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.

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

chart04

  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.

chart01

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.

 

U.S. REITs: Market Sentiment Prior to Q1 Results Release

 

chart01Another quarterly results period has begun, leaving investors anxious to determine where they will place their next investments. I have never been one to invest solely on market sentiment. However, this sort of context is most important when I’m identifying the best investment window. Week in and week out, I’ve been following the ups and downs of the market, while also paying attention to what kind of news has been driving the movements. Consequently, I quickly selected some of the market sentiments that have been formed pre-results over the past few weeks. Now, there’s just one question. Will they hold steady until the end of the period?

These are the following market sentiments toward equity REIT stocks.

Healthcare and Hotels: Due to a large number of stocks trading above average dividend yield, many have looked to stocks in healthcare and hotels to make their long-term bets. The sentiment appears to be correct. However, I don’t want to be a killjoy, but most of these stocks have a reason to be undervalued, so it’s important to pinpoint the causes first. The field here is certainly wider than in most sectors, but I’d recommend exercising some caution and patience before venturing out.

Realty Income: It is upsetting to see the rich universe of equity REITs condensed into a sole stock, but that’s what many investors do. They limit themselves to this stock. For that reason, opinions about how overpriced it is abound on the internet. Since its well established peers in freestanding retail have also appreciated, this sector has become overcrowded. So, the sentiment is right about it being overcrowded. I would definitely stay away from the popular choices.  

Self Storage: It had been awhile since self storage didn’t fall farther than the rest of the market. However, this happened last week. Most stocks fell south of 4%, which I see as a sign of saturation. Also, while I don’t entirely rely on equity research analysts, it’s worth noting that Goldman dumped Public Storage this week. In summary, I could see some movement geared toward selling self storage.

In fact, the strength of the self storage sector is something to pay attention to with the next releases. There doesn’t appear to be blatant signs of oversupply in the market, which makes me believe the fundamentals are still good. For this reason, I wouldn’t recommend shorting it.

In our dividend yield chart, self storage has had the lowest average dividend yield…even lower than the data centers. This is a sign that it could have reached a peak. I’m not sure if it will go down anytime soon, but lower yield and a higher multiple aren’t a good combination for investors willing to buy. Also, given the limited number of options, I haven’t identified an alternative that feeds into the same fundamentals.

Please let us know if you have identified any other sentiments that are not listed above.

Source: Realty Income Corporation(NYSE:O),Public Storage(NYSE:PSA)

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.

Another Industrial REIT Delivers Good Results

 

chart01

  1. Industrial REITs has continuously delivered good results and it doesn’t appear that this is going to change in 2016.
  2. Like Prologis, EastGroup Properties reported a double digit rent releasing spread in Q1.
  3. EastGroup has been distributing the same or increased dividends for the last 24 years in a row, which is definitely a good record among industrial REITs.
  4. Despite its Texas concentration, conservatism has been a mark in the management.
  5. Multiples indicate the stock has been at least correctly priced or overpriced.

As we pointed out in last week’s Prologis article, industrial real estate has been delivering good results and it doesn’t appear that 2016 will be any different (click here). In this context, EastGroup Properties has positioned itself for moderate growth and a good track record. By the way, it is one of two industrial REITs that has been distributing same or increased dividends for 24 years. EastGroup’s dividend has accumulated a CAGR in the range of 3-4%.

Like Prologis, rental change for new leases and renewals has been strong in Q1. EastGroup reported a 16.5% GAAP releasing spread, which is their record. That translated into a mild same store property net operating income growth of 2.2%.

In fact, EastGroup is an entirely different kind of animal when compared to Prologis. It is a midsized market cap REIT (approximately $2 billion), focused on a couple of states in the southern part of the US. Their properties are multi-tenant business distribution buildings close to major transportation routes that cater to tenants who are in need of industrial properties in the 5-50k square feet range.

chart02Naturally, its Texas concentration, specifically in the Houston area (19% of portfolio), has been a concern due to the instability in the oil industry. Given that its occupancy has held steady, we cannot affirm they’ve been strongly impacted, but it has certainly called management’s attention to a broader diversification in their portfolio. EastGroup’s top ten tenants account for less than 10% of the portfolio. Being exposed to a single tenant isn’t a concern here.

This Jackson, MS based REIT has a tradition in development. 39% of its portfolio has been developed by the company, which has proudly been around since 1969 and whose most recent configuration dates backs to the 1980s. Home grown talent seems to be the rule here, as its newest CEO first joined the company as an intern. In addition, some of the senior executives have been with the company for a long time.

chart03Conservatism is definitely one of the company’s features that is also reflected in its dividend policies. Over the past 15 years, the company has maintained a dividend payout ratio in the 60s and 70s. Recently, the ratio has been around 66%.

Its debt profile could be better, since its debt to adjusted EBITDA has been above 6.0. Nonetheless, the company has a BBB credit rating from Fitch and Baa2 from Moody’s and its debt to total market capitalization around a third.

Like a large part of the REIT industrials, the fundamentals have been dependent on GDP performance so it comes as no surprise that the stock is correlated to S&P500. EastGroup has accompanied the market in its ups and downs. Most importantly, the stock has rebounded over and over. In addition, its AFFO multiple has been flying high at around 22x. In turn, its FFO multiple has been around 16x, still higher than historic norm. The stock is definitely not cheap.

For that reason, the company may revise its decision not to issue equity. The company minimized equity issuance in 2015 and their current position is that they don’t expect new issuances this year. They are planning to sell the least strategic properties (including some in Houston) and reinvest in the development.

Source: Prologis, Inc.(NYSE:PLD), EastGroup Properties Inc.(NYSE:EGP), 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.

More Developments from Hotel and Net Lease Retail REITs

chart01

  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

chart01

Download our exclusive REIT report

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.

chart02

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. 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.