Can Externally Managed REITs Build Good Track Record?

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REITs can be managed using either internal managers or external managers. Like their names suggest, internal managers are employees of the REIT, whereas external managers are contracted to manage the REIT’s investment portfolio in exchange for a base management fee as well as a performance-based fee to serve as incentive. Sometimes, REITs use external managers because their resources cannot support a full management team, whereas other times, REITs use external managers because it simplifies their infrastructure. Regardless, externally managed REITs are a fairly controversial practice with a wide range of detractors.

In short, both internal and external managers can be skilled and reliable professionals, but the interests of the latter are not as strongly aligned with the interests of the REIT’s shareholders. This is because both base management and performance-based fees can incentivize decisions that maximize short-term gain for management at long-term loss for shareholders, which is a serious problem for the shareholders but not so much for the external managers. However, it is important to note that in spite of their issues, externally-managed REITs can still make profitable investments and build a good track record.

For example, Gladstone is an example of an externally-managed REIT with a good record when it comes to dividends. After all, while they haven’t raised their dividends in 8 years, they also haven’t missed one of their dividend payments since 2003, which is particularly impressive considering the timing of the Great Recession. Although their AFFO payout ratio is close to 100 percent, its chances of missing a dividend payment are minimal in the short term when considered in combination with their consistently high occupancy rates currently sitting at 97.4 percent as well as a 7 percent expiration rate for its forecast rents through 2019. Finally, it is worth mentioning that the fees for its external managers were recently lowered from a base fee of 2 percent to 1.5 percent and an incentive fee of 20 percent to 15 percent of core FFO. Combined with the insertion of a termination fee when the agreement between the REIT and its external managers is terminated without cause, this should serve to relieve concerns about whether dividends are reliable or not.

With that said, while Gladstone is a profitable investment and has built a good track record, it should be noted that it specializes in providing a stable income rather than spectacular price appreciation, which is something that interested investors should keep in mind when scrutinizing Gladstone shares for their investment portfolios.

Source: Gladstone Commercial Corp.(NasdaqGS:GOOD), 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.

Most Consistent Dividend Paying U.S. REITs: Gladstone Commercial

chart02Gladstone Commercial Corporation (GOOD), a small cap in the diversified sector, is part of a select club that has paid similar or increasing regular dividends time and time again for more than ten years. Some can argue that their last dividend was a very long time ago (eight years ago, to be precise, but you can’t deny that they managed to keep dividend rates unscathed during the great recession. Less than 20% of the stocks in our pool of equity REITs have managed to accomplish such an impressive dividend record. The purpose of this post is to clarify what you should expect from GOOD and look at the reasons why you should consider it.

First of all, you have to think of Gladstone Commercial as a disciplined stock. The first time I learned about Gladstone I found it boring and unattractive. However, as time has progressed, the stock has grown in my eyes. Perhaps these volatile times have made me think that I need more stable stocks in my REIT portfolio and, although growth is nice, a certain level of stability has become paramount. When you look at it from this perspective, GOOD fits the bill.

chart01Since Gladstone declared its first dividend on 9 December 2003, they have never interrupted the series of distributions. In 2004, they distributed quarterly dividends, but by the following year they were distributing monthly. They quickly achieved an annual dividend rate of $1.50 in 2008 and have maintained this rate ever since. In Q4, their AFFO payout dividend ratio was 97%.

Although their dividend rate has been flat, it doesn’t mean they haven’t been growing their assets. It’s actually quite the opposite. Their historical asset growth has had a CAGR of 18%. They are not market timers, so they have consistently issued equity, sometimes at a larger pace to decrease leverage. By continually doing this, they have decreased leverage from 67% to 52% over the past five years.

chart04The portfolio has been built in a peculiar way. Management mostly considers transactions between $5 and $20 million. They target secondary markets with attractive economic growth trends, growing population, and increasing employment. The portfolio has been built for durability – net lease (less operational leverage), diversified but biased towards office and industrial, and present in 24 states. There is no major area of concentration in regards to tenant industries or individual tenants (above 10%).

What I don’t like about the company is that it is externally managed by the advisor Gladstone Management Corporation and the administrator, Gladstone Administration, LLC. Some senior executives work across all three companies. In order to avoid conflict of interest, I’ve always had a preference for internally managed companies.

chart03Their fee structure has been revised to be more in line with other REITs. For the advisor, the management fee is 1.5% of the shareholders’ equity and incentive fees are contingent on the core FFO’s performance. They do not charge acquisition or disposition fees. The administrator covers overhead expenses, including rent and personnel. Both the advisor and administrator also oversee several other publicly traded funds in addition to Gladstone Commercial. They also manage four public companies listed on the NASDAQ exchange – GLAD, GOOD, GAIN and LAND, as well as privately held funds.

From a valuation standpoint, dividend yield is one of the highest among equity REITs, while their AFFO multiple has been lower than their historic normal. The stock seems undervalued. Contrary to its share price performance, the stock is up 9% this year, but those who buy GOOD aren’t interested in price appreciation. As long as they don’t interrupt or slash dividends, their shareholders will be happy.

Source: Gladstone Commercial Corp.(NasdaqGS:GOOD), 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.

U.S. Industrial/Office REITs – Prospecting The Best Performing REIT Stocks

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