Has A Major Tenant Bankruptcy Diminished Spirit? (Part 2 of 2)

Click here if you have not read part 1.

chart06Despite their size, which is almost as large as National Retail Properties, Spirit has yet to achieve valuation multiples that compare with National Retail. A major issue is that Spirit has struggled with concentration by Shopko, their major tenant. Since they have merged with Cole Credit Property Trust II, Inc. in mid-2013, Spirit has certainly come a long way in reducing Shopko’s representation down from sixteen percent to ten percent, but it is still relatively high. Also, the short public history with modest dividend increases may have contributed additional risks to the company.

In addition, the Haggen event certainly does not help to improve the company’s profile, especially a large company by REIT standards that has far more resources to make better decisions. Spirit relayed in late November that they have agreed with Haggen about the future of the master lease for the twenty properties they have acquired. Nine will be sold to other companies, Haggen will keep five stores as part of a thirty-two-store portfolio (that will be marketed), and six stores have been rejected and will be leased by Spirit. Of course this is all contingent on approval from the bankruptcy court.

chart07Spirit Realty shares plummeted to their lowest levels of 2015 on September 10, which happens to be the same week in which Haggen announced their bankruptcy filing. Since that time there has not been much of a rebound, and the stock continues to have the lowest AFFO multiple when compared with their sector peers. Given the current risks and circumstances the company’s share price drop is completely justifiable. That being said, it very may well continue for a long time to come, or at least until the resolution of the Haggen situation is completely taken care of.

In conclusion, we are not sure whether the Haggen bankruptcy has significantly diminished Spirit’s management team. It certainly has thrown some great uncertainties to the manner in which they operate. You do not need to be a real estate expert in order to see that Haggen was a risky tenant. If Spirit is keen on make-or-break transactions, shareholders should most definitely be aware of this fact.

Source: Spirit Realty Capital (NYSE:SRC), Seeking Alpha, National Retail Properties, Inc. (NYSE:NNN), Realty Income Corporation (NYSE:O), Haggen

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.

Has A Major Tenant Bankruptcy Diminished Spirit?

chart01Spirit Realty Capital, a freestanding net lease real estate investment trust that competes with Realty Income and National Retail Properties, has experienced some head-scratching problems lately. They signed a sale-leaseback agreement with a major tenant that filed for bankruptcy just a few months after initiating the contract. The question for Spirit shareholders or potential shareholders remains: How should they view this situation?

During the first half of 2015, Spirit purchased the properties from Haggen Inc., which is a large regional food and pharmacy retailer in the Northwest. It just so happens that Haggen filed for bankruptcy in early September. By the end of November, Spirit negotiated the restructuring of a major portion of the master lease agreement in order to stem the tide and minimize revenue losses. You’ll be able to see the outcome by property below.

chart04Should this be considered a major event? Is there a major flaw with their due diligence process that emerged from this acquisition? Did the management act recklessly? Although we do not have a straightforward answer to any of these questions, we can certainly provide you with a few thoughts in order to flesh them out and avoid getting personal with their management team.

  1. Despite being a top tenant, Haggen Properties encompasses a minor percentage of Spirit’s square footage space that is available for rent. In fact, Haggen leased 1.0 million square feet out of the available 55 million square feet that Spirit owns. These figures equal 20 out of the 2,600 Spirit controlled properties with a 2.4 percent normalized revenues.chart05
  2. Haggen’s explosive rate of growth in 2014 should have raised some red flags. The company was once a small player in the industry, but grew their number of stores by a staggering 800 percent from only 18 to 164 in December 2014. This rapid growth came as a consequence of an agreement that occurred between the U.S. Federal Trade Commission (FTC) and grocery chains Albertsons and Safeway. The FTC approved the merger between both grocery store chains Albertsons and Safeway as long as they sold dozens of stores to their rivals, including Haggen. Spirit ended up purchasing 20 Haggen properties.chart02
  3. During the Q2 results conference call in August, when Spirit was questioned about the risk that Haggen posed, the company defended the acquisition by stating that they were able to ‘cherry pick the best assets that they wanted to keep long-term.’ In addition, they said that the assets not even cost 60 percent of the replacement cost.chart03
  4. Spirit brushed off the concerns regarding Haggen a month before they filed for bankruptcy. The company said that they were confident about Haggen’s ability to absorb the Albertsons stores. This would explain why they had signed a twenty-year master lease.
  5. Spirit disclosed the information in August that Haggen became a top tenant, although the agreement was signed in December 2014, on top of the fact that the properties rolled in during the first half of 2015. It is interesting that Spirit announced Haggen as a top four tenant during the second quarter results without providing any explanation in their Q2 10-Q. The word ‘Haggen’ was mentioned once.

To be continued tomorrow…

Source: Spirit Realty Capital (NYSE:SRC), Seeking Alpha, National Retail Properties, Inc. (NYSE:NNN), Realty Income Corporation (NYSE:O), Haggen

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 REITs That May Be Your Key To Apartments

chart01Smaller companies might be your best chance at making it in the apartment sector. In 2015, since fundamentals have held up, Apartments was one of the best performing sectors in the REIT industry, and there are high chances that this moment will still prevail this year. The only issue at hand is the fact that most AFFO multiples have surpassed 20x apart from the smaller REITs. It goes without saying that there are uncertainties when you invest in companies on the low side of the small cap spectrum.

The companies that are part of this ‘club’ include BlueRock Residential Growth, NexPoint Residential, Independence Trust and Preferred Apartment Communities. They are still rookies in the publicly traded arena and their market capitalization is in the range of $200-300 million. Not only is their leverage on the higher side, they also have the highest dividend yields and the lowest AFFO multiples.

These are the profiles of two companies:

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NexPoint Residential had spun off from NexPoint Credit Strategies Fund before the REIT began trading first half of 2015. The company targets the middle income residents in the US Southeastern and Southwestern. The insider ownership of the company is high at 16% despite the fact that it is externally managed by an affiliate of Highland Capital Management. They believe their NAV is between $15-20 and have traded around $13.

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Independent Trust has recently acquired Trade Street with its shareholders holding 68%. When we looked at the two companies separately right before the merger, Trade Street was one of the fastest growing FFO per share and Independence Trust was one of the slowest. The performance of the combined company is yet to be seen. Trade Street leadership joined the board and the Independent Trust management team has been maintained. The new company has a portfolio $ 1.4 billion, mainly financed through debt, 73%, the highest among these four companies.

Source: NexPoint Residential Trust (NYSE:NXRT), Independence Realty Trust (AMEX:IRT), Bluerock Residential Growth (AMEX:BRG), Preferred Apartment Communities (NYSE:APTS), 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.

 

STAG is waiting for you to buy their stock so that they can issue more (Part 2/2)

Click here if you have not read part 1.

Over the past three years, STAG Industrial has more than doubled its square footage. Despite the growth rates that have occurred at the same time, Core FFO per share has not headed the size increase proportionally because of share dilution. Core FFO per share increased from $0.29 to $0.39, an increase of 34%; during the same period, dividends have grown 28%.

In 2015, STAG acquired $428 million in properties, equivalent to almost 9 million square feet added to its total of 55 million square feet.

chart05Forming partnerships is a clever alternative, but, at the same time, it is not an easy thing to accomplish. It is hard when you are looking for a partner for a startup and in most cases, you might think it is even harder for a billion-dollar company.

Access to equity is key to growth. STAG’s CEO must be thinking of some ways to go around equity issuance, but once the prices shoot up again, he will likely return to equity issuance again.

There are some reasons that the market should use to limit valuation level, though.

  1. Declining same-store net operating income.

The company buys most of their acquisition 100% occupied and with time they become vacant, and the company argues that that drop is always incorporated into the acquisition price.

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  1. A secondary market will always mean a higher risk.

If you want to find a tenant and or to dispose of a property, you are likely to consume more time and effort in the long run. It is wise then to incorporate that price in the share price.

  1. Short public history and small capitalization.

Their track record goes back to 2003, but they have been publicly traded since April 2011. They are also a small cap, with a $1.3 billion market cap.

Source: STAG Industrial (NYSE:STAG)

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.

STAG is waiting for you to buy their stock so that they can issue more (Part 1/2)

logoWhen you hear that a company has set a goal to grow at 25% a year, you will go closer and listen to them. Why is it that you will react differently when you find out that a REIT like STAG Industrial has set a goal of growing assets at 25% for the next years?

What you are supposed to know is that REITs distribute most profits that they make. Now, the fundamental question that you should ask is that, how are they going to fund that growth? What will likely steer STAG into achieving that goal is their capitalization structure that is composed of  equity 63% and  debt 37%.

chart02In the REIT space, raising equity has always been a recurrent option and despite the powerful practical grounds that exist, REIT stocks have not been lately a fertile ground where new equity could be readily issued. The selloff of REIT stocks (including STAG) this August has significantly impacted on the secondary market decreasing issuances of common shares. Not surprisingly, STAG preached equity discipline on the third quarter call and said that they are going to look for capital raising alternatives such as joint ventures. But not even this strategy will eliminate equity issuance completely.

chart01STAG is the cheapest stock among Industrial REITs, and this is what is holding them back. They have an AFFO multiple that is about to 12×. When we compare this with the peer median of 23×, we will find that their multiple is way lower. Another indication they are devalued is that dividend yield is higher than its peers’. They are trading close to 8%.

chart03

An alternative way to help STAG out of this problem is to increase the leverage level. Which I believe STAG will not do. The investment grade status the company enjoys provides access to cheaper financing in the industry. Fitch Ratings has assigned a ‘BBB’ rating to STAG’s rating of $100 million unsecured notes (fixed rate of 3.98%) through a private placement in the middle of December. The warranting of lower interest rates in a rising interest rate environment is of prime importance.

chart04

We’ll post 2nd part tomorrow.

Source: STAG Industrial (NYSE:STAG), REIT.com, 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.

Who Purchased Preferred Apartment Shares Before Christmas?

chart01In the middle of last year’s December holiday season, something major happened to the small cap REIT Preferred Apartments Communities. The Multifamily REIT that had only approximately $300 million in market cap came out under everybody’s radar. It’s worth noting that its stocks have been going below the sector’s median valuation and yielding more than it should.

The stock’s share price had an increase of 12 percent in the month of December. Between the 15th and 22rd of the month, the stock began to soar to higher than normal prices. The peak of this increase came on Dec. 18, when the stock was traded at seven times the stock’s average volume. The rally was unannounced, but there are reasons for this trend.

The fall-out of this came threefold:

First: The increase of the stock put Preferred Apartments at the top of the pack. More specifically, in the top three REIT stocks for 2015. The returns for the company came at 44 percent during the past year. It only trails the stars Extra Space Storage and CoreSite Realty. Even in the top three, Preferred Apartments showed some weak numbers such as their flat AFFO per share and leverage higher than the sector’s average.

Second: This puts a multifamily representative in the top three, which was deserved. This sector itself has seen a boom in recent years. Multifamily units are especially profitable in areas with good job prospects. Preferred Apartments competition, namely Mid-America Apartment Communities, UDR, and Essex Property Trust made their mark in a specific portion of the country, whether it be the U.S. South or West Coast. By contrast, Preferred Apartments invests all across the board, giving them a unique rise to fame. Another difference is their investments in shopping centers with grocery stores.

Third: The AFFO multiple had an increase from 12.3x to 13.5x. It looks good, but it’s still far below the sector’s best performing stocks. Mid-American Apartment Communities trades at 19x, UDR at 25x, and Essex Property at 27x.

It is possible for Preferred Apartments to rally yet again, but not without its possible setbacks. Still, the REIT is smaller than most and has been in the race the least amount of time. There is a chance to catch up.

Source: Preferred Apartment Communities (NYSE:APTS), Mid-America Apartment Communities Inc. (NYSE:MAA), Essex Property Trust, Inc. (NYSE:ESS), UDR, Inc. (NYSE:UDR).

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.

Happy Hopeful REIT Year!

cropped-img_6275.jpgIn 2015 just one third of U.S. REIT stocks earned a positive return, so no one was surprised when the market went flat in the last week of the year. No sector has performed well, but two sectors appear to have fallen even further. The much anticipated hike in interest rates had sounded alarm bells for many, hence few dared to invest in real estate investment trusts and many investors sold large amounts of dividend stocks. If anything, this information shows a low market sentiment for REITs.

However, 2015 has drawn to a close, so we must look forward to the coming year. Investors must remember that Wall Street and Main Street operate quite differently. Most REITs have had a good operational track record, indicating a clear discrepancy between fundamentals and financial market behavior. In fact, the future looks rosier for those who decide to invest in select real estate investment trusts.

I am watching the situation with interest. I feel this might be the biggest investment opportunity for REITs since the great recession, but investors continue to err on the side of caution and no one appears to be in a rush to buy REIT stocks. The market has experienced a run of major and minor selloffs, so stocks are down. Inconsistent economic signals don’t appear to have an adverse effect on REIT fundamentals. I agree that it’s difficult to predict what will happen in the near future, but it will be fun to watch when the investors rush to buy REIT stocks.

We notice underperforming small-cap companies rebound, like CorEnergy Infrastructure Trust did last week. Wheeler Real Estate Investment Trust wrapped up the year with a 51 percent drop; however, last week’s 7 percent hike rendered them the best performer of the week. Such peculiarities tend to show up on our charts when the stock market hits a low.

In contrast, Lodging and Timber performed badly last week, in fact, Sunstone Hotel Investors shares fell by 10 percent. The company have an erratic dividend policy known as catchup dividend, for example, last quarter they paid $1.26, whereas in previous quarters they have paid $0.05.

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

Companies: CorEnergy Infrastructure Trust (NYSE:CORR), Sunstone Hotel Investors, Inc. (NYSE:SHO).

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 December 31, 2015 — 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 November 30, 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.

Disclosure: The author has no positions in any shares mentioned, and no plans to initiate any positions within the next 72 hours.