Author Topic: REITs- Why are they priced so low?  (Read 11368 times)

Packer16

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Re: REITs- Why are they priced so low?
« Reply #10 on: January 31, 2018, 01:36:16 PM »
The interest limitation is not applicable to REITs & now you only have to pay taxes on 80% of the dividends as they are pass throughs independent of income.  The tax benefit alone should enhance value quite a bit.

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Williams406

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Re: REITs- Why are they priced so low?
« Reply #11 on: January 31, 2018, 02:01:25 PM »
"Who knows how else the space will be used."

Ironically, perhaps as self-storage facilities for all the stuff people order from Amazon. I've actually seen some conversions of a KMart (I think) and a car dealership in my area to self-storage facilities. 

thepupil

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Re: REITs- Why are they priced so low?
« Reply #12 on: January 31, 2018, 03:08:20 PM »
While rising rates have been blamed for REITs awful relative performance in 2018 (-10% VNQ versus SPY), I think that there are also more fundamental concerns with respect to the supply / demand picture across other than retail. The manhattan office market is definitely weakening, multi-family has been on a many years construction boom and anecdotally rent growth is stalling there (at least in the yuppy haunts where I and my friends roam), skilled nursing/healthcare seems to be undergoing distress (I don't know much about this, just inferring from securities prices).

I like FCE;  it will be sold. News a few months ago that EQC would buy. NEws out today that brookfield will buy, but not for a big premium. I think it gets taken out in the high 20's. Small position w/ costs of $19.40 / share though, not sure if I'd buy it post B-field bump (ya ya I know everyday you aren't selling you're buying).

I like EQC. It is not at a discount to intrinsic value (99% of my estimated NAV), 81% of market cap in cash. More or less Sam Zell SPAC. Optionality on negative turn in cycle and/or deal before turn in cycle.

I like the 7 1/8% cumulative Colony Northstar preferreds @ 91.63, 9.45% yield to the 2022 call, 7.8% yield on a perpetual basis. I think (but am not so sure) the equity may be very cheap,  but have far more conviction that the equity is not a zero and the prefs are money good. Baupost and Abrams in the common adds some level of comfort as well.

I like FRPH as a well run underlevered owner of blah industrial real estate, aggregates reserves royalties, and 1 important building in SE DC w/ some additional development optionality. My cost is significantly lower than current px and don't think it's that cheap from here, but it's a good company. Rhizome knows this company better than anyone so search for his stuff.

I think VNO is starting to get interesting. Potential takeout by the likes of Blackstone or sovereign wealth as Mr. Roth ages. Stripped down to NYC (plus merch mart and the san fran bulding) makes for a nice clean pure play NYC company and it's cheapened a fair bit. JBGS spin didn't help.

I like the NYRT stub, just as highly levered illiquid beta, to be owned in small size.

I am drawn like a moth to a flame to CBL, but hold myself back. wouldn't be surprised if 2-3x, wouldn't be surprised if 0.

I am waiting for ILPT to decrease in price. IPO range was $26-$28, priced at $24.75, trading at $22.60 It trades at a significant discount to intrinsic value (i see it at about a 6.5-7% cap rate when a substantial portion of assets are really nice hawaiin industrial ground leases with high escalators, great occupancy and high barriers to entry), but deserves it because Portnoys suck. At a price, I want to own it. The hawaii ground lease assets are great and the company is virtually unlevered. Capital allocation will suck. Likewise w/ SIR.

Brixmor is at an 8 cap and rising for myeh grocery anchored strip centers. I recently took a hard look when stock at $19 and thought "myeh" and now at $16. In doing some google earthing and rilling into where exactly their properties were, I jsut wasn't that impressed. Kimco kind of similar thoughts.

In general, I think discounts to private market value are to be had, but there are real risks out there as well in terms of supply/demand imbalance (rent/fundamentals etc.) developing and rising rates, so I limit overall exposure.






« Last Edit: January 31, 2018, 03:10:53 PM by thepupil »

bizaro86

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Re: REITs- Why are they priced so low?
« Reply #13 on: January 31, 2018, 03:26:00 PM »
@thepupil probably the best post on the board for awhile. Thanks! I agree with you on pretty much all of these, and am long FRPH and NYRT for the same reasons.

I wish the Hawaiian ground leases were separate and not run by someone who will do a bad job. Honestly a bank trustee to cash cheques and send dividends would be enough. Under those circumstances I would allocate huge there at anything over 4% cap. That's a generational wealth asset.

DTEJD1997

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Re: REITs- Why are they priced so low?
« Reply #14 on: January 31, 2018, 03:35:50 PM »
I've been wondering this too...

In my area...prices & cap rates for commercial real estate is all over the board.  One trend is very clear, prices are going UP, cap rates are going DOWN.

HOWEVER, when I look at some properties and discuss them with the broker, I'll query as to why I should pay the asking price when I can get 7-8-9-10 in REIT's.  The REIT's are almost 100% passive investments on top of that.  Why should I buy your listed property for a 4.5% cap rate?

The broker then kind of gets of gets silent, shuffles their feet, looks at the floor, "yea, I know"...Almost like a kid that has been caught cheating on a test or homework assignment.  They then suggest that the owner is "open to reasonable offers".

I think that LISTED properties will have the broker pressuring the owner to list it at "top dollar" and see if they can get it.  The brokers are always trying to push prices higher.  There is a LOT of stupid money out there.  If they get top dollar, GREAT!  If not, they can always lower the price in a few months?

HOWEVER, if you list the property just too high...nobody might not even make an offer on it, AND you've wasted MONTHS of your time.

I like your writing style.  Professional wordsmith.  A 4.5 cap rate would imply a very high quality property. With minimal ways to value add. Except pricing power down the road.  A person not in the public domain once told me " In the real estate game you focus on the lowest of the low end or the luxury end. No middle ever!"  That said, its all relative to the market. Low end in LA might be luxury in the heartland. Its either distressed in a good location and having a creative idea to increase earning power or just buy luxury and golf. Why are reits so low? I dont' know. On paper reits seem like a better alternative.

Premfan, I've been called a lot of things over the years, ESPECIALLY by irate ex-girlfriends!  A "professional wordsmith" has never been one of them!  Thank you!  That made my afternoon...

I go far & wide and look at all sorts of different and unusual stuff....some things better than others....HOWEVER, I am not generally looking at "A" properties.  Some of them might arguably be "B" properties...but in reality most of them would probably be "C" or even lower yet!  As time passes, I am generally moving "up the food chain" and getting into better quality properties. 

One thing I notice is that a lot of realtors do NOT act or conduct business in a very professional manner.  Obviously, some do, and some are true experts...but I think that business tends to attract a lot of part timers...and you can tell who those are pretty quick.

Now that I think of it...I have only purchased one property with an agent/broker.  All the other transaction have been seller/buyer.  Also, most of my transactions have been "non-listed" properties.  I go where the bargains are, and they sure ain't on the MLS or LoopNet!

doc75

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Re: REITs- Why are they priced so low?
« Reply #15 on: January 31, 2018, 03:41:23 PM »
While we're on the topic... Anyone here follow/like Gramercy (GPT)?  I've been in it since the recovery from the CDO days, so I'm sitting on a big gain.  But I like the space they're in and I've been so impressed by management that I've kind of put it in a corner of the portfolio and not paid much attention for a while.  Currently down substantially from its highs.

james22

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CorpRaider

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Re: REITs- Why are they priced so low?
« Reply #17 on: February 01, 2018, 05:33:11 AM »
While we're on the topic... Anyone here follow/like Gramercy (GPT)?  I've been in it since the recovery from the CDO days, so I'm sitting on a big gain.  But I like the space they're in and I've been so impressed by management that I've kind of put it in a corner of the portfolio and not paid much attention for a while.  Currently down substantially from its highs.

Yeah, I'm following it.  Seems kind of cheap, so I've been trying to figure out why.  I guess on their last call they said their leverage is a little higher than they want (like almost 1 turn of EBITDA) and they are planning to reduce by selling more Chambers Street properties, right?  But there was some mention of "raising capital."  I guess maybe people don't like having to continue the "transition" from chambers street/office exposure in a deteriorating environment (they are still like 45% exposed to office, I think, and it ain't trophy stuff in manhattan).

Also seems like they keep issuing stock either when it pops up or via upreit acquisitions, but I guess most REITs do that.  Hate to get diluted as part of the ongoing business model. That's probably why I'm only long EQC and VER (though VER did dump some stock on us as soon as the equity got to nicely valued).

I am charmed by management and they seem to be starting to think about being defensive;  for example, talking about how it is late cycle and there is a lot of supply coming to market in last q call.
« Last Edit: February 01, 2018, 05:35:44 AM by CorpRaider »

KJP

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Re: REITs- Why are they priced so low?
« Reply #18 on: February 01, 2018, 06:23:42 AM »
thepupil or anyone else:

Any thoughts on iStar?  It's a non-dividend paying REIT that's using NOLs to avoid tax.   There's a decent argument that it's trading for ~50% of asset value, but it has a large amount of "transitional" and "development" assets left over from the crisis that are currently generating costs but little to no NOI.  G&A is also running ~$70-75 million a year, and it's unclear to me how much of that could be cut out once the "transitional" and "development" assets are turned over into real estate finance and triple net lease assets. 

Today it's basically cash flow breakeven if you put aside asset sales.  The future is hazy, but you can see an outcome in which the current capital structure produces ~$125-150 million in pre-tax cash flow.  The current market cap is ~$720 million.

Much more detailed writeup that's over a year old is here:  http://clarkstreetvalue.blogspot.com/2016/08/istar-non-dividend-paying-reit-with.html

I put the basic math behind the ~$125-150 million pre-tax cash flow in one of the comments to the blog post linked to above.

One major update to the blog post is that last year iStar IPO'd its ground leases into a dividend-paying vehicle called Safety Income & Growth (SAFE).  It currently has 40% ownership of SAFE and a contract to manage the assets.

Finally, I'm not sure about management -- will Sugarman stick to the basic blocking and tackling of running a real estate finance and triple net lease business?  Will he shrink the balance sheet if that's the right thing to do (they have been buying back shares)? Also, is now the right time to be trying to recycle ~$1.5-2 billion in capital into real estate finance and triple net leases?

valuedontlie

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Re: REITs- Why are they priced so low?
« Reply #19 on: February 01, 2018, 06:33:58 AM »
thepupil or anyone else:

Any thoughts on iStar?  It's a non-dividend paying REIT that's using NOLs to avoid tax.   There's a decent argument that it's trading for ~50% of asset value, but it has a large amount of "transitional" and "development" assets left over from the crisis that are currently generating costs but little to no NOI.  G&A is also running ~$70-75 million a year, and it's unclear to me how much of that could be cut out once the "transitional" and "development" assets are turned over into real estate finance and triple net lease assets. 

Today it's basically cash flow breakeven if you put aside asset sales.  The future is hazy, but you can see an outcome in which the current capital structure produces ~$125-150 million in pre-tax cash flow.  The current market cap is ~$720 million.

Much more detailed writeup that's over a year old is here:  http://clarkstreetvalue.blogspot.com/2016/08/istar-non-dividend-paying-reit-with.html

I put the basic math behind the ~$125-150 million pre-tax cash flow in one of the comments to the blog post linked to above.

One major update to the blog post is that last year iStar IPO'd its ground leases into a dividend-paying vehicle called Safety Income & Growth (SAFE).  It currently has 40% ownership of SAFE and a contract to manage the assets.

Finally, I'm not sure about management -- will Sugarman stick to the basic blocking and tackling of running a real estate finance and triple net lease business?  Will he shrink the balance sheet if that's the right thing to do (they have been buying back shares)? Also, is now the right time to be trying to recycle ~$1.5-2 billion in capital into real estate finance and triple net leases?

I own some shares of iStar... it's an interesting asset recycling idea...

My biggest concern is that they've made little/no real progress on winding down these land/development assets ($965m in 2013 and $933m today). The idea is that if they sold all these non-core/non-cash-generating properties and rolled it all into the RE finance/net lease business they could generate some $1-2+ in FFO per share.

I plan to give them a bit more time to execute on this but the portfolio hasn't really been simplifying as fast as it could. The timing isn't going to get a whole lot better to start unloading some of these things.