1. real estate

Welcome to the REIT SAMPLE NEWSLETTER
The following pages are a preview of several sections in the January
2014 iREIT Investor Newsletter. While it’s abbreviated from its original
50-60 pages, it will give you a taste of the valuable information you’ll
receive as a subscriber.
BR AD THOMAS, EDITOR
08
Jan. 2014
VOLUME 08
F E A T U R E S:
REIT Smorgasbord . . . . . . . . . . . 1
Empire State Trust Q&A . . . . . . 3
2013 was like a smorgasbord[1] for REIT investors, especially the
second half of the year where the sector was highly volatile with strong
returns in certain months offset by pullbacks in other months. U.S.
equity REITs ended 2013 with a total return for the year of 3.7%, which
pales in comparison to the 32.4% return posted for the S&P 500 for the
year. Despite strengthening market fundamentals, REITs ended 2013
with modest returns that were well below the previous four years.
Ongoing concerns about rising interest rates dictated the market
during 2013, and REITs, with their significant dependence on borrowing, proved to be more sensitive than the overall market. After starting
out strongly in 2013, concern that the Federal Reserve would begin to
pull back its bond-buying program caused interest rates to rise in the
summer, and this caused REITs to become less attractive.
Blue Chip: Taubman . . . . . . . . . . 5
Nothing But Net . . . . . . . . . . . . . 9
Extra Space Storage CEO . . . 12
Exclusive iREIT Coverage on
ARCP . . . . . . . . . . . . . . . . . . . . . . . . 15
Exclusive iREIT Coverage on
Digital Realty . . . . . . . . . . . . . . 18
Preferred REITS . . . . . . . . . . . . 19
REIT IPO Update . . . . . . . . . . . . . . 22
Glossary . . . . . . . . . . . . . . . . . . . 23
Forbes writer Brad Thomas has a
multilingual approach to real estate.
He has built it, brokered it, sold it,
invested in it, researched it and
he’s telling it. Who can’t learn from
his experience? And that is why I
consider the iREIT Investor to be a
must-have newsletter.
Donald Trump
Portfolios . . . . . . . . . . . . . . . . . 24
margin of safety means sleeping well at night
ireitinvestor.com
SNL US REIT Equity Index 2013 Total Return (%)
SNL U.S. REIT Equity (3.7%)
35
S&P 500 (32.4%)
30
25
20
15
10
5
0
-5
Dec
2013
Jan
2013
Feb
2013
Mar
2013
Apr
2013
Jun
2013
May
2013
Jul
2013
Aug
2013
Sep
2013
Oct
2013
Nov
2013
Dec
2013
SOURCE: SNL Financial. Dec. 31, 2013
The interest rate- fueled roller coaster continued until December when
the Federal Reserve announced that it was going to begin to taper its
bond-buying program. By also making a commitment to keep shortterm interest rates low, the Fed reduced uncertainty about tapering
and the rising interest rates that had plagued the markets.
The hotel sector led all REIT indexes in 2013, with a total return for the
year of 26.3%, followed by the manufactured home sector, with a 2013
total return of 10.7% (source: SNL Financial). The self-storage, industrial, shopping center, office and diversified sectors also all...
2013Y US Equity REIT Index Total Return (%)
30
26.3
25
20
15
10.7
10
9.3
7.4
6.8
6.6
5
5.0
3.7
0
-5
Hotel
Manuf.
Home
SelfStorage
Industrial
Shopping
Center
Office
Diversified
SNL US
REIT
Equity
-4.4
-6.3
MultiFamily
Health
Care
SOURCE: SNL Financial. Dec. 31, 2013
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2
Own a Piece of New York City History –
Empire State Realty Trust
Empire State Realty Trust (ESRT) went public by listing shares on the
NYSE on Oct. 2, 2013. The new REIT consists of 12 office properties
encompassing 7.7 million square feet (around 83.5% leased) and six
retail properties, consisting of four free-standing buildings that are 100%
leased (excluding the Empire State Building). The most recognizable
property in the REIT portfolio is the Empire State Building, constructed
in 1931.
At 102 stories tall, the iconic tower was the tallest tower in New York
City. The building was developed by a group of prominent businessmen
including John Jakob Raskob (founder of General Motors), Coleman Du
Pont, Pierre S. Du Pont (president of E.I. Du Pont de Nemours), Louis G.
Kaufman and Ellis P. Earle, from Empire State, Inc. and Alfred E. Smith,
former governor of New York four times and presidential candidate in
1928.
E M P I R E S T A T E B U I L D I NG
Peter and Anthony “Tony” Malkin forged a deal with the other majority
owner, the Helmsley Estate, to consolidate the fractional owners and
provide them with liquidity, diversification and more predictable cash
flow through a REIT securitization in the form of an IPO that provides an
alternative for investing in a “pure play” New York area office REIT. This
month iREIT Investor caught ESRT’s CEO, Tony Malkin, for an exclusive
interview.
Thomas: After more than a year of debate among the REIT’s stakeholders, Empire State Realty Trust finally completed its $1.07 billion IPO
on Oct. 1. Looking forward to 2014, how does your company plan to
provide a differentiated value proposition?
Malkin: We will focus on the imbedded opportunities for growth within
our portfolio of assets that is supported by one of the lowest leveraged
balance sheets in the public office REIT sector.
Thomas: ESRT priced its common stock at $13.00 and began trading
Oct. 2. The company saw a return of 18.20% from its IPO price of $13
through Dec. 30 (Empire State Realty closed at $15.28). How do you feel
about the first 90 days of trading?
T O NY M A L K I N
Malkin: We focus on creating long-term value for all of shareholders. We
do not comment on the valuation of the company as a matter of policy.
Thomas: ESRT owns office and retail properties in Manhattan and the
greater New York metropolitan area as well as properties in Fairfield
County, Connecticut and Westchester County, New York. Do you intend
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3
to expand that footprint or stay within the confines of the New York City
area?
Malkin: As we have stated previously it is our intention to focus on significant opportunities within one of, if not the strongest markets in the country.
Thomas: The New York City office market seems to be doing very well
and as a result there are many new office projects either proposed or
under construction. How do you feel about the increased competition
and what is the strategy for leasing up the iconic Empire State tower?
Malkin: We feel comfortable with our competitive position based on our
locations, our upgraded assets, and our competitive pricing position.
Thomas: One fascinating feature for investors who own ESRT is the fact
that a significant portion of revenue is derived from the Empire State
building observatory. Can you tell us a little bit about that business?
Malkin: We like this business as a low capital intensive rental revenue
source; if we were not operating the business, someone else would and
that person would pay us rent. We deliver a unique visitor experience at
an international icon which is impossible to replicate. The global presence of our brand, our location, and our offering are unique.
Thomas: Finally, ESRT is paying out a 2.29% dividend yield. What can
you say about the safety of the company’s dividend?
Malkin: It would be...
ireitinvestor.com
4
THE BLUE-CHIP REIT REPORT
In each edition of The Intelligent REIT Investor I feature or showcase
a best-in-class REIT – a “blue chip.” My objective is to analyze a “blue
chip” REIT to determine whether the company is “an investment operation … one which, upon thorough analysis, promises safety of principal
and satisfactory return. Operations not meeting these requirements are
speculative.” (Ben Graham in The Intelligent Investor).
So for December (and every month) I feature a “blue chip” REIT differentiated by widely accepted value and non-negotiable standards.
Each of the honored blue chip REITs will be measured by consistency
and repeatability – the essence of a “blue chip” investment strategy.
These sustainable blue chip picks will be measured based upon the
following attributes:
1. Outstanding proven management
2. Access to capital to fund growth
3. Balance sheet strength
4. Sector and geographical focus
5. Low payout ratio
6. Absence of conflicts of interest
7. Dividend History
(Ralph L. Block, author of Investing
in REITs, has been a visionary writer
and investor, and his book was my
inspiration to create the Blue Chip
REIT Report).
Taubman Centers – A Trusted
60-Year-Old Regional Mall
REIT:
Founded by A. Alford Taubman in
1950, Taubman Centers converted
to a REIT in 1992, and the Bloomfield
Hills-based company has maintained a consistent cash payout history
for more than 21 years. A notable achievement by the Regional Mall
landlord is the fact that Taubman was a pioneer REIT that became the
first publicly traded UPREIT (in 1992), laying the groundwork for real
estate companies in all sectors to access the public equity markets.
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Favoring “quality over quantity,” Taubman owns or manages 28 properties in the U.S. and Asia – large enough to provide economies of
scale and solidify relationships with some of the world’s best retailers,
yet small enough to effectively maximize the potential of every asset by
receiving attention of the senior management team.
Taubman continuously reinvests assets – a process that includes renovations, expansions and ground up development – while also achieving significant organic growth from rising rents from new tenants and
lease rollovers. Taubman distinguishes itself from other REITs by creating extraordinary retail properties where customers choose to shop, to
dine and to be entertained – where retailers can thrive.
Here is a snapshot of the markets where Taubman operates:
International Footprint Despite Smaller Size
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Taubman Centers Differentiated Sales per Square Foot
Platform:
Taubman has a $4.1 billion market cap (added to the S&P Midcap Index
in January 2011); however, the high-end property owner still dwarfs in
size to its closest competitor, Simon Property Group (SPG). In fact,
Simon – with a $47.2 billion market cap – is larger than ALL of the other
mall REITs combined.
Based on Market Cap (in $US billions)
47.253
50
45
40
35
30
25
18.287
20
15
10
5
0
1.102
1.358
RSE
GRT
3.026
3.052
4.062
SKT
CBL
TCO
Taubman stands out the most for being the
Regional Mall REIT with the highest quality portfolio. Compared with its peer group,
Taubman has the highest overall quality based on its underlying demographics:
median household income (15% higher than
the peer group), household density (65%
higher than the peer group), education and
major market penetration.
Around 86% of Taubman’s centers are
located in the 50 largest markets in the
U.S., and Taubman has the highest anchor
tenant quality making the value proposition
superior to the peer REITs (Source: Taubman Investor Presentation). The graph at
the right is a snapshot of Taubman’s sales
per square foot compared with its peers...
8.276
MAC
GGP
SPG
Highest Portfolio Sales Per Square Foot [1]
$699
Taubman
$579
Simon
General
Growth
$562
$549
Macerich
$465
Glimcher
$381
Penn REIT
$358
CBL
$0
$200
$400
$600
$800
Reported sales per square foot (Sept. 30, 2013)
[1] Typically excludes all anchors, temporary tenants and
10,000+ SF Tenants
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U.S. Development
China development
south korea
development
Minimum rent
Significant amount of % rent
marks leases to market
Significant amount of % rent
marks leases to market
10 year initial roll
3–5 year initial roll
5–7 year initial roll
Fixed with tax & insurance
pass through
Fixed service charge
Fixed service charge
Anchor Rent/CAM
Rare
Standard
Standard
Targeted Occupancy Cost
17%
Slightly less than U.S.
Slightly higher than U.S.
Historically 3%–4%
In excess of 10%
6%–8%
Lease Structure
Lease Term
CAM/Service Charge
Sales Growth
Unleveraged After-Tax Return
7.75%–8.5%
6%–6.5%
7%–7.5%
Reaches 10%
Initial Stabilized
10th–11th year
7th–8th year
9th–10th year
By 10th Year
9%–10%
13%–14%
10%–11%
No
Yes
Yes
Taxes (Income & Repatriation)
Comparison of Development
Taubman stands out the most for being the Regional Mall REIT with
the highest quality portfolio. Compared with its peer group, Taubman
has the highest overall quality based on its underlying demographics: median household income (15% higher than the peer group),
Returns (Example)
14
12
While initial yields of China and South
Korea developments are lower...
10
CHINA
SOUTH KOREA
U.S.
8
6
With higher growth, returns in
Asia are greater over time.
4
2
0
1
2
3
4
5
6
U.S. Development
ireitinvestor.com
7
8
China Development
9
10
South Korea Development
8
household density (65% higher than the peer group), education and
major market penetration. Taubman stands out the most for being the
Regional Mall REIT with the highest quality portfolio...
REIT Name
Ticker
Price
M-Cap
P/FFO
Div-Yld
Rouse Properties
RSE
22.19
1.102
na
2.34
General Growth
GGP
20.07
18.287
17.3
2.79
Tanger Factory Outlets
SKT
32.02
3.026
16.7
2.81
Taubman Centers
TCO
63.92
4.062
17.8
3.13
Simon Property Group
SPG
152.16
47.253
17.3
3.15
Macerich Company
MAC
58.89
8.276
16.8
4.21
Glimcher Realty Trust
GRT
9.36
1.358
13.3
4.27
CBL Properties
CBL
17.96
3.052
8.1
5.46
Source: SNL Financial
Nothing But Net
Single-tenant (or Triple Net) REITs outperformed total returns in the
broader U.S. equity REIT sector as of Dec. 31 – by 8.47 percentage
points – as the property sector dominated the REIT space in terms of
M&A with completed deals worth almost $6.90 billion.
Agree Realty (ADC) and Spirit Realty Capital (SRC) led the singletenant REITs with one-year total return performances of 14.60% and
12.78%, respectively, as of Dec. 31, 2013. Through its merger in July
with Cole Credit Property Trust II, Inc., Spirit Realty doubled the
number of properties in its portfolio and increased its enterprise value,
according to Chairman and CEO, Thomas Nolan Jr.
“The expiration of all contractual lock-ups and the merger with Cole
II increased the free flow in our stock from about $500 million a year
ago to $3.7 billion today,” Nolan said during the company’s third-quarter earnings call on Nov. 11.
Agree Realty and Spirit Realty, on the other hand, traded at discounts
to NAV per share of 0.1% and 0.09%, respectively, as of Dec. 31, 2013.
The rest of the REITs in the single-tenant sector traded at a premium to
NAV, led by Getty Realty Corp. (GTY) at 0.26%. ireitinvestor.com
9
1-Year Total Return: Single-Tenant REITs
SNL US REIT Equity 3.72%
45
Single-Tenant REITs 12.19%
40
35
30
25
20
15
10
5
0
–5
12
-3
1-1
2
1-3
1-1
3
2-
28
-13
4-
30
-13
5-
31
-13
6-
30
-13
7-
31
-13
8-
31
-13
9-
30
-13
10
-3
1-1
3
11
-3
0-
13
12
-3
1-1
3
Source: SNL Financial, As of Dec. 31, 2013
Among the single-tenant REITs, Realty Income Corporation (O) had
the highest implied market cap as of Dec. 31, 2013, at $7.7 billion. In an
interview at REIT World 2013, Realty Income CEO John Case relayed
the impact of investment activity in the net-lease sector in 2013. “There
has been a tremendous amount of consolidation activity in our sector
over the last two years,” he said. “A great deal of it has been private
real estate companies in the net-lease sector coming into the public
world, either through listings or through consolidation. We have actually participated in this consolidation trend by making an acquisition
in January of this year of [American Realty Capital Trust], which was a
$3.2 billion dollar transaction. I think it’s good for the sector...”
REIT Name
Ticker
Price
M-Cap
P/FFO
Div-Yld
S&P
One Liberty Properties
OLP
20.32
0.318
na
7.28
na
Monmouth Real Estate
MNR
9.16
0.416
15.4
6.55
na
Gramercy Property Trust
GPT
5.94
0.423
na
na
na
Agree Realty
ADC
29.08
0.433
13.8
5.64
na
GTY
18.44
0.616
14.1
4.34
na
STAG Industrial
Getty Realty
STAG
20.41
0.901
15
6.17
na
Chambers Street
CSG
7.73
1.828
12.2
6.52
na
Lexington Realty Trust
LXP
10.19
2.327
10.2
6.48
BB+
EPR
49.33
2.548
12.6
6.41
BB
ARCP
12.91
2.609
18
7.28
na
EPR Properties
American Realty Capital Properties
Spirit Realty
SRC
9.83
3.641
15.3
6.77
BB-
National Retail Properties
NNN
30.81
3.754
16.2
5.26
BBB
W.P. Carey
WPC
60.99
4.163
20.2
5.71
na
Gaming and Leisure Properties
GLPI
50.26
4.474
na
na
na
O
37.73
7.777
15.8
5.79
BBB+
Realty Income
Source: SNL Financial
ireitinvestor.com
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Based on Dividend Yield
8
7
6
5.26
5
5.64 5.71 5.79
6.77
6.48 6.52 6.55
6.17 6.41
7.28 7.28
4.34
4
3
2
1
0
0
GPT GTY NNN ADC WPC
O STAG EPR LXP CSG MNR SRC OLP ARCP
Total Return
3-Month
1-Year
3-Year
5-Year
Lexington Realty Trust
-8.62
1.23
49.75
202.94
Chambers Street
-9.71
na
na
na
EPR Properties
3.57
13.59
25.63
143.23
One Liberty Properties
3.15
2.65
46.67
254.07
Agree Realty
-1.25
14.41
35.32
144.43
STAG Industrial
5.57
19.39
na
na
Spirit Realty
8.8
13.8
36.22
na
Monmouth Real Estate
4.53
-6.93
27.07
88.55
Realty Income
-3.9
-3.15
26.33
124.21
National Retail Properties
-3.62
1.64
35.02
153.16
2.9
2.64
na
na
W.P. Carey
-6.47
23.84
130.79
257.41
Gramercy Property Trust
48.87
96.69
112.9
375.2
Getty Realty
-1.28
6.74
-32.83
18.54
American Realty Capital Properties
The tragedy of life doesn’t lie in not reaching
your goal. The tragedy of life lies in having no
goal to reach.
Benjamin Mays
ireitinvestor.com
11
Inside the Executive Suite at Extra
Space Storage
Self-storage REITs, oftentimes viewed as a boring asset class, are overlooked by many investors, but that’s not the case anymore. While many
other sectors of commercial real estate were hit hard by the recession,
the self-storage industry weathered the storm with minimal damage.
As vacancy rates fall and rents grow, investor demand for self-storage
properties continues to rise.
Self-storage fundamentals have been improving during 2013, which is a
continuation of the last few years. Vacancy dropped from 14.9% at the
beginning of 2013 to 12.6% in the third quarter. Asking rents have grown
2.1% year-to-date (2013). In 2014, vacancy rates are expected to drop
by another 80 basis points, and asking rents are expected to grow by
about 2.8 percent.
During the last few years, 300 to 400 new, self-storage facilities have
been constructed, and with the economy continuing to improve it’s estimated that as many as 800 new facilities will be constructed in 2014.
Alternatively, there are just four publicly traded self-storage REITs in the
U.S., and given the significant fragmentation there has been a wave of
consolidation.
Leading the way in self-storage growth is
Extra Space Storage (EXR), a Salt Lake
City-based REIT that owns and/or operates
1,007 self-storage properties in 35 states,
Washington, D.C. and Puerto Rico. The
company’s properties comprise approximately 667,000 units and approximately 74.0
million square feet of rentable space, offering customers a wide selection of conveniently located and secure storage solutions
across the country; this includes boat storage, RV storage and business storage. Extra
Space is the second largest owner and/or
operator of self-storage properties in the
United States and is the largest self-storage
management company in the country.
Extra Space is trading at $42.09 a share with a dividend yield of 3.80%.
The company has a total market capitalization of around $6.9 billion with
a Price to Funds from Operations (P/FFO) multiple of 20.9x. As exclusive
ireitinvestor.com
12
Earnings and Price Correlated F.A.S.T. GraphsTM (8 Year)
coverage for iREIT newsletter subscribers, I recently interviewed Spencer Kirk, CEO of Extra Space. Here is the Q&A:
Thomas: How you would describe the self storage industry today? What
are the forces driving the industry today?
Kirk: The industry is in a uniquely positive position. As the economy
continues to rebound, demand for self storage remains stable. There
continues to be virtually no new supply in the markets that Extra Space
is located in.
Another major paradigm shift in the industry is the death of the yellow
pages and the unparalleled growth of the internet and the importance it
has on identifying, attracting and capturing demand. Mobile search for
storage is the fastest growing sales channel in the industry. Those that
can capitalize on this growth through technology and sophisticated data
analytics will have a definite advantage over the competition.
All this combines to provide an opportunity to sophisticated, large-scale
operators to maximize revenues.
Thomas: How have the fundamentals improved for Extra Space in 2013?
ireitinvestor.com
13
Kirk: Extra Space saw rental demand remain strong and stable in 2013.
Street rates increased and the company saw record occupancies and
lower discounts offered to new customers throughout the year. Extra
Space saw again record-setting same-store results in 2013.
Thomas: How about acquisitions in 2013? Do you see more growth in
2014?
Kirk: In 2013, Extra Space Storage acquired 78 assets for approximately $700 million dollars. This was one of the company’s largest acquisition
years on record. This was on top of acquiring 91 assets for approximately $701 million in 2012.
For every minute
you remain angry,
you give up 60
seconds of peace
of mind.
Ralph Waldo
Emerson
There is a lot of demand for storage assets, and cap rates remain low
to reflect that demand. Extra Space remains committed to a long-term,
accretive and disciplined approach to growing its portfolio. The company will continue to leverage its existing JV and management relationships (constituting approximately 50% of the Extra Space portfolio)
where possible to gain the advantage of an off-market pipeline. Being
committed to long-standing and mutually-beneficial relationships has
been a competitive advantage for Extra Space.
Thomas: Extra Space has grown its dividend consistently since the
Great Recession. What are the primary drivers that would allow the
company to grow its dividend?
Kirk: As FFO has continued to grow, the dividend has followed suit.
In general terms, the Extra Space Board has historically provided a
dividend that meets the minimum requirements required to retain its
REIT status. This is constantly evaluated and reviewed to ensure there
is an optimal balance between shareholder demands and capital for
company growth...
Dividends Paid
1.60
1.4500
1.40
1.20
1.00
0.8500
0.80
0.60
0.40
0.4000
0.5600
0.20
0.00
ireitinvestor.com
2010
2011
2012
2013
14
I would never
talk bad about
anybody, even
if they have
something derogatory to say
about me. I’m the
bigger person.
Buddy Valastro
ireitinvestor.com
Exclusive iREIT Investor Coverage on
American Realty Capital Properties
Since going public more than two years ago American Realty Capital Properties (ARCP) has literally snowballed into a dominant Triple
Net REIT. After listing on NASDAQ on Sept. 6, 2011 by raising around
$70 million (and 63 properties), the New York-based REIT now has over
2,560 freestanding commercial properties, net-leased to 452 primarily
investment-grade and other credit tenants, totaling approximately 43.7
million square feet in 49 states, the District of Columbia and Puerto Rico.
ARCP recently announced (on Jan. 8) that it completed its transition to
self-management on schedule, within days of the close of its acquisition of American Realty Capital Trust IV, Inc. (ARCT 4). Also on January
9th ARCP announced that it completed its acquisition of 120 properties from affiliates of funds managed by Fortress Investment Group
LLC for $601.2 million. According to a Jan. 9 news release, the portfolio houses 17 tenants and has an average remaining lease term of
12.9 years.
15
With the pending closing on the “mega” deal with Cole Real Estate
Investments (COLE), I recently caught up with ARCP’s confounder
and CEO, Nicholas Schorsch. Here is the exclusive iREIT Investor
interview:
Thomas: Congratulations on the acquisition of American Realty Capital Trust IV, Inc. as well as the transition to self-manage American Realty Capital Properties (ARCP). What is the value proposition for ARCP?
Schorsch: Thanks Brad. ARCP’s rapid growth of assets and revenue
over the past year has allowed us to achieve a size where the costs to
self-manage will be lower than the cost to externally advise. We have
also added a best-in-class executive management team through the
hires of David Kay [President], Lisa Beeson [COO] and Lisa Pavelka
McAlister [CAO] who will join Brian Block [CFO] and me [CEO & Chairman]. Our compensation is linked in large part to the performance of
ARCP and our interests are closely aligned with the interests of ARCP’s
shareholders. Also, institutional investors, research analysts and the
financial press have historically viewed externally managed REITs
as being susceptible to potential conflicts of interest, which we have
seen to be the case in the public markets: externally managed publicly
traded REITs have traded at lower earnings multiples relative to selfmanaged REITs. We expect ARCP to take part in multiple expansions
and provide significant value to our shareholders.
Nic h o l as S c h orsc h
ARCP CEO
Thomas: The Cole Real Estate (COLE) deal is expected to close in
the first quarter of this year making ARCP the largest Triple Net REIT in
the world. How will the size and scale of ARCP benefit the company?
Schorsch: Well first off Brad, the deal is now likely to close by the end
of January which we are extremely excited about. Both companies
have been working around the clock to make it happen. The merger
will create the world’s largest net lease REIT with an enterprise value
of about $22 billion. This will bring significant benefits to our shareholders. Our dividend will increase to $1.00/share, up from $0.94. Our
increased scale will create operating and revenue efficiencies including a lower cost of capital, superior growth opportunities and high
investor returns. We are also well positioned for a potential inclusion
into the S&P 500 index.
Thomas: Many analysts and investors don’t understand the advisory
business that ARCP is acquiring from COLE. What is the value behind
the business model?
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Schorsch: There is tremendous value Brad. The advisory
business
provides
ARCP an alternative source
of stable income and we
expect it to be a source of
significant revenue growth.
There is also no leverage
associated with the cash
flows. Cole has raised over
$10 billion of equity capital
since 2007 and is a leading
brand in the growing nontraded REIT industry. We
believe the PCM revenue will
realize significant value in
the public market.
ARCP – Stock Price
ARCP – Dividend Yield
Thomas: What is the future
for the Non-Traded REIT
model?
Schorsch:
Non-traded
REITs have posted a record
year, raising $20 billion in
sales for 2013; doubling
the $10 billion raise in 2012.
Investors are recycling the
capital from the recent
liquidity events, which have
given investors additional
confidence. This year [2014]
could see another $20 billion to $30 billion in sales.
Thomas: Although public for just over two years, ARCP has been
highly successful growing its dividend. Given all of the M&A activity,
how sustainable is ARCP’s dividend?
Schorsch: Very sustainable. Our AFFO payout ratio is about 80% to
90%.
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Exclusive iREIT Coverage on
Digital Realty
According to Rich Miller, editor-in-chief of Data Center Knowledge,
“demand from social media companies and cloud-builders contributed to a surge in leasing of wholesale data center suites in 2013, with
total leasing volume up about 25 percent from 2012,” specifically, in the
wholesale data center sector (a tenant leases a dedicated space) where
companies are leasing large amounts of space (typically 500 kilowatts
or more).
Digital Realty (DLR) was a pioneer of the wholesale data sector, and
the industry has become much more competitive in recent years, with
at least 10 providers booking substantial wholesale leases in 2013.
According to Miller, the biggest tenant in the market was fast-growing
microblogging network Twitter, which committed to leases for more
than 25 megawatts of data center space, including a long-term deal
in Sacramento and an expansion of its space in Atlanta. Next up was
Microsoft, which leased 17 megawatts of space across three markets
to support its growing cloud computing operation.
The market was also boosted by several companies shifting from collocation to using wholesale data center suites. These included social
network LinkedIn, which leased 14 megawatts of space with Digital
Realty in Virginia and Dallas, and cloud storage provider Dropbox,
which booked deals for 6.3 megawatts of space in three key markets
(Ashburn, Chicago and Santa Clara).
We must use time
wisely and forever
realize that the
time is always ripe
to do right.
NELSON MANDELA
As part of my exclusive coverage for iREIT Investor subscribers, I’m
bringing you a “hot off the press” interview with John Stewart, VP of
Investor Relations with Digital Realty. I’m sure many of you have seen the
volatility of Digital’s shares in 2013, and I intend to provide you with the
latest news on Digital as well as other REITs in the Data Center sector.
The top of the next page is a snapshot (FAST Graph) of Digital Realty’s
earnings and dividend history:
Thomas: I think management has taken some important steps and
I’m encouraged by your coming on board last year. Can you reflect
on whether this has been a “cultural” shift for the company or just an
“administrative change?”
Stewart: Sure. Thanks, Brad. I think the truth lies somewhere in between.
I’d like to think that I bring a bit more to the table than just an administrative change, but part of the reason this opportunity appealed to me...
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How Does Preferred Equity Work?
Don’t aim for
success if you want
it; just do what you
love and believe in
it, and it will come
naturally.
David Frost
Preferred equity is a valuable way for companies to access permanent financing without diluting shareholders. Similar to debt, companies have to make coupon payments on preferred equity; however,
unlike debt, the principal amount never has to be repaid. Additionally,
preferred equity holders have no claim on assets, and therefore the
company cannot default due to missed payments.
The pricing of preferred equity is similar to bonds. They are issued at
par (usually $25), and the price (theoretically) moves inversely to interest rates. Preferred equity is often issued with a five year call provision,
which means the company has the right, but not the obligation, to buy
back the stock at par at any time after five years. The call provision
limits the upside potential of the security.
When interest rates drop, companies can exercise the call provision in
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order to take advantage of lower rates. Calling the stock at par erases
any price increase the investor could have recognized as a result of
interest rate movements, which restricts how far above par a security
may trade. During times of rising interest rates, companies may elect not
to call the security at par as it may be trading below the par value, and
cheaper alternatives presumably would not exist for permanent capital.
Preferred REITs
In addition to investment in the common equity of REITs, preferred
stocks are a very popular, and sensible, form of REIT investment. Most
REITs will utilize preferred stock as a vehicle for raising capital for the
following reasons:
„„ As stated earlier, REITs are required to pay out at least 90 percent
of taxable income to their shareholders in the form of dividends.
REIT preferred stock dividends count toward this payout requirement and are, therefore, a useful form of capital for REITs as they
are a non-diluting form of capital, and
„„ Preferred stock is typically perpetual, meaning there is no definitive
repayment date. This is important to a REIT in that they do not have
to replace the capital through cash on the books - which is typically
a smaller amount of their assets due to the payout requirement - or
through issuing common stock (dilutive) or bonds, the amount of
which is capped by covenants contained in their bonds.
To understand REIT preferred stock, one must understand where they fall
in the capital structure and why this is important. REITs have limitations
on the amount of capital that can fall within the debt portion of the capital structure, while preferred stock and common equity can be used in
limitless fashion. The reason behind this is that preferred stock dividends
have to be declared by the board, and can be suspended should a REIT
encounter financial stress (although it rarely is in practice). So it is debt
like, but a suspension of the dividend is not an event of default.
I know of no more
encouraging
fact than the
unquestionable
ability of man
to elevate his
life by conscious
endeavor.
Henry David
Thoreau
As dividends have to be declared by the board, it is equity like, but
preferred stock holders do not have the voting powers similar to
common equity owners. Preferred stock is an “in between” type of
security and has features unique from other parts of a REIT’s capital structure. An investor must understand the features and terms of
preferred stock in order to successfully invest in this part of the capital
structure and in this asset class generally. Some of the key features of
preferred stock that investors must consider are:
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REDEMPTION: REIT preferred stocks are usually redeemable at par
five years after issuance. An investment above par which is redeemed
will negatively impact the yield on that preferred stock.
CUMULATIVE OR NON-CUMULATIVE DIVIDEND: Most REIT
preferred stock have cumulative dividends, meaning dividends will
continue to accrue if suspended.
MATURITY: Most REIT preferred stock is perpetual. The lack of maturity date can lead to price swings in rising/falling rate environments.
VOLUME: Preferred stock does not trade with the same volume as
common equity and can, at times, be illiquid. In the current environment,
redemption risk has surfaced as being one of the key risks with REIT
preferred stock as companies have been issuing new preferred stock in
order to redeem higher coupon, currently redeemable preferred stock.
With these factors in mind, here are two REIT preferred stocks that are
appropriate core holdings for an investor’s REIT preferred portfolio.
The preferred selections this month continue to diversify the preferred
portfolio and add companies with strong and growing fundamentals,
business stability and attractive yields.
This month in the Intelligent REIT preferred portfolio we are adding
exposure to non-apartment housing and lodging. While driven by the
same broader macroeconomic themes as most REITs, they benefit
from different phases in the business cycle. This month I have three preferred picks: CubeSmart (CUBE), CBL &
Associates (CBL), and Kimco Realty (KIM). These specific details can
be viewed below:
January 2014 REIT Preferred Portfolio Additions — Fundamental Snapshot
Company
MKT Cap
no. of
prop
p/b
CubeSmart
2248247411
381
2.14
CBL & Associates Properties, Inc.
3116104467
163
3.79
Kimco Realty Corp
8173320228
896
Average
FFo
p/ffo payout
ffo/sh
Growth
div
yld
Debt/ mtg debt/
ebitda total debt
6.06
22%
7.05
90%
debt/ re
assets
18.57
46.7%
26.8%
2.7%
7.46
30.1%
8.6%
5.0%
49%
2.20
15.00
75.8%
-0.8%
4.2%
7.41
24%
47%
2.71
13.68
0.51
0.12
0.04
6.84
0.45
0.56
Call
Date
YTC
Rank
7.3%
Preferred
72%
November REIT Preferred Portfolio Additions — Recommended Securities
REIT Name
Security
Series
Par
Px
CY
SY
CUBE 7 3/4
A
25
$25.30
7.67%
7.68%
11/2/2016
TAUBMAN CENTERS INC
TCO 6 1/4
K
25
$20.88
7.49%
7.52%
3/15/2018
11.3%
Preferred
KIMCO REALTY CORP
KIM 5 1/2
J
25
$19.99
6.89%
6.89%
7/25/2017
12.6%
Preferred
$22.06
7.35%
7.37%
CUBESMART
Average
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21
All You Want To Know About a REIT IPO
A successful and growing real estate organization could list several
reasons why it might choose to go public as a REIT. One of the most
obvious is because REITs pay no taxes at the corporate level, thus
enabling them and their shareholders to avoid double taxation.
Second going public provides a REIT greater access to capital and
financing flexibility that publicly traded companies enjoy. Another
factor to induce companies to go public is the ability of the public
company to provide liquidity for the ownership interests of the
management and employees.
Of course, from the demand side, more and more investors are
attracted to the REIT structure and investment interest remains
robust. As David Ethridge, Senior Vice President and Head of the
Capital Markets Group at NYSE Euronext, explains:
“2013 was notable for the robust REIT IPO activity – topping off the
year with a total of 16 REIT IPOs on the NYSE which raised more than
$4.4 billion. We welcomed many industry leaders such as Empire
State Realty (ESRT) and Brixmor Property Group (BRX). The REIT
sector raised a further $26.9Bn on the NYSE from follow on common
stock issuance making it one of the largest issuance sectors in the
U.S. We also welcomed several previously non exchange traded
companies such as Cole Real Estate Investments, Columbia Property Trust and Chambers Street Properties, which successfully brought
the power of an NYSE listing to their many shareholders. Looking
ahead to 2014, we expect continued interest in REIT stock issuance
given the improving economy and overall stock market health.”
Here is a snapshot of all REITs that listed in 2013 on the NYSE Euronext:
REITs Listed on the NYSE in 2013
Brixmor Property Group Inc.
QTS Realty Trust, Inc.
Cherry Hill Mortgage Investment Corp.
Empire State Realty Trust, Inc.
American Homes 4 Rent
Rexford Industrial Realty, Inc.
Physicians Realty Trust
American Residential Properties, Inc.
Armada Hoffler Properties, Inc.
Ellington Residential Mortgage REIT
Hannon Armstrong Sustainable Infrastructure Capital, Inc
Five Oaks Investment Corp.
Aviv REIT, Inc.
ZAIS Financial Corp.
Independence Realty Trust, Inc.
Orchid Island Capital, Inc.
Source: NYSE
ireitinvestor.com
Ticker
Exchange
Date
BRX
QTS
CHMI
ESRT
AMH
REXR
DOC
ARPI
AHH
EARN
HASI
OAKS
AVIV
ZFC
IRT
ORC
New York Stock Exchange
New York Stock Exchange
New York Stock Exchange
New York Stock Exchange
New York Stock Exchange
New York Stock Exchange
New York Stock Exchange
New York Stock Exchange
New York Stock Exchange
New York Stock Exchange
New York Stock Exchange
New York Stock Exchange
New York Stock Exchange
New York Stock Exchange
NYSE MKT LLC
NYSE MKT LLC
29-Oct-13
8-Oct-13
3-Oct-13
1-Oct-13
31-Jul-13
18-Jul-13
18-Jul-13
8-May-13
7-May-13
1-May-13
17-Apr-13
21-Mar-13
20-Mar-13
7-Feb-13
13-Aug-13
14-Feb-13
22
REIT GLOSSARY
Beta: The extent to which a stock’s price moves with an index of stocks, such as the S&P 500.
Bond proxies: A slang term used to refer to the shares of a REIT that provide an aboveaverage dividend yield to its shareholders but where FFO/AFFO and dividend growth rates are
expected to be quite low, for example, 1 to 3 percent annually.
Book value (per share): The dollar amount of a company’s assets less its liabilities, as reflected on its balance sheet pursuant to GAAP, divided by the common shares outstanding. Book
value will reflect all prior depreciation and amortization, which are expensed for accounting
purposes and may have little relationship to a company’s net asset value when valued at current
market prices or prevailing cap rates.
Correlation: The extent to which the price of one type of investment, e.g., REIT stocks, moves
with those of other investments. A perfect correlation of 1.0 suggests that the price movement
can be exactly predicted by the price movement of the investment to which it is compared. A
correlation of zero suggests that there is no correlation at all, while a correlation of – 1.0 indicates that the price will move in price exactly the opposite of its compared investment.
Cost of capital: The cost to a company, such as a REIT, of raising capital in the form of equity
(common or preferred stock) or debt. The cost of equity capital should take into account the
dilution of the interests of the existing equity holders in the company. The cost of debt capital is
merely the interest expense on the debt incurred.
Debt capital: The amount of debt (as opposed to equity) that a REIT carries on its balance
sheet. This would include the combination of fixed-rate or variable-rate debt, secured or unsecured debt or debentures issued to public or private investors, borrowing under a bank credit
line, and any other type of indebtedness. It does not include equity capital, such as common
or preferred stock.
Equity market cap: The total value of all issued shares of a public company, such as a REIT,
which is determined by multiplying the company’s total common shares outstanding by the
market price of the shares as of a particular date. Sometimes “equity market cap” includes
operating partnership units issued by an UPREIT or DownREIT that are convertible by the
holder into common shares, and some investors include the stated (or par) value of outstanding
preferred stock.
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The Most Important Thing
As the editor of The Intelligent REIT Investor, it’s my goal to provide
you with research and insight that will enable you to make sound investment decisions. Although I may come across an exciting bargain, I will
continually remind you to diversify your holdings – whether it is REIT
stocks or other valuable portfolio equities.
It’s true that diversification is a risk management tool which embodies
the maxim “don’t put all of your eggs in one basket.” It’s widely held
within the investment world that company-specific risk can be reduced
by holding somewhere between 15 - 50 stocks. Industry-specific risk
can be reduced by holding stocks from varying industries, countryspecific risks can be reduced by holding stocks from varying countries
and so on.
Laziness may
appear attractive,
but work gives
satisfaction.
Diversification is good when it reduces risk without inhibiting returns.
Diversification is bad when a portfolio becomes so diversified that
mathematically it becomes difficult to outperform a benchmark or
achieve a desired level of return. The more money you have to invest
obviously the bigger your average position size is going to be, particularly if you are trying to achieve an optimally concentrated portfolio.
For really large portfolios this means many small cap stocks become
un-investable. Essentially, your flexibility is reduced.
As some of you know, I have started to build my own REIT portfolio.
Yes, that means I have “skin in the game” and although I’m starting
small, I intend to build a REIT portfolio that provides durable income
for years to come. So I believe I have a tremendous advantage over
ordinary investors because I study REITs on a daily basis, not for the
purpose to be a day trader, but more so to stay actively engaged with
the REIT sector and make the most intelligent picks. At the end of the
newsletter I have provided you with my portfolio of REITs to date.
Anne Frank
My Bullish Picks:
Every month I will include three different REIT portfolios and each portfolio is geared for different investor profiles: (1) SWAN – The “sleep well
at night” portfolio is aimed to benefit the conservative investor, often
a retiree, who is interested in Rule #1 – DON’T LOSE MONEY AT ALL
COSTS. This portfolio will include “blue chip” REITs and other REITs
that have demonstrated exceptional risk management attributes. (2)
SALSA – The SALSA portfolio is not a portfolio of speculative companies but more of a growth portfolio that is aimed to produce higher total
returns (than the SWAN). There will be some REITs in the SALSA port-
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folio that you many not own individually (like a hot pepper); however,
the “hot” ingredients in the SALSA portfolio will enable investors to take
on medium risk for higher returns.
First, let’s talk about the SALSA portfolio. As you all know, many of the
high-quality stocks have dropped in price creating wider “margin of
safety” characteristics. If you have read any of my articles you should
know that the REIT market is trading off of economic data more so
than fundamentals. However, investors should be cognizant of what
the market is saying and always keep a close eye on the sectors and
the impact of rising interest rates.
This month the SALSA portfolio includes five light blue labeled REITs.
That means that my BUY price is at least 10% below my TARGET price.
That does not necessarily mean you should go out and buy them today
(because they could be cheap for a reason); however these REITs are
all trading at a price that is worth further investigation. These five REITs
are Taubman Centers (TCO), Excel Realty (EXL), Digital Realty
(DLR), Lexington Realty (LXP), and Campus Crest (CCG).
The SALSA portfolio also includes four yellow labeled REITs. These
REITs are trading below my TARGET price but not as much as 10%.
The following REITs include CBL Properties (CBL), American Realty
Capital Properties (ARCP), UMH Properties (UMH), and Chambers
Street (CSG). The average dividend yield for all of the SALSA REITs
has increased month-over-month from 5.23% to 5.32%.
You can review the SALSA REIT metrics on the Exhibits attached.
Now let’s drill down to the more attractive SWAN (sleep well at night)
opportunities. As you can see below, there are twelve potential SWAN
candidates and I consider eight (of the 12) to be potential BUY opportunities. The REITs shaded in orange are all trading at -10% or higher
than the recommended BUY prices and the REITs shaded in green are
trading at -10% below the suggested BUY prices. In other words, there
are five REITs that look most attractive: American Campus Communities (ACC), Taubman Centers (TCO), Digital Realty (DLR), Biomed
Realty (BMR), and Realty Income (O).
Things which
matter most must
never be at the
mercy of things
which matter least.
Johann Wolfgang
von Goethe
There are three REITs shaded orange (trading -10% or higher than my
price target) and they include Monmouth Real Estate (MNR), Weingarten Realty Investors (WRI), and HCP, Inc. (HCP). The average dividend yield for the SWAN portfolio is 4.82% (was 4.80% in Dec. 2013).
You can review the SWAN REIT metrics on the Exhibit attached.
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SALSA PORTFOLIO
a growth portfolio aimed to produce higher total returns
Please go to ireitinvestor.com and become a
subscriber to view the full portfolio.
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SWAN PORTFOLIO
the “sleep well at night” portfolio, aimed to benefit the conservative investor
Please go to ireitinvestor.com and become a
subscriber to view the full portfolio.
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THREE D PORTFOLIO
As you all know, we all buy REITs for one thing: dividends. Why?
Numerous studies have shown that companies that raise dividends
outperform the companies that don’t pay dividends. Historically, the
S&P Dividend Aristocrat Index has outperformed the S&P 500: Since
inception in 1990, the Aristocrats have returned 901% versus the S&P
500, which returned 469%.
Last month I introduced the Three-D portfolio, and over the course of
the last 30 days the portfolio value is up over 5% and the average dividend yield is now 5.16% (was 5.02% in December 2013).
Remember: the Three-D REIT portfolio only includes REITs that have
NEVER cut a dividend; hence the name (Disciplined and Durable Dividends). Here is the list:
Please go to ireitinvestor.com and become a
subscriber to view the full portfolio.
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Minimize Risk and Protecting Your Nest Egg At All Costs
Ben Graham wrote, “you are neither right nor wrong because the
crowd disagrees with you. You are right because the data and reasoning are right”. As Graham defined it, the “margin of safety” constitutes
a “favorable difference between price on the one hand and indicated
or appraised value on the other.” Here is a close-up of BioMed using a
FAST Graph – clearly a REIT to explore:
Earnings and Price Correlated F.A.S.T. GraphsTM (8 Year)
Thank you for reading the January 2014 edition of The Intelligent
REIT Investor. I am continually looking to improve the content and
provide you with research and meaningful analysis that is intended to
serve as a risk minimization tool. I’m working hard to earn your trust
and I always welcome any suggestions that you have.
While it is impossible to eliminate all investment risk, Ben Graham’s
methods greatly minimize such risk by filtering out disadvantageously
positioned securities from the outset. That is the primary reason why
they have proven to be successful. After all, it stakes only a few large
losses to decimate overall investment performance, even if many other
investments prove successful.
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Real Estate Investment Trust Intelligence
www.ireitinvestor.com
The Definitive Source of REIT News
This newsletter is intended to provide information to interested parties. As I have no knowledge of your individual circumstances, goals and/or portfolio
concentration or diversification, readers are expected to complete their own due diligence before purchasing any stocks mentioned or recommended.
Brad Thomas is a financial columnist, licensed real estate broker and REIT expert with more than 25 years
of experience in the investment industry. He is ranked #1 in both REITs and Finance on the Seeking Alpha
website (Seeking Alpha is the leading website and social network for business analysis, vibrant investment
discussion and financial opinion. Reaching more than 10 million monthly uniques and published more
than 250 opinion articles daily, giving a voice to more than 7,000 contributors, while connecting executives
and financial experts from around the world). He also contributes frequently for The Street, The Motley
Fool and Forbes.com. Also he’s published in Forbes Magazine and is a regular contributor for The
Commercial Real Estate Radio Show. He has many quoted in many leading publications and he has
been seen on Fox Business. Thomas is also editor of The Intelligent REIT Investor, a subscriptionbased newsletter.
Disclosure: Brad Thomas and/or his family owns the following REIT securities:
O, DLR, VTR, HTA, STAG, UMH, CSG, GPT, ARCP, ROIC, MPW, HCN, OHI, LXP, KIM.
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