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.

 

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

 

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

These are the following market sentiments toward equity REIT stocks.

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

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

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

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

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

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

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

Disclaimer: This newsletter is not engaged in rendering tax, accounting, or other professional advice through this publication. No statement in this issue is to be construed as a recommendation to buy or sell any security or other investment. Please do your own due diligence before making any investment decision. Some information presented in this publication has been obtained from third-party sources considered to be reliable. Sources are not required to make representations as to the accuracy of the information, however, and consequently the publisher cannot guarantee accuracy.

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

Another Industrial REIT Delivers Good Results

 

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

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

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

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

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

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

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

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

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

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

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

Disclaimer: This newsletter is not engaged in rendering tax, accounting, or other professional advice through this publication. No statement in this issue is to be construed as a recommendation to buy or sell any security or other investment. Please do your own due diligence before making any investment decision. Some information presented in this publication has been obtained from third-party sources considered to be reliable. Sources are not required to make representations as to the accuracy of the information, however, and consequently the publisher cannot guarantee accuracy.

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

More Developments from Hotel and Net Lease Retail REITs

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  1. Hotel REITs has occupied the bottom portion of our weekly performance chart, after topping the chart the prior week.
  2. Hotel REITs will be subjected to a higher volatility in function for a lack of a catalyst.
  3. Also, threats such as having a narrowing gap between supply and demand and being able to quickly adjust rates do not help the sector.
  4. Overpriced stocks in the net lease retail and self-storage have also dropped.
  5. Whatever caused the stock to drop appears to have been limited to just equity REITs.

Two weeks ago, hotel REITs has monopolized our headlines for occupying the top position of our weekly performance chart. However, last week they were at the bottom. Yet at the same time, hotel REITs continues to be an attractive option with their lower multiples and high dividends yields. They continue to be very sensitive to market fluctuations. People who buy Hotel REIT should take into consideration that they will be exposed to higher levels of volatility.

I have not observed any changes in the lodging fundamentals that makes me think that a sector’s share appreciation will happen anytime soon. While it is true that demand has been greater than supply; demand growth has decreased and hotel pipeline has increased. This has led to a narrow gap between supply and demand, which shows that supply will soon catch up to demand.

Although some people seem to favor hotels in a rising interest rate environment, the Fed has already signaled that it should be a slow process. Hotels are quick to adjust their daily rates if inflation kicks in. However, remember that this a double-edged sword, since they might also have to reduce their rates. This is not unlikely in an environment where people keep saying that a recession is right around the corner. Alternatively, you might try some individual stocks and look for more robust portfolios.

Overpriced stocks in a net lease retail and self-storage have dropped as well. Popular REITs, such as Realty Income and National Retail Properties have also been at the bottom of our weekly performance chart. According to Seeking Alpha, a slight increase in the 10-year yield has prompted a selloff of REITs (click here).

The fact the Reality Incomes has been overpriced has been propagated among REIT investors which fueled all sorts of opinions. I have seen arguments that are defending this is a good moment to short the stock, or that the stock could be reaching new highs, much like the heights that the Federal Realty Investment and Public Storage enjoy.

Whatever has caused the stock drop last week appears to have been limited to equity REITs, where more than 3/4 of the stocks returned negative. In comparison, the S&P 500 was slightly up and several dividend ETFs were positive. If the cause is really interest rate uptick, this is just a sample of what will happen in the short term when the Fed raises interest rates again.

Source: Realty Income Corporation(NYSE:O), National Retail Properties, In(NYSE:NNN), Yahoo!Finance

Disclaimer: This newsletter is not engaged in rendering tax, accounting, or other professional advice through this publication. No statement in this issue is to be construed as a recommendation to buy or sell any security or other investment. Please do your own due diligence before making any investment decision. Some information presented in this publication has been obtained from third-party sources considered to be reliable. Sources are not required to make representations as to the accuracy of the information, however, and consequently the publisher cannot guarantee accuracy.

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

Prologis Q1 Results Reinforce Logistics Strength

 

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  • Prologis’ recent Q1 results reinforce the thesis that industrials are still in the expansion phase of the cycle.
  • With a $24 billion market cap, Prologis is a reference point in the Logistics Real Estate sector.
  • By any standard, 2015 was a year of records for Prologis. The question, though, is if they will be able to top it in 2016.
  • So far, the REIT has been successful in accomplishing its goal of capitalizing rent growth.

Some analysts believe that a good way to vet a sector is by performing a bottoms-up analysis, looking at individual stocks. If you follow this logic and start browsing Prologis’ Q1 figures, the first REIT to release results among its peers, the sector of logistics real estate appears to be on a continuous rise. Focusing on the same property net operating income, a growth rate of 7.4% in Q1 is pretty solid compared to figures in the past.

With a $24 billion market cap, Prologis is a reference point in the sector and is, therefore, a good company to start with. The company has a well-diversified customer base of more than 5,000. What’s more is that their top 10 customers represent only 13% of net effective rent. Prologis also has an international component and it has sourced its growth from the expansion of e-commerce- both domestically and internationally.

Another key factor in the company’s success is that they have a high repeat clientele, demonstrating high customer retention in the mid-80s. For the sake of comparison, a growing logistics peer like STAG had a retention rate of 42% in Q1, even for a good size of expiring of square footage. Even if you compare their historical data, STAG’s retention rate has averaged around the high 60s. In analysis, Prologis has been able to maintain consistent and high levels of customer satisfaction.

Prologis’ management described 2015 as the best year ever. Indeed, almost 97% of the company’s real estate was occupied by the end of 2015. Nevertheless, the natural question is whether they will be able to keep up this momentum. The answer is yes! Well, at least in Q1.

Core FFO per share went up by 24%. Also, the company has a strong balance sheet with debt to adjusted EBITDA under 6x and debt to gross market capitalization of 34%. It is important to note that the debt is mostly unsecured and fixed. Furthermore, the company is well on its way to an A credit rating.

An important item in Prologis’ goals, which is also a sign of portfolio strength, is rent growth of the new lease compared to the prior lease for the same space. In Q1, they achieved a 20% increase, which is explained when you replace leases originated during low rent periods following the global financial crisis.

Although, I have been highlighting Prologis’ success throughout the article, there’s usually no success without defeat. In fact, last year, as well as early this year, the company suffered some misfortunes in the financial markets. Following an intense period of volatility, their share price tanked- reaching a low last February. However, the volatility reduction in the last two months have helped the share price reach an AFFO multiple of 20. Also, dividend yield is below equity REIT average.

In summary, Prologis is worth leaving in an investor’s watch list (as opposed to buying it) as this REIT has become overpriced.

Source: Prologis, Inc.(NYSE:PLD), STAG Industrial, Inc.(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.