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Any REIT experts here?


muscleman
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With interest rate almost certainly going to continue falling, I wonder if REITs will continue to go up. So I start to get interested.

Mind sharing what the most important metrics to look at for a REIT?

If they keep paying out 90% of their earnings, how do they make new acquisitions of properties?

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With interest rate almost certainly going to continue falling, I wonder if REITs will continue to go up. So I start to get interested.

Mind sharing what the most important metrics to look at for a REIT?

If they keep paying out 90% of their earnings, how do they make new acquisitions of properties?

 

Debt and dilution +1031s

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With interest rate almost certainly going to continue falling, I wonder if REITs will continue to go up. So I start to get interested.

Mind sharing what the most important metrics to look at for a REIT?

If they keep paying out 90% of their earnings, how do they make new acquisitions of properties?

 

Debt and dilution +1031s

 

In addition, the 90% rule applies to taxable income.  Depending on the REIT, non-cash depreciation charges can create a tax shield that allows some cash to be retained without violating the rule that 90% of taxable income must be distributed to keep pass-through tax status. 

 

As a practical matter, however, many REITs are marketed as yield vehicles and thus distribute based on FFO or AFFO, rather than taxable income.  Those REITs are in the same position as an MLP that distributes all of its DCF -- as Gregmal explained, they can only acquire assets via new capital (either debt or equity) or asset swaps (1031 exchanges).

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One REIT that puts out a ton of financial detail and commentary in the 10k is Public Storage (PSA). You can tell the CEO is a Buffett fan. You can learn a lot about real estate just reading the annual letter. Separately, I found a cheat sheet online that is handy for REIT terminology (page two for REITs). Lists the most common key metrics such as FFO and NOI, definition and strengths/weakneses. There is a fair amount of lingo to learn when evaluating REITs.

Cash_flow_metric_cheat_sheet.pdf

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Yes, FFO and AFFO are the key metric, not earnings because of the reason stated above. 

 

There is a book called Investing in Reits by Block which everyone who likes reits has read.  It's a good place to get a foundation in what types of reits are out there, how they are valued and what to look out for.  It's what I read to get started learning about them.

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If I can jump in with a question, why should investors ignore real estate depreciation ? (When they use FFO as replacement to net income)

Buildings and parking lots also get old, crumble and need design changes to keep them looking attractive and serve changing needs...

 

FFO probably already includes maintenance costs for the properties right?

The accounting depreciation for the properties don’t reflect the reality. ( unlike Oil and Gas companies who also use FFO like a joke)

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Guest cherzeca

with reduction of corporate tax, REIT's comparative advantage has largely disappeared for any organization that is real estate based and is attracted to ability to retain earnings in a C corp setting.

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If I can jump in with a question, why should investors ignore real estate depreciation ? (When they use FFO as replacement to net income)

Buildings and parking lots also get old, crumble and need design changes to keep them looking attractive and serve changing needs...

 

FFO probably already includes maintenance costs for the properties right?

The accounting depreciation for the properties don’t reflect the reality. ( unlike Oil and Gas companies who also use FFO like a joke)

 

AFFO is supposed to include management's estimate of maintenance cap ex and typically straight-lines rents. 

 

As for why real estate investors should ignore depreciation, I don't think they should.  But they should also understand that unlike most other assets, properly maintained real estate can appreciate in value over time.  Under US GAAP, that appreciation in value in not recorded.  So, at the end of the day, what information is GAAP depreciation really giving you?

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Went on a REIT / RE deep dive several years ago. Here's what I learned:

 

AFFO is a better proxy than FFO (depends what they take out, but generally AFO is like FCF), so a good metric to look at is AFFO / Dividend to see how much they are retaining vs paying out to share-holders.

 

For valuation, good to look at Price / AFFO and Price / NAV. You can build out NAV based on cap rate / valuation on each building or some type of replacement cost assessment.

 

Think in terms of a per sq. ft basis (rents, cost to build, maintenance costs, replacement cost) -- learn the industry & class & geography averages

 

What are the tenants like (industry, creditworthiness). Some Canadian reits w/ O&G clients got crushed w/ the energy downturn. How long are leases for? Is there a lease re-rating story (i.e. some tenant got a long 20 year lease and absurdly low prices < 50% market, lease expires next year)?

 

What are the manager's incentives (grow AUM recklessly w/ debt? how is voting power structured?)? Internally or externally managed? The Portnoy family stands out for being terrible and self-enriching. I spent a good bit of time w/ the egress of Northstar Financial their management team as well

 

Take a look at a great RE write-up from a hedge fund here posted on LAACO: http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/laacz-la-athletic-co/?action=dlattach;attach=7008. Land and Buildings is another good HF w/ write-ups

 

I'd actually suggest general RE investing books rather than REIT books like The Real Estate Game by Poorvu or Confessions of a Real Estate Entrepreneur

 

 

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Went on a REIT / RE deep dive several years ago. Here's what I learned:

 

AFFO is a better proxy than FFO (depends what they take out, but generally AFO is like FCF), so a good metric to look at is AFFO / Dividend to see how much they are retaining vs paying out to share-holders.

 

For valuation, good to look at Price / AFFO and Price / NAV. You can build out NAV based on cap rate / valuation on each building or some type of replacement cost assessment.

 

Think in terms of a per sq. ft basis (rents, cost to build, maintenance costs, replacement cost) -- learn the industry & class & geography averages

 

What are the tenants like (industry, creditworthiness). Some Canadian reits w/ O&G clients got crushed w/ the energy downturn. How long are leases for? Is there a lease re-rating story (i.e. some tenant got a long 20 year lease and absurdly low prices < 50% market, lease expires next year)?

 

What are the manager's incentives (grow AUM recklessly w/ debt? how is voting power structured?)? Internally or externally managed? The Portnoy family stands out for being terrible and self-enriching. I spent a good bit of time w/ the egress of Northstar Financial their management team as well

 

Take a look at a great RE write-up from a hedge fund here posted on LAACO: http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/laacz-la-athletic-co/?action=dlattach;attach=7008. Land and Buildings is another good HF w/ write-ups

 

I'd actually suggest general RE investing books rather than REIT books like The Real Estate Game by Poorvu or Confessions of a Real Estate Entrepreneur

 

Thank you! I see some REITs have very low yields like 3.8% while some REITs have yields like 10%. Do these 10% ones usually have problems?

Can a REIT be a growth stock like a technology company?

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Can a REIT be a growth stock like a technology company?

 

The cell tower REIT's (AMT, CCI, SBAC) and data center REIT's (EQIX) have been growth stocks in recent years. They're not tech companies but tech-related.  The dividend yields of these stocks are pretty low compared to your average REIT due to the stock prices being bid up, sort of similar to no yield growthy tech companies.

 

 

Mike

 

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Can a REIT be a growth stock like a technology company?

 

The cell tower REIT's (AMT, CCI, SBAC) and data center REIT's (EQIX) have been growth stocks in recent years. They're not tech companies but tech-related.  The dividend yields of these stocks are pretty low compared to your average REIT due to the stock prices being bid up, sort of similar to no yield growthy tech companies.

 

 

Mike

 

Thank you! I am taking a look at two REITs. QTS and EPRT.

For QTS, it is a data center REIT. I am not sure why these data center REITs are good because I thought everyone is moving to AWS or MSFT cloud. It seems to be a headwind for all other data center operators. Can you please share your thoughts on this?

EPRT is more e-retailer resistent REIT. But it seems expensive.

Is it better to own a REIT with higher cap rate or lower cap rate?

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One way to invest here that for me has worked well so far is to buy solid NNN firms.  These firms are a combination of real estate and long-term secured lending to tenants which have contractual rent increases in the leases.  You can get a combination of yield & built in increasing recurring revenue for over 10 years.  The tenants pay for most of the maintenance so this is not as capital maintenance intensive as other REIT-types.  Sort of like mature software without the software price tag.  Some of the most interesting include STOR and Broadstone Net Lease.

 

Packer

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Thank you! I am taking a look at two REITs. QTS and EPRT.

For QTS, it is a data center REIT. I am not sure why these data center REITs are good because I thought everyone is moving to AWS or MSFT cloud. It seems to be a headwind for all other data center operators. Can you please share your thoughts on this?

EPRT is more e-retailer resistent REIT. But it seems expensive.

Is it better to own a REIT with higher cap rate or lower cap rate?

 

Amazon and Microsoft have their own data centers but also lease space from places like Equinix and Digital Realty.  In fact, that's an additional selling point these REIT's offer.  You have the option to directly connect in with AWS's and/or Microsoft's Azure servers of you co-locate in one of their data centers:

 

https://aws.amazon.com/directconnect/partners/

https://www.equinix.com/partners/microsoft-azure/

 

As far as cap rate goes, I'd say it depends.  It's a ratio of net operating income to purchase price, so you can increase cap rate by raising rents or buying at cheaper prices, or some combination.  A REIT may buy a property at a cap rate of 5%, but the property's leases are below market rents, it's not fully leased up, and the leases that are in place are ending soon. That REIT is in a great position to increase that property's cap rate.  Sometimes you'll see this when a large company buys, say, a strip mall that was independently owned.  The original owner didn't have the funds to keep the property maintained well enough to charge market rents. On the other hand, a REIT that buys a fully-leased up property that's charging market rents at a cap rate of 6% probably doesn't have much room to raise its net operating income further.

 

 

Mike

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Some of the most interesting include STOR and Broadstone Net Lease.

Thanks for the recommendations - have you been able to review the performance of these NNNs under stressed market conditions?

 

How do you view tenant mix and location mix, particularly in terms of correlated risk?

 

If AFFO is the main driver of returns and valuation, the question is what drives AFFO. As you mention the two methods to grow AFFO are rent increases, and acquisitions - but really this means tenant and location mix (i.e. what you acquire and where). The real question is how that tenant mix behaves under stress. In such situations, do you know if REITs typically modify lease terms to work with tenants (and maintain occupancy)?

 

My concern is large exposure to small and middle market businesses which may perform worse in a recession - and while the tenant mix may appear diversified, will it actually behave like a hedge during a recession?

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Some of the most interesting include STOR and Broadstone Net Lease.

Thanks for the recommendations - have you been able to review the performance of these NNNs under stressed market conditions?

 

How do you view tenant mix and location mix, particularly in terms of correlated risk?

 

If AFFO is the main driver of returns and valuation, the question is what drives AFFO. As you mention the two methods to grow AFFO are rent increases, and acquisitions - but really this means tenant and location mix (i.e. what you acquire and where). The real question is how that tenant mix behaves under stress. In such situations, do you know if REITs typically modify lease terms to work with tenants (and maintain occupancy)?

 

My concern is large exposure to small and middle market businesses which may perform worse in a recession - and while the tenant mix may appear diversified, will it actually behave like a hedge during a recession?

 

ERPT is mainly on small to middle market businesses, and I have the same concerns. Do they actually perform worse or do you think they perform worse in a recession?

 

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Do they actually perform worse or do you think they perform worse in a recession?

 

I am not sure. It is a good question.

 

My assumption is their performance mimics stock market performance i.e. where we see Small/Middle market enterprises show more volatile performance under stress. For example, compare the SP500 to the Russell2000 from 2007 to present - SP500 performed "better" in the 2008 period and rebounded more successfully.

 

I would think this behavior translates to real estate performance, as less-capitalized tenants are unable to weather the storm, so to speak. This goes to my question of modifying terms - if your tenant mix is simply not as well capitalized, is it more successful for the REIT to modify their lease terms (lower rental income) and maintain the tenant, or not?

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Some of the most interesting include STOR and Broadstone Net Lease.

Thanks for the recommendations - have you been able to review the performance of these NNNs under stressed market conditions?

 

How do you view tenant mix and location mix, particularly in terms of correlated risk?

 

If AFFO is the main driver of returns and valuation, the question is what drives AFFO. As you mention the two methods to grow AFFO are rent increases, and acquisitions - but really this means tenant and location mix (i.e. what you acquire and where). The real question is how that tenant mix behaves under stress. In such situations, do you know if REITs typically modify lease terms to work with tenants (and maintain occupancy)?

 

My concern is large exposure to small and middle market businesses which may perform worse in a recession - and while the tenant mix may appear diversified, will it actually behave like a hedge during a recession?

 

One of the positives are the good underwritten NNN that were around in 2008 did well look at O, NNN.  They acted more like bonds (which in part they are) & if the underwriting is done correctly you get first claim on many of these businesses as they pay their rent before their creditors where location is important.  STOR has some examples were they have found new tenants when lease was in default.  They key is property location which many of these REITs focus on.  Broadstone has broader customer with about 40% industrial.

 

Packer

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For starters on the triple net stuff, O and NNN are basically the models.

 

In regards to the questions on performance in a recession/bad market, look at the above two during the market swoons going back a few years or check the tape the next time we have a 500 point selloff. They largely resemble and have bond like characteristics and an important metric to observe is % of investment grade tenants.

 

I personally hate replacement value as a metric. It’s bullshit and I get skeptical of management teams that tout it as an excuse for an acquisition. Go check out the massive Toy R Us headquarters replacement cost vs actually sale price. It’s on a beautiful piece of land, but what the fuck do you do with buildings of that size when your only tenant leaves? Burn a lot of money repositioning it, that’s what.

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Is it common for REITs to pay dividends while issuing stocks at the same time? It seems silly to me. Kinda reminds me of an Oil and Gas stock Fairfax was in that didn't end up well a few years back but I forgot the same.

https://seekingalpha.com/filing/4607267

With that said, I remember S-1 forms are for issuing new equities. What is FORM 424B5?

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Is it common for REITs to pay dividends while issuing stocks at the same time?

 

 

Yeah.  For a typical slow/moderate growth REIT the dividend is much of return you get as an investor, plus some capital appreciation over time.  Since the REIT is paying out most of its income as dividends, if it needs to raise money it does it by taking on new debt, issuing more shares, and/or selling appreciated properties.  If the REIT is smart it's raising money with the right tool at the right time, ex. issuing shares when shares are expensive and not cheap, etc.

 

 

Mike

 

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Went on a REIT / RE deep dive several years ago. Here's what I learned:

 

AFFO is a better proxy than FFO (depends what they take out, but generally AFO is like FCF), so a good metric to look at is AFFO / Dividend to see how much they are retaining vs paying out to share-holders.

 

For valuation, good to look at Price / AFFO and Price / NAV. You can build out NAV based on cap rate / valuation on each building or some type of replacement cost assessment.

 

Think in terms of a per sq. ft basis (rents, cost to build, maintenance costs, replacement cost) -- learn the industry & class & geography averages

 

What are the tenants like (industry, creditworthiness). Some Canadian reits w/ O&G clients got crushed w/ the energy downturn. How long are leases for? Is there a lease re-rating story (i.e. some tenant got a long 20 year lease and absurdly low prices < 50% market, lease expires next year)?

 

What are the manager's incentives (grow AUM recklessly w/ debt? how is voting power structured?)? Internally or externally managed? The Portnoy family stands out for being terrible and self-enriching. I spent a good bit of time w/ the egress of Northstar Financial their management team as well

 

Take a look at a great RE write-up from a hedge fund here posted on LAACO: http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/laacz-la-athletic-co/?action=dlattach;attach=7008. Land and Buildings is another good HF w/ write-ups

 

I'd actually suggest general RE investing books rather than REIT books like The Real Estate Game by Poorvu or Confessions of a Real Estate Entrepreneur

 

LAACO is a MLP, not a REIT.  But they own good real estate and trades at 12x P/FFO or P/AFFO.  The FFO is still growing rapidly and you get a call option on Downtown LA gentrifying.  The drawback is that it is illiquid and you get a K-1.  But it is probably one of the safest real estate company with decent upside. 

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  • 2 weeks later...

Some of the most interesting include STOR and Broadstone Net Lease.

Thanks for the recommendations - have you been able to review the performance of these NNNs under stressed market conditions?

 

How do you view tenant mix and location mix, particularly in terms of correlated risk?

 

If AFFO is the main driver of returns and valuation, the question is what drives AFFO. As you mention the two methods to grow AFFO are rent increases, and acquisitions - but really this means tenant and location mix (i.e. what you acquire and where). The real question is how that tenant mix behaves under stress. In such situations, do you know if REITs typically modify lease terms to work with tenants (and maintain occupancy)?

 

My concern is large exposure to small and middle market businesses which may perform worse in a recession - and while the tenant mix may appear diversified, will it actually behave like a hedge during a recession?

 

One of the positives are the good underwritten NNN that were around in 2008 did well look at O, NNN.  They acted more like bonds (which in part they are) & if the underwriting is done correctly you get first claim on many of these businesses as they pay their rent before their creditors where location is important.  STOR has some examples were they have found new tenants when lease was in default.  They key is property location which many of these REITs focus on.  Broadstone has broader customer with about 40% industrial.

 

Packer

 

Thank you Packer. Do you have any views on the storage REITs?

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