Where do REIT'S go from here ?

[Simon]

GIC with another take private, this time a Canadian industrial REIT. Per PR, offer price is ~1.2x sellside consensus NAV.

 

https://www.newswire.ca/news-releases/summit-industrial-income-reit-enters-into-agreement-to-be-acquired-by-gic-in-partnership-with-dream-industrial-reit-in-c-5-9-billion-transaction-861766472.html

[Ulti]

On 9/18/2022 at 10:56 AM, Gregmal said:

Bad news for everything but AIV ( and JOE)

https://www.redfin.com/news/november-layoff/

https://calculatedrisk.substack.com/p/new-home-cancellations-increased-5b3

Unfortunately, looks like the excess is coming off in the housing market. Should be good for rentals in excellent locations.

[Ulti]

https://calculatedrisk.substack.com/p/housing-and-inflation

all about rent trends

[Ulti]

https://www.rentcafe.com/blog/rental-market/market-snapshots/adaptive-reuse-apartments/

[Gregmal]

Thought this was funny because there still remains this bizarre narrative in the market that retail and hospitality should be shunned because of economical cyclicality and e-commerce destroying brick and mortar. As Ron De Santis says, scoreboard! 

[tede02]

When will we start to see rising borrowing costs hit REITs? Separate but related question, do most REITs borrow at the corporate level vs property level? The handful of REITs I follow seem to borrow at the corporate level. One in particular is starting to feel the effects of rising rates as they've had to refi maturing debt. Rents have been stable but rising interest expense is starting to eat into profits. I was annoyed that management didn't try to lock in longer-term debt in 2021. Do most REITs borrow on shorter terms or does it largely depend on the type of real estate?

 

 

[Spekulatius]

17 minutes ago, tede02 said:

When will we start to see rising borrowing costs hit REITs? Separate but related question, do most REITs borrow at the corporate level vs property level? The handful of REITs I follow seem to borrow at the corporate level. One in particular is starting to feel the effects of rising rates as they've had to refi maturing debt. Rents have been stable but rising interest expense is starting to eat into profits. I was annoyed that management didn't try to lock in longer-term debt in 2021. Do most REITs borrow on shorter terms or does it largely depend on the type of real estate?

 

 

They do both (Corporate and asset level borrowing) and some management teams prefer one over the other. Asset level borrowing is often cheaper. It gives the Reit the option to sent the keys to the lender if the asset has issues and cannot be refinanced.

 

Typical commercial real estate asset secured real estate loans have a duration of 5 years. they can't really get 30 year loans like you can get for single family homes or condos. if they do borrowing on a corporate level, they can borrow higher durations.

 

The interest rises have only began this year, so it will take a while for increased borrowing costs to make their way into the income statements.

[Gregmal]

Yea the cost cost increase and eating into profits thesis is hugely overblown. First, most are healthily at or around 40% net debt to EV. Second, they’re often staggered. Third, just do the math on say a $5b company with $2b total debt, refi-ing maybe 1 tranche of say $400m with a 3% bump to interest? Say that occurs over 3 years. It’s not that relevant especially if the assets are growing income.

[Gregmal]

Tesla dealership. About $800k in NOI. 2.5% annual rent bumps. Anyone wanna take a risk of looking like a fool trying to state what it’s worth? My first thoughts proved to be downright stupid. Why REITs are way more potent than you may think….

 

 

Edited November 30, 2022 by Gregmal

[Sweet]

Never owned a REIT, never had a reason to, but some of these yields are compelling.

 

As a complete novice, is there anything I should be looking out for as I learn about this sector?

Started to get curious after reading this article:

https://www.marketwatch.com/story/20-dividend-stocks-with-high-yields-that-have-become-more-attractive-right-now-11669731365?mod=home-page

 

[realassetsvalue]

Green Streets materials, methodologies, and webinars (they do many for free) have been very formative for me as I have learned about investing in REITs. I have attached a couple of documents of theirs - their explanation of their valuation framework, how its changed, and a glossary of terms - I have found useful through the years.

 

A controversial and perhaps counterintuitive starting point is that in my expiernce investing in REITs with high dividends usually leads poor total returns. I find "high yield REITs" to be an unattractive pool to fish in.

 

Oh and follow @thepupil, @Gregmal and @BG2008 on here and twitter for ideas and the pragmatic side of REIT investing. Good hunting!

 

green-street-advisors-glossary-of-commercial-real-estate-terms.pdf IntrinsicNAVModelExcerpt_GreenStreet.pdf RE-07-07-Green-Street-NAV-Methodology.pdf

[Sweet]

1 hour ago, realassetsvalue said:

Green Streets materials, methodologies, and webinars (they do many for free) have been very formative for me as I have learned about investing in REITs. I have attached a couple of documents of theirs - their explanation of their valuation framework, how its changed, and a glossary of terms - I have found useful through the years.

 

A controversial and perhaps counterintuitive starting point is that in my expiernce investing in REITs with high dividends usually leads poor total returns. I find "high yield REITs" to be an unattractive pool to fish in.

 

Oh and follow @thepupil, @Gregmal and @BG2008 on here and twitter for ideas and the pragmatic side of REIT investing. Good hunting!

 

green-street-advisors-glossary-of-commercial-real-estate-terms.pdf 205.74 kB · 1 download IntrinsicNAVModelExcerpt_GreenStreet.pdf 2.05 MB · 0 downloads RE-07-07-Green-Street-NAV-Methodology.pdf 1.79 MB · 0 downloads

 

Thank you @realassetsvalue

[Gregmal]

3 hours ago, Sweet said:

Never owned a REIT, never had a reason to, but some of these yields are compelling.

 

As a complete novice, is there anything I should be looking out for as I learn about this sector?

Started to get curious after reading this article:

https://www.marketwatch.com/story/20-dividend-stocks-with-high-yields-that-have-become-more-attractive-right-now-11669731365?mod=home-page

 

Theres a lot of decent literature but one of the more useful things for me is just to observe. See whats going on in different areas. Drive by new development. Check out different areas or read various surface level stuff to get an idea. Realdeal and shoppingcenterbusiness are good. CREXI has listings. CBRE, JLL, etc have reports. Randomly call brokers. 

 

Ultimately if you're interested in something you'll figure a lot out on your own. Ive just never fully grasped the appeal or moat of stuff like warehouse or office. Ones done well, ones sucked. I dont know if my apprehensions were right or not, but I just found other stuff like retail and residential and done very well with that. So stick with what interests and makes sense to you. 

 

Also before anything else either, try to understand HBU. Its why that Tesla shop above is probably worth a ton more than 95% of people would think at first glance. 

[Ulti]

https://www.realtor.com/research/2023-national-housing-forecast/

[Spekulatius]

14 minutes ago, Ulti said:

https://www.realtor.com/research/2023-national-housing-forecast/

Thanks for sharing. They are predicting 5.4% existing home appreciation for 2023. I take the under on that one.

[Ulti]

Vacancy rates have begun to improve from long-time lows, which will help rent growth further moderate. However, rents are expected to set a new high in 2023.

This looks good for MF

6 minutes ago, Spekulatius said:

Thanks for sharing. They are predicting 5.4% existing home appreciation for 2023. I take the under on that one.

I waffle on this.. If the fed is forced to stimulate by decreasing interest rates, I can't help but think that housing will go up. But what do I know.

[Gregmal]

General housing data is pretty useless. Housing has always been regional. Theres more stuff than not in that report that I find horrifically wrong. For instance mortgage spread to treasury is nearly double its historical average, so future rate hikes arent really going to have a 1:1 impact. I see virtually no way the 30 year fixed is over 7% all year. 

[UK]

I think, even on general level US housing does not look very overpriced or as scary as some other places. In the longer term, there is still healthy demand, favourable demographics, stronger economy. In the short term, some other also good and previously hot places, like Canada, Australia or Scandinavia and other EU cuntries  looks much more overpriced and dangerous, especially markete with large part of variable rate mortgages. Then I think there is quite a big differences in US itself, with some places perhaps much more overpriced and maybe in biger risk to suffer from all this easy money bubble burst, residual WFH movement, unfavourable tax policies etc. 

[Sweet]

15 hours ago, Gregmal said:

Theres a lot of decent literature but one of the more useful things for me is just to observe. See whats going on in different areas. Drive by new development. Check out different areas or read various surface level stuff to get an idea. Realdeal and shoppingcenterbusiness are good. CREXI has listings. CBRE, JLL, etc have reports. Randomly call brokers. 

 

Ultimately if you're interested in something you'll figure a lot out on your own. Ive just never fully grasped the appeal or moat of stuff like warehouse or office. Ones done well, ones sucked. I dont know if my apprehensions were right or not, but I just found other stuff like retail and residential and done very well with that. So stick with what interests and makes sense to you. 

 

Also before anything else either, try to understand HBU. Its why that Tesla shop above is probably worth a ton more than 95% of people would think at first glance. 

 

Thanks Greg, unfortunately I have no idea how I would even go about pricing the above.  If I was to have a go at valuation, I would probably approach it like a stock or bond, figure out cashflows and think what it might be worth.

 

What is the rough valuation for interests sake?

Edited December 1, 2022 by Sweet

[Ulti]

https://www.yahoo.com/finance/news/blackstone-limit-withdrawals-giant-real-155132626.html

[Gregmal]

4 hours ago, Sweet said:

 

Thanks Greg, unfortunately I have no idea how I would even go about pricing the above.  If I was to have a go at valuation, I would probably approach it like a stock or bond, figure out cashflows and think what it might be worth.

 

What is the rough valuation for interests sake?

Most people would do the lazy institutional thing. Look at the NOI and then assign a cap rate. Maybe small premium or discount based on tenant quality. 
 

That’s totally wrong. First, where is the dirt? It’s in one of the hottest MSA in America. Next, what’s it zoned for and what can it be zoned as? How business friendly is the area? Look at what similar parcels or acreage goes for. This is what’s called a covered land play. You have an income stream and investment grade tenant, but a huge call option to put something more valuable there. Look at what’s transpired with much of that South Florida assets. Even office is smokin hot. So while someone who’s never been outside an office cubicle in NY might arrive at a 7-8 cap on Excel…someone active in the market probably sees significantly more value and optionality and views a 7-8 cap as a total steal. 
 

Well located properties aren’t just what they currently are, they’re also priced as a function of what they can be. Which highlights how dumb the “I’d rather buy treasuries at the same yield” argument is. 

[fareastwarriors]

17 minutes ago, Ulti said:

https://www.yahoo.com/finance/news/blackstone-limit-withdrawals-giant-real-155132626.html

 

https://www.globest.com/2022/12/01/blackstone-sells-stake-in-two-vegas-hotels-for-5-5b/?slreturn=20221101144525

 

Blackstone will receive $1.27B in cash and Vici will assume Blackstone’s share of about $3B in debt, according to a report in the Wall Street Journal.

 

According to the WSJ, the NY-based investment firm is reaping a profit of $700M in the deal, including rent from operators during the past three years.

 

[Dinar]

31 minutes ago, Gregmal said:

Most people would do the lazy institutional thing. Look at the NOI and then assign a cap rate. Maybe small premium or discount based on tenant quality. 
 

That’s totally wrong. First, where is the dirt? It’s in one of the hottest MSA in America. Next, what’s it zoned for and what can it be zoned as? How business friendly is the area? Look at what similar parcels or acreage goes for. This is what’s called a covered land play. You have an income stream and investment grade tenant, but a huge call option to put something more valuable there. Look at what’s transpired with much of that South Florida assets. Even office is smokin hot. So while someone who’s never been outside an office cubicle in NY might arrive at a 7-8 cap on Excel…someone active in the market probably sees significantly more value and optionality and views a 7-8 cap as a total steal. 
 

Well located properties aren’t just what they currently are, they’re also priced as a function of what they can be. Which highlights how dumb the “I’d rather buy treasuries at the same yield” argument is. 

Is it really at a 7-8% cap rate?  

[Gregmal]

3 minutes ago, Dinar said:

Is it really at a 7-8% cap rate?  

This one is open for offers. Just used that as an example. But it’s probably in the ballpark of what most would arrive at. It’s why most of traditional Wall Street missed a huge boom in retail net lease the past half decade. Way more to it than just “oh retail sucks”. “Oh cap rate”. Same reason many have been massacred in office but just in reverse. Way more to it than just “oh credit tenant and 12 years left”.

[Gregmal]

One of the golden rules of old school institutional REIT or real estate investing was to almost exclusively focus on lease term and credit tenants. Why? Probably unspoken but of course if you’re not looking to take any career risk and wanna do nothing and line your pockets with fees, a 15 year lease to Facebook or Verizon corporate probably ensures you never have to answer any questions or face blowback during your tenure. But all that nonsense has been turned upside down the last half decade or so. If you’re a real owner/operator or private market operator looking to achieve better than mid single digit returns, the money is in growth markets and often turning over properties and repositioning as sentiment and sectors shift. That’s why Miami parcels are going for a quarter billion plus an acre. It’s what drove NYC prices for several decades. Essentially if your value is not in the land you probably don’t want to touch it. Or at least that’s what I’ve stuck with and done well with.