First Potomac Needs Strong Signal of Growth

chart01Over the past few weeks, First Potomac Realty Trust has been one of the REIT stocks that have experienced a drop greater than 10%, joining a group that includes the lodging sector and ‘anomalies’ such as NorthStar Realty Finance and the Ashford REITs. In fact, Potomac, an office REIT focused on the Washington DC area, has been found to feature great dividend yield, and growing net operating income and FFO per share. The FFO multiple is currently below the sector average therefore the question is, is it worth pursuing it?

From its 52 week high, the stock price has been down 29% and this year, the share price has dropped by approximately 18%, which is more than majority of REITs indices and its office peers. For instance, the Vanguard REIT ETF dropped by 4% this year.

Potomac opportunity lies in the reason that their portfolio has been repositioned over the years. This has resulted in the company becoming leaner therefore decreasing the square footage from 13 million in 2010 to the current 8 million. This has also increased the average lease rate from $9 to $17 per square foot. Also, Potomac’s occupancy has increased while Washington DC region office occupancy has decreased.

chart02Potomac continues its repositioning. Out of their total capitalization of $1.6 billion, they will be disposing of $200 million in assets as part of a plan to get rid of the non-strategic assets. Also, last November, additional changes were made in relation to replacing the management. The founders have retired from executive functions, providing the company with fresh enthusiasm which will take it to great heights.

Therefore, what’s missing?

Currently, the organization is not sending a clear direction to where it’s headed. Is it shrinking or resuming growth? After the sale of the first properties which are associated with the $200 million disposition plan, the company will be using the proceeds to retire its preferred dividends. Recent history of shrinkage and new leadership puts a question mark on growth plans.

Sentiment towards the office sector has been weak, but in some places like Washington DC area, office-occupying jobs have increased. From an investor’s standpoint, weak sentiment is helpful especially when finding good opportunities.

chart03Due to lack of growth, the company has not been able to increase its dividends since 2008. In fact, it’s been normal to find office REIT stocks which have not increased their dividends over the past few years.

In reality, the company has reduced its dividends from $1.36 to $0.60 a share for the period 2008 to 2013. From then, the dividend rate has been flat despite the 60% FFO payout ratio. The company has wanted to keep a cushion for the changes it has promoted.

In conclusion, although it is possible to make a quick buck on Potomac for being undervalued, I have not yet been able to see a strong commitment to promote the company’s growth.

Source: First Potomac Realty Trust(NYSE:FPO), Vanguard REIT ETF(ARCA:VNQ), 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.

CorEnergy’s Top Tenant Downgraded Again

chart01.pngCorEnergy Infrastructure Trust has drawn much attention lately because it has seen sharp ups and downs in the financial markets. It would go from worst performing stock a week to best performing the next. Over the past six months the stock has fallen by almost 50%, leading to an AFFO multiple of 4.4x and a dividend yield of 19%. The truth is that it is never comforting when investors start discussing the repercussions of a potential bankruptcy of its main tenants.

The risks of CorEnergy are in the same bracket as NorthStar Realty Finance and the Ashfords REITs, which have been target of activists. The risks are high, but the rewards are potentially very lucrative. But, since CorEnergy’s assets appear shaky, the chances of activists coming to give their share price a boost looks low.

Concentration is one thing that turns a lot of potential investors off, and it also contributes to share price discounts. CorEnergy has three leases, but half of its 2015 lease revenues came from one tenant, Ultra Petroleum Corp. Ultra Petroleum operates in Pinedale, Wyoming and is in the natural gas industry. It’s traded on the New York Stock Exchange under the ticker UPL and its share price has declined by almost 90% in the past twelve months.

chart02When a stock like CorEnergy is volatile, I always look for signs of safety in the rental payments. Unfortunately, this rule may not apply here. CorEnergy claims that rental payments make up a tiny percentage of Ultra Petroleum’s operating expenses; however, it’s possible that the issue here runs much deeper.

Ultra Petroleum Has Been Downgraded to CCC-

This Monday (Feb 01), Standard and Poor’s downgraded Ultra Petroleum’s corporate credit rating to CCC- from B+, with negative outlook. Ultra was also downgraded last October.

This is what S&P said in their press release:

“Our ratings on Ultra reflect our view of the company’s fair business risk, highly leveraged financial risk, and weak liquidity. The negative outlook primarily reflects our view that Ultra Petroleum will breach its leverage covenant at the end of the first quarter, and could restructure its debt or announce a distressed exchange within the next six months.”

It is clear that Ultra is vulnerable, especially considering the current energy price trends. Ultra has the option to assign its lease agreement to a third party. Given the present situation, it’s unlikely that the potential new tenant will hold a worse credit rating, so this possibility can actually work in CorEnergy’s favor. CorEnergy’s other top tenant, Energy XXI Ltd, which contributed to a third of 2015 lease revenues, holds the same S&P rating as Ultra Petroleum.

Although the tenants’ creditworthiness has been CorEnergy’s biggest headache, the company had been struggling with 2014 loans of $15 million to Black Bison Water Services, a provider of services for the disposal of flow back and produced water generated from oil and gas-producing wells. Due to reduced drilling activity in its area of operations, Black Bison has not repaid the loans. CorEnergy has agreed to forbearance twice and set aside half of the loan as bad debt.

Source: CorEnergy Infrastructure Trust(NYSE:CORR), Ultra Petroleum Corp. (NYSE:UPL), Standard and Poor’s, 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.

Farmland REIT Returns Not As Good As NCREIF Index

chart02Institutional investors usually refer to farmland as a better investment than commercial real estate. The major challenge, though, is that the historical performance of farmland as a real estate investment trust has been limited. Both farmland REITs we track, Farmland Partners and American Farmland Company, have been public for less than two years. The former distributed first dividend in June 2014, while the latter did the same last December.

All the same, investors usually consider how farmland is performing based on its National Council of Real Estates Investment Fiduciaries’ index (NCREIF Farmland Index). NCREIF was established to provide the institutional real estate investment community with real estate performance information.

However, the NCREIF Farmland returns do not necessarily match the REIT return. In 2015, NCREIF Farmland had positive total return of 10.4 percent whereas American Farmland showed a total return of -16 percent and Farmland Partners 5.6 percent.

NCREIF returns stem from appraisals which can happen once in a year and do not take into account the fluctuations in the financial markets. Also, the appraisal of all the assets in the index does not take place simultaneously. Moreover, appraisal results are generally smoothed out. As an example, the evaluators sometimes do not capture changes in pricing entirely until a pattern is well defined.

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NCREIF Farmland Returns

The farmland REIT environment is structured as farm rentals where the REITs typically pay for the property insurance, taxes and maintenance. The tenant is responsible for input costs, labor and fuel. The tenant can either be under a participating or fixed lease depending on the types of risks the company chooses to take.

The shareholders in farmland REITs do not have as much information about their tenants as those in regular REITs. Some of the decisions the tenants make are subjective and can affect the overall performance of the crop. Also, crops are subject to external factors such as natural disasters (hail, drought, floods, and so on). But, in bad years, crop insurance is an important mitigant and helps curb the losses.

Farmland business has its own advantages despite being a tough business. In the long run, there are bound to be benefits from this investment. The downside of farmland is its reliance on weather conditions which may either diminish the crop or lead to oversupply. Additionally, crop prices (particularly corn) have been dropping in the market, and this has been a setback.

However, factors such as growth in population, especially in the middle class population, will push the demand for food upwards. There are also other imminent factors such as desertification and urbanization that are eating up productive land. The resulting effect will be a rise in value of farmland.

Source: NCREIF, Yahoo!Finance, American Farmland Company(AMEX:AFCO), Farmland Partners Inc.(NYSE:FPI)

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.

Simon Spoiled Taubman’s Mall Project

Last Friday, some investors in the financial markets were disappointed at the Q4-2015 results of Simon Property Group, a huge regional mall REIT ($58 billion market cap), but in the world of brick and mortar, that may not be the case. Simon looks to have beaten Taubman Centers’ ($4 billion market cap regional mall REIT) plan to open an enclosed shopping mall in downtown Miami. Taubman is instead settling for a high end retail street.

chart03.pngAlong with Miami Worldcenter Associates and Forbes Company, Taubman intended to construct a 765,000 square foot mall which was fully enclosed. While retail, dining and entertainment were to be key, over 40% of the mall was set to be dedicated to Bloomingdale’s and Macy’s. Included in the plan was a pedestrian-only street which featured multiple restaurants and shops on 7th street, which led directly to the American Airlines Arena. A press release on Jan 11 stated that the mall project had been discarded, and in its place would be a high end retail street, positioned south to north between 7th and 10th streets.

chart04.pngSimon planned to construct an open-air shopping center simultaneously in downtown Miami. The luxury mall is to be 500,000 square feet, and complete with high-end retailers along with plenty of dining and entertainment facilities in the Brickell neighborhood. Part of the project has already been finished and is to open this year. Local developers have been developing the project with Simon. Both projects are mixed-use and also include offices, hotels and residences.

chart05.pngTaubman’s decision strikes many as yet another signal that the idea of a mall no longer works in America. Cities have become increasingly urbanized and, along with the growth of online shopping and the boost to high street shopping, malls have become marginalized. But while Taubman is looking to expand overseas, and in particular to Asia, it’s unlikely that they will scrap future mall projects in the U.S. This scenario appears to be just a downtown Miami battle between two competitors.

chart02Due to recent selloffs, some regional malls REIT stocks have returned poorly, whereas others have been holding better. Simon has been the latter. Following the release of its results on Friday, Simon stocks dropped, but they quickly rebounded. Simon’s Q4-15 funds from operations have fallen in comparison with Q4-14. Also, occupancy dropped by 100 basis points. Despite this result, vacancy levels for malls in general have trended downwards.

The regional malls REITS that have higher sales per square foot have been doing better. Macerich, Taubman, Simon and General Growth average an AFFO multiple of 24x. In contrast, Rouse Properties, Pennsylvania Real Estate, WP Glimcher and CBL & Associates are languishing badly with an AFFO multiple of just 11x.

chart01

As a result of the project change, Taubman’s share price fell for days after the announcement was made. Taubman trades at 27x yield at 3.2%, which is the highest AFFO multiple among its peers.

chart06Source: Taubman Centers, Inc.(NYSE:TCO), Simon Property Group Inc.(NYSE:SPG), General Growth Properties, Inc(NYSE:GGP), WP GLIMCHER Inc.(NYSE:WPG), Pennsylvania Real Estate Inves(NYSE:PEI),The Macerich Company(NYSE:MAC), CBL & Associates Properties In(NYSE:CBL), Rouse Properties, Inc.(NYSE:RSE), Yahoo!Finance, Fast Graphs, Brickell City Centre, Miami Worldcenter, Reis

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.

When will DuPont be leaving the bullpen?

sample.pngOver the past week, in anticipation of its Q4 results which are to be released this coming Thursday on February 4th, the rally for DuPont Fabros has been over 9 percent.

For a great part of 2015, DuPont was in the bullpen. CEO Christopher Eldredge was the one put in charge to contain losses after a top tenant declared bankruptcy. It is good news that the succeeding tenant seems to be doing quite a lot better and kept some of the storage space. Due to the issue, it is expected that the 2015 AFFO per share will go up by 6 percent in a sector in which competitors have increased by two digits.

Since the arrival of the new year, new forecasts have been put forth, and DuPont is expecting to experience a better year in 2016. Especially in the first years of his leadership, Eldredge does not wish to be left behind by its peers. Since the company might soon overcome last year’s issues, this could be the year that the company really thrives as things currently are looking rather favorable.

In comparison to its peers, DuPont has a great entry point, which is based on a 12x AFFO multiple along with a decent dividend of 5.7 percent. The dividend payout is set under 70 percent. Though it does not possess an investment grade rating as that of Digital Realty, the company’s ratio for debt to total capitalization is suitably under control.

Because of the fact of tenant concentrations, a risk premium should be added to the company’s valuation. The reason is that there is always the possibility of a corporate decision that will change the storage host or make a downgrade, even if they are not running out of money. More than half of the annual based rent is represented by Microsoft, Facebook, Rackspace, and Yahoo!.

The truth of the matter is that tenant concentration is a delicate issue, but I would not be surprised to see DuPont leave the bullpen sooner than most companies with the same issue.

What happened to make STAG Chief Financial Officer leave?

On Tuesday, STAG Industrial informed that CFO Geoffrey Jarvis left the company. I wonder if the unexpected exit has to do with the company’s challenging period. Because its share price dropped in 2015, the company has been unable to offer major issuance of equity. The management expects to grow assets by 25 percent annually. In 2016, the stock is currently down by 8.2 percent.

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

Source: Digital Realty Trust Inc.(NYSE:DLR), DuPont Fabros Technology, Inc.(NYSE:DFT), STAG Industrial, Inc.(NYSE:STAG), Fast Graphs, Yahoo!Finance.

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 January 29, 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 December 31, 2015, 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.

Would An Apple Store REIT Spin-Off Make Sense?

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A REIT that includes Apple Inc. (NASDAQ: AAPL) retail stores seems like an excellent idea. Apple stores share an advantage that is seen in retail REITs with the most success — high sales per square footage. When one looks at regional mall REITs, this is very apparent. Those with higher sales per square footage also have higher valuation multiples.

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Who is Looking Out For NorthStar Realty?

chartAs a result of the value of numerous U.S. equity REIT stocks plummeting since the end of 2014, there are currently a number of discounted stocks available, which has plenty of activists focused on the potential hefty rewards. In the past several weeks, we have seen a couple of activist investors take an assertive stance in an effort to make their case, which also results in making money for themselves and their investors. One of the most notable cases, due to its size and complexity, involves NorthStar Realty Finance.

Since splitting in mid-2014, both REIT, NorthStar Realty (NRF), and management team, NorthStar Asset Management (NSAM), have seen a significant decline in their value. While NRF lost 64%, NSAM lost 37%. Unfortunately, this was the complete opposite of what management believed would happen. The management team, led by a former Goldman Sachs investment banker, had thought the separation would generate more value to the shareholders.

There are several external factors that can explain the recent fall of REIT stocks, but it’s important to point out that the management’s loss of credibility only made the fall worse. Last November, NRF completed a spin-off of its European assets, creating another REIT called NorthStar Realty Europe (NRE). Both separations (NRE and NSAM) brought to the surface a number of incentives that potentially conflict with shareholders.

To resolve any concerns regarding misalignment between management and shareholders, the best solution is to make NRF an independent, self-run REIT. Currently, NRF needs a management team that is both 100% focused on and committed to their assets. This means no incentive contracts, termination fees, or sharing of management attention and focus.

While some might consider recombining NRF and NSAM to be an option, it will not address the current issues because the concerns would not be gone altogether. NSAM also has non-traded REITS under its management. From a structural standpoint, it makes sense to have separate management companies take care of the funds. However, a merger of NRF and NSAM won’t change the fact that management must oversee several funds. As a result, potential conflicts between NRF and its sister funds will still continue.

Last Friday, activist Land & Buildings proposed that NSAM put up for sale the management contract with NRF, which could be worth more than NSAM’s market capitalization. One of the possible buyers, NRF itself,  could sell some of its most valuable assets to buy the contract from NSAM. L&B estimates the contract to be worth $2.6 billion, while NSAM’s market cap is $2.3 billion. According to its balance sheet, NRF has almost $19 billion in assets.

Two weeks ago, NSAM had hired Goldman Sachs to explore strategic alternatives that would maximize shareholder’s value. Land & Buildings applauded this decision.

With both Goldman Sachs and Land & Buildings looking out for NSAM’s interests, what NRF’s board of directors should do right now is take control of their situation. Unfortunately, this is very unlikely to happen because the NRF board has not been engineered to act this way. Three of the four independent directors also serve as directors of NSAM.

Source: NorthStar Realty Finance Corp.(NYSE:NRF), Yahoo!Finance, Northstar Realty Europe Corp.(NYSE:NRE), Northstar Asset Management Group (NYSE:NSAM)

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.