Oh W.P. Carey,There’s a Wild World Out There

chart04The torchbearer of separating W. P. Carey into more focused entities, left the company abruptly last week, leaving us with questions about what’s going to be announced in the fourth quarter results next Thursday, Feb. 25. WPC’s CEO, Trevor Bond, stepped down to pursue other interests, according to the company. The stock dropped by 7%, but it has shown signs of recovery.

In the third quarter results, W. P. Carey tested out the possibility of separation of its entities. The separation was given a great amount of attention in the report and even the disclaimer referred to the potential separation. It sounded like the company had already made its decision; it was just testing the waters before sailing ahead

chart03W.P. Carey has a dual structure; besides being an REIT, it also has an investment management branch that oversees publicly-owned, non-listed REITs under the brand, Corporate Property Associates, or CPA®. A rough split of assets under management between REITs and the CPAs is half-and-half. The total AUM is $22 billion.

The company has not mentioned how the split would take place; however, REIT peers that have been both REIT and advisor to other funds have split the REIT from the management–external management is on one side and assets are on the other. They’ve also come up with long-term management agreements with strict clauses, tying management to the assets. Recent examples have been NorthStar Realty and Ashford Prime.

Nevertheless, these two companies have not had successful separations. Both NorthStar and Ashford Prime saw their share price plummet and occupy the bottom position of the stock performance last month.

We all know it is a wild, wild world out there. As if that’s not enough, besides the drop, they’ve been the subject of activist attacks who are looking to close the gap between their NAV and the discounted share price.

Mr. Bond was very positive about the separation during the third quarter conference call. This is what he said during the call:

chart01
Former CEO

“We believe that separation would provide for a more focused and simplified structures that would be easier for investors to understand. We think that aligning each platform with sector specific shareholders is desirable and that we could achieve a cost of capital most appropriate to each entity by this alignment. We think that would allow us to allocate capital in a more focused way. We think this this idea allows for better alignment of currency exposure, each of the platforms are different investors.

Most importantly, I think we feel that this could potentially allow us to pursue individual growth and business opportunities for each of the separate entities. For instance, our investment management arm would have a greater ability to grow unconstrained by REIT status. We can also pursue individual inorganic growth strategy, strategic opportunities having a public currency that we could use for that.

So, I think the bottom line here is that this creates even stronger business that can pursue better growth opportunities as separate entities and create long-term value, and we look forward to posting you more in the future as that unfolds.”

If I were on the board right now, I would not pursue the split–very bad timing. Besides the NorthStar and Ashford bad examples, the market has been very volatile and big changes in this environment can go south quickly. The market can either say ‘we’re glad you did it’ or ‘what a bad idea, let’s sell off’.

chart02
The new CEO

Despite the dual nature and having become an REIT in 2012, W. P. Carey carries a good reputation in the market. It has been managing real estate for 40 years, its assets are net leased, and diversified. The portfolio is pretty much split among office, industrial, warehouse, and retail. Occupancy has reached 99%; it has been rated investment grade, and they have distributed dividends consistently since 1998.

With the share price drop, the dividend yield is now at 7.2% and the AFFO multiple has been around 11x. As for being diversified, it is more challenging to compare with its peers; but on the surface, it looks underpriced.

Source: Seeking Alpha,W. P. Carey Inc.(NYSE:WPC), 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.

Attention, Loyalists, STAG Dropped Another 9% 

 

chart01.pngI’ve always struggled covering popular stocks because oftentimes investors form opinions based on emotions rather than facts. I’m not very keen on unanimity because it creates an aura around a company and management that makes people disregard weaknesses. For sure, it’s good for the company, but this benefit doesn’t necessarily translate to the investor.

Take STAG Industrial for instance. The company has demonstrated numerous flaws in its investment strategy and the way it handles its funding. But no matter what, there has been a legion of investors loyal to the company. The management used to tell investors they wanted to grow their assets aggressively, annually, and the ‘masses’ loved it. The management only skipped the part that a significant portion of growth would come on the shareholders’ expenses. Go figure!

STAG’s share price has now trended downwards. Even a Wall Street analyst downgraded the stock last year; I believe it takes a lot of guts for an analyst to downgrade a stock when everyone else is not. The price accumulated a 17% drop this year and 38% since December 31, 2014. It is now very cheap relative to its peers. Whenever the share price drops, people hopeful of a rebound buy more. By the way, loyalists, just a heads-up–the STAG share price dropped another 9% last week.

The same aura has been created around big ‘O’, the monthly dividend company. The company released its results last Wednesday and shares spiked by 8.2% last week. National Retail Properties (NNN), its closest peer, also released strong results on the following day and the market reaction was ‘nada’. In fact, I have already written articles showing that NNN’s performance is as good as big ‘O’. Also, in the same category of net leases, I have highlighted Agree Realty Corp as an opportunity.

The secret of the big ‘O’ is its track record and consistency. Every month when it distributes the same or increased dividends, it is holding itself accountable to its shareholders. That is, it sends the following message: ‘We have generated growing cash and here it is’. And since it’s been doing so for years and has increased the dividend for 73 quarters in a row, the stock seems to be immune to these volatile times. It has a beta of 0.12, as opposed to NNN’s 0.36.

The other side of the coin is that people quickly forget that the stock seems overpriced relative to its peers, edging an AFFO multiple of 22x. Also, dividend yield of 3.9% is below peer average. It is at the same magnitude of Public Storage, which reached 27x, but it has moved way above the entry point.

Maybe that’s something STAG could learn from O. Focus on track record and consistency, and the market will reward you. This way, STAG could detach from the market’s volatility (STAG’s beta of 1.05).

Check the reports for Dividend Yield by Sector and Weekly Returns.

Source: Public Storage(NYSE:PSA), Realty Income Corporation(NYSE:O), National Retail Properties, In(NYSE:NNN), STAG Industrial, Inc.(NYSE:STAG)

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 12, 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.

Jeff Bezos, Did You Get Mad at a Future Landlord?

chart01 Here’s a quick look at how the 21st century retail business model works. First, you open an online store because it’s so cheap (today, you don’t even need your own website). Next, you sell as much as you can and use the profits to build huge warehouses where you both store your inventory and finish off your brick and mortar competition. Finally, you open up physical stores for better logistics. If somebody had told you this is how things would work fifteen years ago, you wouldn’t have believed it. However, this is the way things are going.

Amazon is a newcomer to the brick and mortar world. Last week they left many people scratching their heads when the CEO of a regional mall REIT, General Growth Partners, allegedly disclosed Amazon’s plans to open anywhere from 300 to 400 bookstores in the US. Later, in an effort to fix the confusion, the CEO stated that he had never meant to speak on Amazon’s behalf. However, given that Amazon said there’s no immediate plan, one can always assume that there’s something along these lines in the works.

Investors have been well aware that Amazon has been trying their hand at brick and mortar stores. This time last year, Amazon opened its first physical “bookstore” at Purdue University in Indiana. In fact, the store didn’t have any visible inventory, but it was a place where you could order online and pick up your merchandise in the “store”. Last fall, Amazon has also opened a physical store in Seattle, which does have visible inventory.

chart02
purdue.amazon.com

The bankruptcy of Borders, a bookstore with locations across the nation, in 2011 still remains fresh on the minds of investors. People have become convinced that physical stores are a thing of the past. With Kindles everywhere and a humongous online library, why would you even bother with building a chain of bookstores? Some people, however, see a lot of value in the brick and mortar store proposition, mostly related to delivery. Here are a few situations where they would be useful:

  • You don’t want your package delivered to your doorstop.
  • You don’t want to wait and prefer to pick up your purchase in a nearby store.
  • Amazon wants to reduce dependency on shipping companies.
  • To return merchandise, it’s much easier to go directly to the store than the post office.
  • Stores can function as local warehouses to deliver in the neighborhood by land or using drones.

There’s no doubt that the bookstore giant Barnes & Noble is now doubly scared. In addition to competing with Amazon online, it is now likely to have to fight Amazon with physical space. In fact, shares plummeted by 10% when the possible plan was made public, but went back up.

chart03.png

So, what does this have to do with REITs? The fact that a mall REIT operator was the source leads to speculations about lease negotiations with Amazon. Like Apple and other online companies, Amazon could very well begin to show up in American malls.

It’s never too late to see a revenge of the malls. The same companies that have prompted specialists to pronounce the slow death of malls in America, while also creating an entire generation of people questioning why malls even exist, have now become their tenants. After all, as far as I’m concerned, stores may have become digital, but people still need a physical place to hang out.

Source: General Growth Properties, Inc(NYSE:GGP),Barnes & Noble, Inc.(NYSE:BKS),Amazon.com, Inc.(NasdaqGS:AMZN),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.

Activists Ignore Investor Sentiment Against Lodging

chart02 Activists have ignored a lingering investor sentiment against lodging as a major driver. Instead, they have been looking for an uncertain fight. Last month, Sessa Capital targeted the Ashford REITs and Land & Buildings selected FelCor Lodging Trust.

While it’s impossible to deny that some lodging REITs have enjoyed a very strong operational performance, their share prices have all gone downhill anyway. In fact, the market hasn’t spared a single stock. We saw a big bloodbath in 2015 and 2016 hasn’t started out any differently. So far, lodging has been a bottom performer; something I hope will come to an end soon.

If I had to give a reason for this massive selloff, I’d say that investors have been afraid of oversupply. Although the lodging REITs deny that supply has outpaced demand, some investors are not keen on the steadily rising supply. Carter Wilson from STR wrote an interesting analysis of the current environment in the lodging industry.

Airbnb has also been mentioned as a reason, but anyone who travels abroad regularly knows that renting rooms, and even entire homes, is nothing new and has never made the hotel industry disappear. Yes, Airbnb has made it more secure and easier to rent rooms and homes, but I believe that it is farfetched to call it a major threat to hotels.

We have mentioned Sessa Capital’s case in a previous post. Early February they filed a lawsuit against Ashford Hospitality Prime questioning a huge termination fee that penalizes Ashford Prime if they elect a majority of directors not approved by its external management Ashford Inc. The share price fell by 33% this year, only trailing NorthStar Realty Finance’s 35% drop.

As to Land & Buildings, at the same time they were challenging NorthStar Asset Management for being undervalued, they were also making their case for FelCor Lodging Trust.

chart01 FelCor is a $1 billion market cap that invests in several types of hotels outside the gateway market, such as resorts and those in suburban and airport areas. If the new supply is being built in the gateway market, which currently receives most of the spotlight, the rationale was, why don’t we invest in a hotel REIT that is located elsewhere? According to L&B, FelCor is the hotel REIT in the best position to capitalize on this idea, as 57% of the investments are exposed to markets expected to outperform for the next two years.

When we last looked at FelCor in 2015, the company was experiencing a decline in revenues, as well as one of the highest leverage ratios among its peers. The good thing was that FelCor featured strong same store growth markets and its AFFO per share increased. To get rid of its reputation for low quality and reposition it as one of higher quality, the company has sold and renovated some of its assets.

Last month L&B listed several items that would help close FelCor gap between their net asset value per share and their share price. Among others, they recommended that they sell their NY hotels, reduce their current debt, buyback their shares, and enhance corporate governance. In response, FelCor said that they had already implemented these ideas.

FelCor, indeed, has an AFFO multiple that is below its peer average and like a good portion of the lodging REITs, FelCor has been undervalued. However, that doesn’t mean that I will be running out to buy their stocks just yet. The bloodbath in the sector is not over yet.

Source: FelCor Lodging Trust Incorpora(NYSE:FCH), Ashford Hospitality Prime(NYSE:AHP),Ashford, Inc.(AMEX:AINC),NorthStar Realty Finance Corp.(NYSE:NRF),Northstar Asset Management Gro(NYSE:NSAM),Land and Buildings, 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.

What Happens When Manhattan and Beijing Band Together

chart01 What happens when you have a group of Chinese investors who crave a safe haven on one side and a small cap Manhattan hotel centered REIT who can’t raise the equity funds they need to tap into new opportunities on the other side? It’s simple. They enter into a partnership in which the REIT sells stakes of the Manhattan hotels and uses the proceeds to go shopping elsewhere. This is an example of two groups, Chinese Cindat Capital Management and the lodging REIT, Hersha Hospitality Trust, who have perfectly matched their aspirations to create a win-win situation.

Every REIT investor is well aware that China has been in trouble lately. Just two months into 2016, due to a slowdown in the Chinese economy, volatility in the U.S. financial markets has increased and depressed stocks, including REIT stocks. In fact, with so many outflows of capital, Chinese investors have been looking for a safe haven. The amazing twist is that some of this foreign capital has ended up in the REIT world, which has raised Hersha Hospitality’s profile.

In addition, lodging REIT stocks have decreased significantly over the past twelve months. Hersha stock decreased by 31% compared to SNL’s US REIT Hotel index of 34%. Also, it’s AFFO multiple has been at 9.4x, which is below the peer average. Hersha took advantage of the stock being priced so low and purchased 10% of its shares outstanding in 2015.

chart03.png For the Chinese, it doesn’t seem to really matter that they might be buying in the peak. Hersha recently said that their Manhattan hotels have enjoyed increased occupancy and although supply was a threat in 2014-15, this doesn’t appear to be the case moving forward. It’s more about making a stable investment in an area that will always attract a buyer’s interest if they want to sell.

It is also interesting to note that the Chinese are not buying 100% stakes of the properties. For foreign investors, it’s crucial to have a local partner who knows the ropes. Hersha mentioned that revenue management in Manhattan has been very hands-on, so I believe that the Chinese welcome this kind of help from their U.S. partners. Also, Hersha is not entirely disposing of the properties, so they must see some upside. 43% of their EBITDA has been generated in Manhattan, so I believe that must have a good bit of intelligence regarding the local market.

chart02
Hersha before the sale

The end result is that Hersha’s exposure to Manhattan will decrease 25% of their total EBITDA and they will be able to buy properties in Washington D.C. They’ve been bullish on DC due to an increase in government spending, an increase in the number of conventions held in the city and this year’s elections.

Hersha’s share price spiked by 13% when this announcement was made last week. Although the stocks appear undervalued and they invest in upscale properties in gateway markets, I’d be very cautious about entering now. This is because of a strong dollar decreasing revenues from international travelers, as well as lingering investor sentiment against lodging.

Source: Hersha Hospitality Trust(NYSE:HT), 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.

Physicians have more financial sense than you might think

 

chart01Physicians Realty Trust, whose NYSE ticker is DOC, has been a breath of fresh air in the equity REIT space, which has challenged some of my beliefs. One of those beliefs is that physicians dedicate their entire lives to healthcare, leaving them with limited financial and stock market knowledge. This is turning out not to be true.

Physicians has invested in medical office buildings, which are in high demand due to the increasing number of outpatient services offered. Let me be clear. Medical office buildings are not hospitals. They include private physician’s offices, laboratories, imaging suites, and outpatient surgical centers. They may standalone or be associated with a hospital, as well as on or off campus.

Physicians has capitalized on the strong healthcare fundamentals in the United States. With the population aging and ObamaCare increasing the number of insured people, consumers are choosing healthcare options that are strategically located.

chart02Here are several beliefs that Physicians has made me question.

  1. For being a small cap, there should be additional risk premium.

Since Physicians went public in mid-2013, the company has grown fourteen fold. Today’s market capitalization is $1.8 billion and its valuation multiples have been in line with bigger peers. Its AFFO multiple is 20x versus their peers 14x. I don’t see Physicians being penalized for being a small cap.

  1. This is not an environment for raising equity.

The current selloffs made new equity offerings harder. However, Physicians was able to raise capital in late January to payoff unsecured revolving credit facility and invest in working capital and real estate.

  1. It is harder for a small cap company to become investment grade.

The company was awarded an investment grade rating by Moody’s in mid-2015.

  1. Due to its relative high valuations, dividend yield sucks.

Based on the universe of healthcare REIT stocks, Physicians has been in the bottom 1/3 in terms of dividend yields. However, compared with the overall REIT universe, its yield of 5.2% has been better than 60%.

  1. Beta must be high.

Small caps usually carry more risks than large caps as the former doesn’t have shock absorbers during unstable periods. Their shares tend to fluctuate more often. As a result, their beta is also high.

However, Physicians performance in the stock market has been relatively stable. They have a beta of 0.39, better than many large caps in the REIT space. As a matter of fact, the average beta for healthcare stocks has averaged around 0.33, which makes it a more stable sector.

On a final note, I haven’t been able to find any actual physicians on Physicians management team. It seems they are physicians in name only.

Source: Physicians Realty Trust(NYSE:DOC), 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.

 

 

 

 

Apartments REITs Declined Despite Good Results

f99fb780-1e11-4b54-8c6c-e012f0fccafa.jpgIt was a bittersweet week for apartments REITs – at the same time they have posted strong fourth quarter 2015 results, they also suffered losses. On average, apartments stock prices fell by 4.1%, almost as much as timber, which fell by 4.3%. Increased supply and deceleration of the West Coast market growth are some of the reasons why the shares declined.

Together with Aimco, Mid-America Apartment and Post Properties, the following apartments REITs have released Q4-15 results:

  • AvalonBay Communities increased its quarterly dividend by 8% and released strong results. Core FFO grew 14.4% for the quarter and 11.4% for the full year. In 2016, Core FFO is expected to grow slightly below at 9%. However, this was not enough to excite the markets and its share price decreased by 3% last week. AvalonBay showed caution when referring to the West Coast. The company has seen slowing job growth and, although it still believes the West Coast will outperform the East Coast, the difference in growth will narrow.
  • Essex Property Trust, which is focused on the West Coast, fell by 5% last week. The company confirmed expectations of a less heated market on the West Coast due to a moderate job growth rate. Specifically, they believe market rents will increase by 7.5% in Northern California in 2016, down from the 2015 average of 10.9%. Nonetheless, Essex closed the year of 2015 with an impressive 15% Core FFO increase. Since its highest share price ever on December 29, 2015, the share price has declined.
  • UDR increased its dividend by 7%. Despite its strong results and not being as exposed to the West Coast as Essex, its share price fell by 5% last Friday.

Other highlights:

  • Armada Hoffler Properties increased quarterly dividend by 6%.
  • Hersha Hotels entered into a joint venture partnership with Cindat Capital to which they will sell a significant stake of seven hotels in Manhattan. The company intends to use the funds to invest in other locations and reduce its exposure to New York City. The stock went up by 7% last week.
  • After posting good Q4-15 results, DuPont Fabros went up by 4% this week. It appears that management has contained losses regarding the replacement of a bankrupt tenant.

Check the reports for Dividend Yield by Sector and Weekly Returns.

Source: AvalonBay Communities (NYSE:AVB), Essex Property Trust Inc.(NYSE:ESS), Armada Hoffler Properties, Inc(NYSE:AHH), UDR, Inc.(NYSE:UDR), Hersha Hospitality Trust(NYSE:HT), DuPont Fabros Technology, Inc.(NYSE:DFT), Apartment Investment and Manag(NYSE:AIV), Mid-America Apartment Communit(NYSE:MAA), Post Properties Inc.(NYSE:PPS)

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 5, 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.