Seventy percent of the tenants occupy small spaces of less than 3,000 square feet, which matches the surrounding neighborhoods’ shared needs.

Despite having a diverse foundation of over 1,380 tenants, targeting these smaller retailers as a community center strategy carries more risk. These current properties are located in the two growing metropolitan areas of Houston, TX, and Phoenix, AZ. Eighty-four percent of the company’s gross leasable areas are located in those two cities. Unemployment in these areas has been under 5 percent.

Whitestone must be very active in its asset management in order to attract their target tenants and create the right combination for the needs of each neighborhood. Close attention must be dedicated to watch vacancy since lease terms are shorter. With an occupancy rate of 86 percent, the company’s performance is lower than comparable retail REITs.

locationOther metrics, however, show evidence for boisterous growth. Whitestone just celebrated its five-year anniversary as a public company. The second quarter of 2015 showed exuberant results. Total year-over-year revenue has escalated 27.3 percent. Just as impressive is the 33.2 percent property net operating income growth. Same store NOI raised 6.9 percent while core fund from operations rose 27.3 percent. Core FFO per diluted share jumped 20.7 percent. This great performance hasn’t translated in an increased dividend, though. The dividend has remained at a $0.095 per month since its IPO launch in 2010.

Whitestone’s price-to FFO of 9.1x is in line with that of a riskier smaller company. But, this is down from its historic norm. The dividend yield has generally been high and at the current upper 9 percent yield range makes the company an attractive investment. However, this investment has a downside given that the dividends haven’t been raised in the past 5 years. The price per share of just under $12 hasn’t raised significantly from the IPO share price of $12. The shareholders carried the burden of the company’s growth because of share dilution.

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Whitestone has a unique business model, setting it apart from other retail REITs. However, the company relies heavily on management to make the model work well. My initial excitement has been tempered by realizing the risk level involved. As a result, this is an investment that I won’t make.

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.

National Retail Properties – A Solid REIT In The Retail Sector

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National Retail Properties is a REIT with a focus on properties leased to retail tenants. Listed on the New York Stock Exchange (NYSE: NNN), their properties are leased under triple net lease contracts leading to the nickname Triple N. Company management believes triple net lease properties provide a stable and predictable return as well as creating potential for future increased returns and capital appreciation. In addition to the lease payment, with a triple net lease, the tenant is responsible for the property operating expenses including insurance, utilities, repairs and maintenance, capital improvements, and real estate taxes.

National Retail Properties management also believes success comes one step at a time. Over the past 25 years, the company has built a stellar reputation by increasing dividends in small increments, sometimes by just one penny, every year. Management impressively navigated the company through the Great Recession maintaining its impressive dividend track record, even in 2010 when the dividend was not covered (current dividend payout is 78 percent). Occupancy was also little affected with a small dip to 96.4 percent. The portfolio has since improved to a current occupancy rate of 99 percent.

National Retail Properties owns, acquires, develops, and invests in properties that are primarily leased to retail tenants through long-term net leases. As of March 31, 2015, the company owned 2,104 properties across 47 states with 23.1 million square feet of gross leasable space and an average remaining lease term of 12 years. The company’s portfolio is geographically concentrated in the south and southeastern United States with a significant portion of their tenants being convenience stores and restaurants.

NNN has employed both debt and equity to drive growth. The company’s balance sheet has a relatively low level of leverage and they have wisely staggered debt maturities. The bulk of NNN’s debt is unsecured with a zero floating rate and the metric debt-to-total capitalization is 23 percent.

In terms of the company’s valuation, price-to-FFO has been in line with the sector’s median. The same is true for its dividend yield making NNN a low risk solid equity investment.

 Metrics  2015
Revenues – Q1, in percent 11.6
NOI – Q1, in percent 13.0
FFO per share – Q1, in percent 5.9
Alternate FFO per share – Q1, in percent 5.9
AFFO per share – Q1, in percent 7.8
Dividend per share, Q1, percent 3.7
Dividend payout ratio – Q1, in percent 76.4
Occupancy – Q1, in percent 98.8
Total debt to total enterprise value – Q1 23
FFO per share, in percent (Projected) 2.9
AFFO per share, in percent (Projected) 4.5
Implied Cap Rate – Q1 8.1

Written by Heli Brecailo

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

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