The Truth Must Be Told: Industrial REITs Have Not Been a Breeding Ground to Harvest Hefty Dividends

chart01Last November, we asked ourselves why First Industrial had not been generous enough with its shareholders. Although the dividend has grown at a double digit every year since it was reinstated in 2013, the dividend yield was way below its peers; in fact, it is one of the lowest among equity REITs. For the fourth quarter, the company decided to correct this situation and its dividend has gone up by almost 50%.

The company’s quarterly dividend rate went up from $0.13 to 0.19, equalizing an annualized yield of 3.7% with the sector median. Its previous yield was on par with the 10-year U.S. Treasury yield, likely the most obvious reason why management decided to bump it up. Also, the AFFO payout was below 60%, which made room for aggressive increases.

chart02.png The truth must be told: Industrial REITs have not been a breeding ground to harvest hefty dividends. Except for STAG Industrial, Liberty Property Trust, and Monmouth Real Estate Investment Corporation, all others have yielded below the equity REIT average. STAG Industrial has been the most popular for investing in secondary and tertiary markets. First Industrial, in turn, invests in the top industrial real estate markets in the U.S.

First Industrial went through tough times during the great recession, turning itself very stringent about dividend distributions. Its share price reached the bottom at $1.91 on March 03, 2009, after reaching its all-time peak of $50.52 in November 2006. On March 31, 2009, its total debt to total market capitalization reached 84%. Its FFO per share plummeted in 2008 and went negative in 2010. For that reason, liquidity has become an important component of its strategy. In 2009, they announced that they would distribute the minimum amount of dividends required to maintain the REIT status.

chart03.png Fast forward to December 31, 2015, and the situation had completely changed. Its share price had surpassed $20. Its total debt to total market capitalization had plummeted to 36% and last September the company was granted investment grade status by Standard & Poor’s. That recognition must have also encouraged the company’s decision to make the dividend policy less stringent.

Last year, First Industrial stock performed well. Its total return was just under 10%, which was better than most of its peers. Only PS Business Parks and Terreno did better than First. Since management expects its FFO per share will increase by 15% in 2016, there’s a good chance that the company can continue its stock performance in 2016. In terms of AFFO multiple, the company is comparatively cheap. While the peer average is 18x, First has been trading at 16x. It is not as blatantly cheap as STAG (which is trading at 11x), but there’s certainly room for appreciation.

The only caveat is that First shares tend to be as volatile as the market. In 2016, we’ve seen a significant drop of 5%, a bit more than S&P500’s drop of 7%. Given that the Q4 results last Friday were strong, this could be a good entry point.

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Source: First Industrial Realty Trust(NYSE:FR), 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.

Multifamily REITs – Expensive Becomes More Expensive

chart01Whenever I hear news reports regarding the U.S. rental market, whether urban legend or not, I tend to remember stories about people sleeping in their cars and showering at companies based in the San Francisco Metro Area. Recently the world has learned that the same principles apply to Washington, D.C. Speaker of the House, Paul Ryan, admitted that he sleeps at his office, and showers at the gym. Well, the next thought that comes to mind is that of Essex Properties Trust.

chart03There are not many multifamily REITs that have the ability to enjoy tailwinds as well as Essex. This Palo Alto, California-based company primarily invests in the same state that it is based out of. Essex has surfed the wave of the housing rental industry with high-end apartments. The company’s success has been fueled by a combination of millennials postponing their first home purchase, shortage of supply, and a presence in housing markets that enjoy high levels of job creation. There is no wonder that Essex made it to the top in our Q2 US equity ranking amongst apartment REITs.

Q3 Performance

Year over year Q3 figures are once again proof as to why this company shines in the sector. Essex has shown a 15 percent increase in Core FFO per share, 10 percent growth in same property net operating income, 12 percent bump in total revenues, and an 11 percent rise in their dividend per share. In summary, these figures are extremely similar to the results in Q2 that catapulted the company to the top.

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Locations

Essex owns and operates 245 properties totaling 58,000 homes that are divided into three areas: Southern CA, Northern CA, and the Seattle, Washington Metro Area.

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Multifamily Fundamentals

The company’s multifamily fundamentals could not be any better for businesses that operate on the West Coast. There have been several recent reports that name Florida metro areas as the best place for job growth, however not all jobs are equal especially in salaries. That being said, San Jose, CA has emerged as a region with one of the highest paying job creation potential.

chart04The cities in which Essex operates have been flagged as areas where demand is greater than supply. There do not seem to be any signs that this will change anytime soon. For example, many of the most expensive single-family home prices are in San Francisco, San Jose, and Oakland. Coldwell Banker formulated a list of the most expensive housing markets in 2014, and an incredible 9 out of 10 were in California. Renting as opposed to purchasing homes in those areas simply makes sense at this time.

When compared with its peers, Essex enjoys the highest same store net operating growth. In Q2, the company shared that title with Trade Street Residential, however that company was acquired by Independence Trust Realty in Q3 this year.

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Debt Profile

In most cases higher levels of leverage are linked to larger levels of default, however this is not a problem for Essex. The company certainly has a great debt profile with a total debt to total capitalization of 26 percent, one of the lowest in the apartment sector. Essex maintains the majority of its debt fixed to in order to reduce interest rate sensitivity. In addition, a significant portion of the debt is unsecured. The company has received investment grade ratings by three credit agencies, and last June Standard & Poor’s reaffirmed their BBB rating, “The outlook is positive. We believe favorable multifamily fundamentals will persist over the near term, with steady demand and manageable new supply in most of Essex’s core markets.”

Threat

A potential tech bubble burst may pose a threat to multifamily properties in Northern California, an area that generates approximately 40 percent of Essex’s net operating income. At last week’s NAREIT conference, Essex made the case for themselves that consolidated industry giants such as Google, Apple, and Cisco create far more jobs than billion dollar startups. Following that thought, analysts that are concerned about the strength of the fundamentals should shift their focus away from the riskier tech companies and towards the more mature.

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Valuation

Essex’s stock yield is currently at 2.5 percent, which is below the sector median of 3.5 percent. The stock does not appear to be attractive, however it needs to be taken into consideration that its total return is close to 12 percent year to date. Having invested in a low yield stock is not necessarily a bad thing after all.

Essex’s price-to-FFO, a P/E for REITs is 24x, higher than most of the company’s peers. This is a sign that Essex has been able to weather the storm of the REIT selloffs.

Takeaway

The apartment sector has been a top performer in terms of cash flow and profitability. Essex Properties have been one of the sector’s most coveted representatives. What was an expensive stock has become more expensive. Despite a high valuation and low yield, the company has been able to deliver stellar performance to its shareholders.

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Source: Fast Graphs, Essex Properties Trust (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.

Hotel REIT stocks do not deserve to be in the bottom

Hotel REITs have under-performed the broad REIT market in 2015 (thus far), in a big way, returning 15% less than the broad REITs index.While sector fundamentals forecasts suggest more growth is ahead,

Sourced through Scoop.it from: seekingalpha.com

Although our analyses have shown that hotel REITs are a top performing sector in Q2 (which will likely continue in Q3) operationally speaking, we’ve been struck by the underperformance of their stocks.

Growth stocks such as Pebblebrook, DiamondRock, and Chatham are in the bottom 10 percent of performing REIT stocks year-to-date. The question is, how can a top performing sector, which sports higher growth rates of cash flow generation and profitability than most property sectors, be in the bottom position in terms of stock performance?

Oversupply doesn’t seem to be an industry concern in the short-term (despite being the first concern of a real estate investor). Nevertheless, Pebblebrook’s CEO, Jon Bortz, addressed the concern of a potential oversupply in their Q3 conference call, “Supply continues to be restrained with the three months trend at just 1.2% and our expectation is that demand will likely continue to outpace new supply over the next two to three years.”

Demand has exceeded supply, and although new supply is expected over the next months, supply should not catch up with demand in 2016.

Occupancy peaks could be a concern, but hospitality performance isn’t only occupancy. The sector has reached an occupancy in the low eighties and many people, including some in the industry, don’t believe it can go any higher. In contrast, occupancy is not the only important metric for internal growth since room rates (ADR and RevPAR) can increase.

Self-storage is a property sector that is faring well operationally and in contrast is also performing well in the stock market. Like lodging, self-storage has been faced several times with fears of oversupply, although they don’t seem to be as strong as there are clear bottlenecks in the industry that will slow supply down.

In summary, it’s not clear why investors have been dumping lodging REITs. They recently suffered a major drop after Pebblebrook indicated softer results in Q3 and adjusted down its Q4-outlook. The main reason for the adjustment was softer growth in international inbound travel, lackluster data on global growth, and weaker job growth.

Source: Pebblebrook Hotel Trust (NYSE:PEB), DiamondRock Hospitality Company (NYSE:DRH), Chatham Lodging Trust (NYSE:CLDT), Seeking Alpha

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.

Which is Performing Better, First Industrial or Terreno Realty? (Part 2/2)

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Click here if you haven’t read Part 1.

First Industrial and Terreno Realty have been two of the few stocks in the industrial sector that performed in a positive manner year to date. For example, STAG Industrial has decreased by 22 percent this year, Terreno has returned a positive 6.4 percent and First Industrial has returned a positive 3.2 percent. Terreno’s total return is at 11 percent while First Industrial is at 7.1 percent, both strong figures.

Both companies have a strong debt profile. Although First Industrial’s total debt to total capitalization is greater than Terreno Realty’s (38 vs. 28 percent), they are within the sector range. Three credit agencies have rated First’s senior unsecured notes as investment grade.

This is what Standard & Poor’s said about First Industrial’s recent upgrade in September,

“We are raising our corporate credit rating on First Industrial to ‘BBB-‘ from ‘BB+’, driven by strong recent operating performance and improving credit metrics, which we believe are sustainable based on favorable industrial real estate demand.”

Also in September, Terreno closed a large private placement of $100 million in senior unsecured notes at average interest rates lower than First Industrial’s.

Investors have been underwhelmed by First Industrial’s lower dividend yield of 2.4 percent. This is not much greater than a ten-year yield, and is far below the sector median’s 3.7 percent.

On the other hand, First Industrial does have one of the most conservative dividend payouts in the segment. This translates into the fact that the company could easily position itself on par with their peers. First Industrial has kept their dividend payout to Adjusted FFO under 50 percent all along.

chart06In addition, First Industrial has shown generosity by increasing growth rates since it reinstated dividends in 2013. The Q3 dividend is 24 percent higher than the same quarter last year. Still, investors wonder whether management has failed to be generous enough. The company did not make any dividend distribution from 2009 to 2013.

In the end, we have yet to detect a clear winner, although our scorecard has shifted towards Terreno. If you are willing to take a larger risk for the potential reward of a higher yield, then Terreno may be the way to go.

Source: First Industrial Realty Trust (NYSE:FR), Terreno Realty Corporation (NYSE:TRNO), STAG Industrial (NYSE:STAG), Standard & Poor’s

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

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

Which is Performing Better, First Industrial or Terreno Realty? (Part 1/2)

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Two industrial companies have surpassed expectations in our Q2 US equity REIT ranking. Without further ado, they are First Industrial and Terreno Realty. Please note that Prologis, the largest pure play REIT in the industrial sector, deserves attention from investors based on the company’s strength, tenant diversity, and robustness of their results.

chart02That being said we typically tend to explore additional options by highlighting companies that are outperforming their peers, regardless of size. That is why we featured Terreno Realty’s robust Q3 results last week. Today we will compare their results with First Industrial to answer the question of which company has performed better in Q3.

chart03Terreno Realty is certainly on the lower end of the small capitalization spectrum with a market cap of approximately $1.0 billion. In comparison, First Industrial enjoys a market cap of $2.4 billion, and has a larger footprint with 629 properties containing 64 million square feet in gross leasable area. Terreno owns 141 properties with a total of 11 million square feet.

Regarding location, First Industrial’s top three markets, as calculated by rental income, are Southern California, Pennsylvania, and Chicago representing about 30 percent total. On the other hand, Terreno has a far more concentrated portfolio because they focus on six major coastal markets only. All of the company’s properties have been distributed within those markets, with Northern New Jersey/New York City and Washington, D.C./Baltimore accounting for almost half. Both REITs tend to invest in warehouses.

chart04Both companies have been performing well in different areas due to their size and life stage. For example, Terreno’s year over year growth in revenues has been at an extraordinary level, showing 46 percent in Q2, and 37 percent in Q3 respectively. The company also has a strong FFO per share growth, which is one of the metrics that is closely related to dividend distribution potential. Terreno has been on an acquisition spree recently that is comparable to STAG Industrial’s. They plan to become as large as First Industrial in the mid term.

First Industrial has enjoyed a more tamed approach to their revenue growth rate that falls between 7 and 8 percent in Q2 and Q3 (year over year), but a stronger FFO per share growth rate and increased dividends. The company mainly invests in development along with a few selected acquisitions. Terreno does not engage in ground up development.

To be continued…

Source: First Industrial Realty Trust (NYSE:FR), Terreno Realty Corporation (NYSE:TRNO)

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.

First Industrial: Third In The Pack

logoFirst Industrial Realty (NYSE:FR), founded in 1993 and currently the third largest company in the industrial REIT pack, has seen improvements in its logistics market dynamics over the last few years. Pounded during the great recession, during which time funds from operations went negative and share prices plummeted from $ 32.13 (September of 2008) to a mere $1.76 (March of 2009), First Industrial’s dividend distribution went on hiatus for several years, until 2013. First Industrial owns 629 industrial properties located in 25 states, whose total amount of gross leasable area is about 63 million square feet.

The company focuses its strategy on top industrial real estate markets in the United States, especially where the fundamentals have been favorable, i.e., increasing demand and short supply. They also try to find niches that can benefit from global trade and local consumption growth. Such fundamentals have enabled First Industrial to thrive since 2010. Occupancy, cash rental and same-store net operating income have increased from 85 to 94, -15 to 2 and -3 to 6 percent respectively. The top markets have also been those of DCI Industrial — Southern California and Chicago — while other main markets have been Central Pennsylvania and Minneapolis.

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In the first quarter of 2015, in comparison with the same period of 2015, First Industrial has demonstrated mixed results among its peers — on the one hand:

  • Dividend yield of 2.4 percent has been one of the lowest.
  • Debt-to-capitalization of 35 percent has been one of the highest.
  • Funds from operations per share tanked by 18 percent because of interest rate protection write-off.

Presence

On the other hand:

  • Dividend-per-share growth of 25 percent has been one of the highest.
  • Dividend payout of 50 percent has been one of the lowest.

First Industrial has definitely not been lagging behind its peers like DCT Industrial — which has not increased dividends for six years — but it still is not an obvious purchasing choice in the industrial REIT sub-sector. I would continue monitoring.

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Source: First Industrial Realty, Fast Graphs


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.​