U.S. REITs: Like Father Like Son

 

chart01PS Business Parks (NYSE:PSB) is a mixed office and industrial REIT that has distributed same or growing dividends over the past eighteen years. PSB boasts a track record of a successful REIT and is part of our first tier group of REIT stocks, which is a handful that hasn’t cut dividends over long periods of time. It is the only investment grade ‘industrial’ REIT of the first tier group.

Forty two per cent of PSB’s shares are owned by Public Storage (NYSE:PSA). Both companies have a long history dating back to 1980s. PSB was formed in 1984 under the name Public Storage Properties XI, with PSA as its general partner. In a 1998 merger, the name was changed to PS Business Parks.

chart02Although PSB and PSA have a lot in common, both companies differ when it comes to REIT size. The former is a mid-sized company with a $2.7 billion market cap that invests in flex office/warehouse spaces, while the latter is one of the largest U.S. equity REITs that owns thousands of self storage stores across the country. However, despite the difference, PSB certainly capitalizes from its large REIT peer.

A recent example is that Standard & Poor’s granted PSB a corporate credit close to its major shareholder. Last year, the company was also upgraded from BBB to A- bringing it even closer to PSA’s ‘A’ credit rating.

PSB’s Portfolio Strength

chart03PSB is a fully integrated, self-advised and self-managed. The company has diverse tenant base, which consists of more than 5,000 customers. The top ten tenants account for 12% of the total annualized income, 6% of which is the U.S. Government. This is an excellent figure.

Half of the company’s rentable square footage is targeted at peculiar types of properties called flex. This type of investment is a combination of warehouse and office space, and has a variety of uses. Among them is the capacity for companies to have management and operations in the same physical space.

chart04The flexibility of this type of investment appeals to small and medium sized business tenants, which encompasses more than a third of rental income. Due to the tenant profile, PSB doesn’t usually compete with institutional buyers in acquisitions.

Geographically, although PSB is limited to six states, investments are well distributed within those states. Moreover, the company took advantage of high demand (and valuation) for flex, industrial and office assets and exited Portland, Phoenix, and Sacramento markets. The high demand explains why the company wasn’t active in terms of acquisition in 2015.

Valuation

Like PSA, PSB doesn’t come cheap compared to the broad REIT market. Since the share price has risen 23% over the past 12 months, it comes as no surprise that dividend yield is below equity REIT average and multiples are high. Yield is around 3% and stock is trading at 26 times AFFO.

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Source:PS Business Parks Inc.(NYSE:PSB), Public Storage(NYSE:PSA),Fast Graphs, Standard and 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.

This Data Center REIT Went from Bottom to Top

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So far this year, DuPont Fabros Technology was the single best performing stock among data center REITs, as well as one of the best performing stocks among REITs as a whole with an astonishing 31% return. The stock was beaten out by no one but CorEnergy Infrastructure with an even more astonishing 40% return and Seritage Growth with 32%. However, it is important to remember that REIT investors should not put too much faith in a single factor because neither a REIT’s past performance nor a REIT’s future performance can be summed up with such ease. Last year, the stock performance was negative; by far, it was the worst performance among data center REITs.

First, the positives. In short, DuPont has a dividend yield of 4.5%, which should be an attractive prospect to investors who are more interested in a stable income than in something more speculative. Better still, it has some unique characteristics that enable it to stand out in an industry that already has strong fundamentals. It’s particularly encouraging its new leadership, who is both energetic and flexible enough to continue improving its performance.

However, it is important to mention the negatives as well. DuPont’s portfolio has high tenant concentration, so much so that its four biggest tenants are responsible for more than 60 percent of its annualized rental income. Although an argument can be made that DuPont has nothing to fear in pursuing the wholesale strategy that has led to the current situation because the majority of the revenues are investment-grade, it is nonetheless indisputable fact that the loss of even a single one of the main tenants would be devastating. Remember that the company had a bad experience with a top tenant last year.

Since the company is trading at a multiple of 16 times AFFO, at the lower end of the spectrum for data center REITs, it seems safe to conclude that DuPont has some room for continuing appreciation. However, based on the risks mentioned above, I wouldn’t say it will outpace its peers. For that reason, REIT investors interested in data centers should not put all of their faith in DuPont. For instance, as a good diversification strategy, Bill Stoller suggested in a recent article owning the entire data center sector on an equal weight basis.

In conclusion, investors that like DuPont should consider investing at least in another data center REIT with lower tenant concentration and something other than a wholly wholesale strategy in order to capitalize on the potential of data center REITs while also hedging their investments at the same time.

Source:DuPont Fabros Technology, Inc.(NYSE:DFT), 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.

What’s to Love and Hate about Government Properties?

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Over the past week, we’ve seen the emergence of externally managed REITS in our weekly best performing stocks. Ashford Prime, CorEnergy Infrastructure, Government Properties, Ashford Trust, and New Senior Investment rounded out our top five companies. With the exception of CorEnergy, which is suffering from energy low prices, they have been impacted by activists’ attacks over the past twelve months.

Although Montgomery Bennett, which is from both Ashfords, has developed a negative sentiment from investors recently, the Portnoy family (who runs four REITs in different sectors – Government Properties, Select Income, Senior Housing Properties and Hospitality Properties) took their turn last year, thanks to several controversial moves in terms of corporate governance. In March 2015, the family disarmed a hostile activist by having Government Properties purchase Select Income shares owned by the activist. In June 2015, the Portnoy family made all of their four managed REITs buy stakes in their external advisor, RMR Group. Obviously, the Portnoy family retained voting control over RMR.

I’m not going to assemble all the arguments against externally managed companies here and ignore some of the good facts. As an investor who is aware of my biases, I acknowledge that I have a bias against externally managed companies. I’ve noticed that some other investors have the same thoughts, too, but unlike them, I’m going to go ahead and go over the positive and negative aspects.

For instance, did you know that of the Portnoy family’s managed companies have maintained or increased dividends since their inception? A couple of weeks ago, I featured Senior Housing Properties and mentioned a few of the things I didn’t like about the company. One thing that I do like is that the company has distributed same or growing dividends for the past 16 years. Government Properties has done the same for the past six years.chart02

In fact, Government Properties has been the third best returning REIT stock this year, following CorEnergy’s whopping performance and Seritage Growth’s spike, even though the REIT has a meager yield of 2%. Since it bottomed in February, Government Properties has rallied and is currently trading at 8x FFO, which is still lower than its historical multiples.

Additionally, the company doesn’t seem to show any signs that it cut its dividends in the short term. The dividend yield is currently at 9.5%, but its FFO payout ratio is at a comfortable 71%. The company also holds an investment grade credit rating from Standard & Poor’s, so it has kept its servicing costs under control.

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Finally, Government Properties’ tenants are primarily U.S. federal and state government agencies, which are an unquestionably secure rental income. 93% of their rental income is sourced from the U.S. government, 12 state governments, the United Nations, and two municipal tenants. With 71 properties in 31 states, they are geographically diversified. Although government agencies tend to sign long-term agreements (between 10-20 years), the average remaining term lease is around 5 years. More than 60% of the leases will expire by 2020, but Government is confident they will be able to retain their tenants.

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Regardless, this hasn’t changed my mind. Beside management entrenchment, the other caveat is that by investing with Government, you are exposed to Select Income. Select Income Investment represents about half of Government’s market cap. Last year, about a third of their FFO was sourced from Select Income dividends, so its dependency on its sister company is undeniable.

Source: Government Properties Income T(NYSE:GOV)

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.

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.

U.S. REITs: Our Best 2016 Month Yet

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March of 2016 has been an enormous success for equity REIT stocks. In total, equity REIT stocks rose by 9 percent in value, which comes as welcome news after the unpleasant seesawing of recent times. However, it is important to note that like always, some equity REITs have benefited more from the surge than others. For example, Manufactured Homes managed no more than 5.6 percent, whereas Timber managed a much more respectable 16 percent.

Regardless, two top performers were Ashford Hospitality Prime and CorEnergy Infrastructure Trust, which have long been popular choices for speculative investors because of their volatile prices. In brief, CorEnergy managed to claim the top position with an astonishing rate of return of 52 percent, which was fueled by two hectic weeks of activity after it released its 10-k in the middle of March. However, the reasons behind the rapid increase remain unclear at the moment. After all, although CorEnergy’s dividend yield remains one of the highest in its field at 15 percent, the performances of its biggest clients, Ultra Petroleum and Energy XXI, remain lackluster because oil prices remain low.

Likewise, Ashford Prime’s stock prices have seen enormous increases in spite of somewhat mixed circumstances. On the one hand, its stock is currently trading at 6 times its AFFO compared to 5 times its AFFO not so long ago, which is still low enough to permit room for further increases in the stock price. On the other hand, it is currently caught up in a struggle between its current external leadership led by Montgomery J. Bennett and Sessa Capital led by John Petry.

In short, the struggle has revolved around governance issues, including a $100+ million termination fee that Bennett has imposed on Ashford Prime in case its shareholders choose to remove its current team of advisors, though this is but one of the concerns that have been brought up by Petry. To correct these problems, Petry wants to bring in new directors to replace the current directors, which will be decided by the shareholders in the annual meeting.

Currently, investor uncertainty regarding the future of Ashford Prime is undoubtedly keeping its stock prices low, particularly since Sessa Capital has little experience as an activist. As a result, it remains to be seen whether the REIT stock can continue rising higher for the foreseeable future.

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Source: Ashford Hospitality Prime, Inc(NYSE:AHP), CorEnergy Infrastructure Trust(NYSE:CORR), Ultra Petroleum Corp.(NYSE:UPL), Energy XXI Ltd.(NasdaqGS:EXXI)

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.

The Dividend Prospects of this Student Housing REIT

 

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A student housing REIT named American Campus Communities has experienced a recent fall in its funds from operations (FFO) per share, which is basically the cash flow from its operations calculated by adding both amortization and depreciation back to its earnings. As a result, it should come as no surprise to learn that some of its investors have become concerned about its dividends even though it has been paying either similar or higher dividends for 11 years straight now, which is an impressive record that most REITs cannot match.

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On the surface, it would seem that these investors are correct to be concerned about American Campus; however, the company is experiencing a period of significant appreciation, which can be seen through its metrics. Industry wise, student housing has seen a falling capitalization rate and a vanishing premium versus multifamily residences, which are significant on their own, but become much more when taken in at the same time.

chart03For starters, its adjusted funds from operations (AFFO) multiple is closing in on 20x, which suggests that it is one more in a long list of overvalued residential REITs. Furthermore, it has had a below-average dividend yield of 3.4%.

With that said, not all is lost, particularly since American Campus seems to have been putting its resources to excellent use in preparing for the future. For example, it has been selling older student housing that are situated further from the campuses in preference for focusing on newer and more convenient student housing, which is obviously more attractive from the customer’s point of view. Similarly, it has been using the cash raised from the recent issuance of 18 million shares to pay down its outstanding debt, so much so that its ratio of net debt to EBITDA has fallen from 7.4x to 5.6x, which is so impressive that S&P has upgraded its credit rating from BBB- to a much more respectable BBB.

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Although it is not guaranteed that American Campus will prosper in the future, their moves are nonetheless encouraging, particularly since the student housing market still retains enormous potential. After all, the successful management of student housing needs specialized expertise and experience from specialist REITs such as American Campus, meaning that investors are more interested in entrusting their investments to them than banking on new ventures. Combined with the fact that the student housing market is enormous as well as the fact that the REIT should be more than capable of covering its expected dividends (payout ratio is 58%), there are no signs that American Campus plans to break its streak anytime soon.

Source:American Campus Communities, I(NYSE:ACC)

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.