This Office REIT’s Entry Point

 

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I have had an overwhelming feeling that healthcare and hotels reits are the only good entries left. Over the last few months many companies, with good fundamentals have reached high multiples. This has left fewer options on the table, and one of the last groups left has been net lease retail. Since this list has begun to slowly decline, I have found myself starting to weigh the risks over rewards more often and reviewing less popular picks. For example, just last week I picked Spirit Realty Capital, from the net lease group. I picked Spirit Realty because it showed a chance of potentially having a turnaround in the market.

This week, we’ll feature Whitestone, which is another option to the overcrowded shopping center sector. This company displayed some risks that could have some potential negative impact on their stock performance. But, today, I will look at Government Properties Income, an office REIT that is part of our second tier group. That is, for over five years, this company has been distributing the same or increasing stocks without interruption.

chart02During the last twelve months, the Government share price was down, and more recently up. It has an AFFO multiple that has been around 10 while its dividend yield is at 9% making it one of the highest yields. Despite the recent appreciation, this stock still has a 20% upside just from looking at its past performance.

Government Properties, which has been externally managed by the Portnoy family, is currently faced with two main concerns. The most compelling is that a portion of their portfolio is currently expiring in the short and mid-terms. Meaning that over the next two years 26% of this company’s portfolio will expire. In addition, since this is an election year, there will be a certain degree of uncertainty over the projected federal government expenses.

One of the management’s main goals has been to renew as many of their leases as possible, which they accomplished in the Q1. With their new leasing, the profile has improved, as opposed to the same time frame of last year. The occupancy levels have also been steady over the last year.

At the same, though, we are not sure about their debt profile, since those metrics have deteriorated. The ratios between debt to adjusted EBITDA and the total debt to total gross assets have increased. But the deterioration, so far, has been in small increments and has not yet threatened its public debt covenants. The company hold an investment grade rating.

chart03In regards to the elections, the management has yet been able to tell which direction the market will go. As of right now, they have also decided to not outline possible scenarios. With a potential change of party on the horizon, this will certainly cause a splash in the federal government. As a result of this, it will add more uncertainty to the expiring leases.

In conclusion, with so many declining opportunities that are outside the healthcare and hotel realms, Government Properties, with their high dividend yield and decent record, seems to be a good entry point into the market.

Check our previous post on Government Properties.

Source: Government Properties Income T(NYSE:GOV), Spirit Realty Capital, Inc.(NYSE:SRC), Whitestone REIT(NYSE:WSR)

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: Data Center Up, Self Storage Down

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In a week during which several REITs have released their Q1 results, REIT stocks were slightly up. While data center stocks were the best performing sector, self storage was the worst. This week’s highlight was the merger between two office REITs.

Among data center REITs, CoreSite Realty shares saw a 5.2% increase in the last week when the company announced stronger results for the year. They also saw a 4% increase in their 2015 FFO per share guidance. The FFO multiple of the $2.3 billion market cap company is currently around 22 times.

For yet another week, self storage stocks fell. We’ve been noticing the formation of a negative sentiment against this sector. Despite the high multiples, this is the first time we have seen a real movement to dump the stocks, which fell, on average, by 10% in April.

For instance, Public Storage, the largest self storage REIT, saw a 6% increase in dividends during the last week, yet this wasn’t enough to excite the public. Despite the good Q1 results, their shares were down by almost 5%. Rather than investing in the common, many investors have opted to invest in their preferred stocks.

However, last week’s highlights definitely involved office REITs. Cousins Properties and Parkway Properties entered into a stock to stock merger where Parkway shareholders will receive 1.63 shares of Cousins stock for each share of Parkway stock they own. Following its merger with Cousins Properties, Parkway shares went up by 9.2%, while Cousins shares went down by -0.3%.

Right after the merger, the Houston assets will be spun off into a new publicly traded REIT called HoustonCo. The merger will produce a larger Cousins, which will focus on the Sun Belt markets, while excluding exposure to energy markets. HoustonCo will be an independent and internally managed REIT led by some Parkway executives.

On a final note, the shares of Investor Real Estate Trust plummeted by 13% when the activist Land and Buildings went short. L&B believes IRET has 35% downside due to North Dakota’s struggling energy market and a weak apartment market.

Source: CoreSite Realty Corporation(NYSE:COR),Public Storage(NYSE:PSA),Cousins Properties Incorporate(NYSE:CUZ),Parkway Properties Inc.(NYSE:PKY),Investors Real Estate Trust(NYSE:IRET)

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 April 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 March 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.

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

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  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.

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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.

 

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.