Where do REIT'S go from here ?

[Dinar]

10 hours ago, frommi said:

I hold positions in EPRT,SRC and AMT. I think NNN and the Tower-REIT's (CCI,AMT) are the best REIT's to own, because they have the most staying power, easily survived the GFC and Covid situations without dividend cuts or problems with tenants. Especially the tower REIT's are very interesting because they can get high ROI's when a tower is leased to several different wireless providers. I think that they capture most of the value of wireless connections, while AT&T, Verizon etc. are the true bagholders. And because the big telcos always struggle for money they outsource more and more of their towers. The only risk is when some of the big telcos merge, like last year it happened with Sprint, thats the reason FFO of the tower REIT's didnt grow last year.

I would avoid stuff like EPRT and SRC, historically have been lousy investments

 

[frommi]

EPRT has been a pretty good investment since its IPO, outperformed all other NNN REIT's and NNN Reits return on average between 10-15% over the long term. Its a pretty simple business. SRC had problems with leverage, but they are now pretty much the same as Realty Income, which was a very good long term hold. But SRC is 50% cheaper.
Chris Volk of STORE Capital (where BRK invested some years ago) has created SRC and his colleague has created EPRT, and they are even better and more conservative (less leverage= more future growth) than the folks at STOR.

Edited January 6, 2023 by frommi

[Dinar]

30 minutes ago, frommi said:

EPRT has been a pretty good investment since its IPO, outperformed all other NNN REIT's and NNN Reits return on average between 10-15% over the long term. Its a pretty simple business. SRC had problems with leverage, but they are now pretty much the same as Realty Income, which was a very good long term hold. But SRC is 50% cheaper.
Chris Volk of STORE Capital (where BRK invested some years ago) has created SRC and his colleague has created EPRT, and they are even better and more conservative (less leverage= more future growth) than the folks at STOR.

If you think that EPRT and other NNN Reits will return 10-15% per annum on a going forward basis, I think you will be very disappointed.  Just do the math based on the value of the portfolio (cap rates), cost of financing and you will see.

[thepupil]

1 hour ago, LearningMachine said:

I haven't been following this, but hoping someone has done the math on what will be available to shareholders after mortgages/debt is refinanced at higher rates as it matures.

the publics have nicely staggered debt making this risk pretty manageable. To illustrate let's take ESS. ESS has about $5.3B of bonds outstanding at a 3.1% WA interest rate. $600mm / $5.3B is 2048 and 2050 maturity. that's not all their debt, but I'm just going to use that for simplicity. 

 

Below is the WAIR assuming they refi'd the existing bonds at 5% and 7%.

 

Note how it takes a full 8 years to raise ESS's debt cost by 1% if current rates of about 5% on their bonds prevail. this is despite the fact that their wgt average bond maturity is "only" 7.5 years. 

 

Each year they have $300-$500mm mature which is about the same as their current $550mm/yr dividend and about 1/2 their FFO. worse comes to worse, just go to be net neutral on shareholder distro (issue stock = dividend) and pay off debt due in a coming year, though that'd be a not great outcome. 

 

point is the big publics can handle a huge increase in cost of debt/equity capital. in that scenario, the private market would be in shambles and many owners will be handing back keys. Many MF owners have 70-80% leverage. 

 

to put some more numbers behind it, the bonds are about 80% of their debt cost and are about $166mm interest / yr. If you had to refi it all at once at 7%, it'd suck and decrease cash flow by $200mm/yr ($3.1/share vs 2023E FFO of $15) so about 20% . But that's not what will actually happen.

 

I'd also note that increasing rates offer buyback opportunities for the in place debt. The 2.65%'s of 2050 trade for 60% of par right now. At 7% they'd be at $47

Edited January 6, 2023 by thepupil

[frommi]

3 minutes ago, Dinar said:

If you think that EPRT and other NNN Reits will return 10-15% per annum on a going forward basis, I think you will be very disappointed.  Just do the math based on the value of the portfolio (cap rates), cost of financing and you will see.

Thats pretty easy, 4.5% from the dividend, 2% growth through lease escalations, 2-5% from reinvested FFO at 7% caprates with 50/50 debt/equity mix. That is the formula since more than 25 years for something like Realty income. 

[frommi]

Oh and for SRC the math is 6.5% dividend+4% growth+5-10% rerating. 

EPRT can simply grow by using more leverage. As long as they can issue debt at 4-5% rates and buy properties at >7% caprates everythings fine. And i doubt that this gap closes to zero for long periods of time. Probably we will see higher caprates soon, or lower interest rates.

Edited January 6, 2023 by frommi

[thepupil]

6 hours ago, Spekulatius said:

I bought some CPT (sunbelt MF) and ESS (West coast MF). I think Multifamily Reits have outperformed the SPY over the long run, but not lately (last few years). Lower interest rates have to do with it (not lately though) but I think pricing power and lack of terminal value risk and relative stability of rents are factors that make this a good asset class.

 

Best asset class in Reits may be trailer park Reits like ELS and SUI but both still trade at pretty rich multiples.

 

here's the chart you're looking for. The future won't be as good as the past, but long term REITs have provided returns in line with the indices, MF REITs have done better than REITs, and blue chip MF have done better than MF (and ESS has done better than blue chip because you know California). 

 

I don't know what next 10 yrs look like, but would be surprised if they can't put up solid and safe high single digit annualized returns (with some optionality to higher IRR's over shorter time frames from re-rating). Nothing crazy, but not a terrible way to preserve and grow one's purchasing power. 

[frommi]

But the reason that ESS performed so well was because of the tech boom and the growth of high income IT workers or not? That boom is over. And btw. 4000% over 28 years is around a ~14% CAGR, Realty Incomes total return from there is 15%.

Edited January 6, 2023 by frommi

[thepupil]

yea, I'm not predicting that gets repeated, nor am i incredibly excited about ESS (have about a 4% position). if i thought ESS was going to compound in teens i'd put my entire NW in it and retire lol.  it probably goes lower over next few q's maybe years as tech bad news shows up in fundamentals . I think ESS did well because california doesn't build enough housing or raise property taxes and it owns a high barrier to entry irreplaceable portfolio (tech boom also helped of course). 

 

I'm not a big "this is the only geography that will do well" guy. I rolled my APTS profits into a Nashville ground-up mixed use development. Can't have a better economic outlook than NAshville, also a market that's bringing on crazy supply. I own a valuable house in suburban DC. I own JOE. I own ESS. I'm a permabull and i want some Cali, some NYC, some Nashville, some FL, some DC....all as long as it's reasonably priced. 

 

I don't have a strong view on Realty Income, other than that their model is more dependent on accretive issuance (which is fine and can work)

[thepupil]

 

also relevant to rising rates/ cap rates. At a constant exit cap rate (a key assumption), it is better to buy at a higher cap rate, and lever with higher cost debt, than to buy at a low cap rate and lever with low cost debt. A big landlord on twitter did a poll on this to illustrate it and 63% of people answered "incorrectly".

 

Now it's more complex than that, but the public market allows us to buy MF at 6% cap rates with 3% in place debt (ie the best of both world's) but with too little leverage (ie overly safe). Because of this low leverage, cash flows to equity aren't as exciting as one would like (call it 6% ish) 

 

 

https://twitter.com/MRossG199/status/1603445100939341824?s=20&t=TwL6ugvNPveI5hNSwlhk2A

https://twitter.com/c_huss/status/1603454080403357698?s=20&t=TwL6ugvNPveI5hNSwlhk2A

[Spekulatius]

1 hour ago, frommi said:

But the reason that ESS performed so well was because of the tech boom and the growth of high income IT workers or not? That boom is over. And btw. 4000% over 28 years is around a ~14% CAGR, Realty Incomes total return from there is 15%.

The tripple net landlords will get destroyed when higher inflation persists. Their rent escalation is typically 2% annually which means you are buying a bond more so than real estate.

[frommi]

48 minutes ago, Spekulatius said:

The tripple net landlords will get destroyed when higher inflation persists. Their rent escalation is typically 2% annually which means you are buying a bond more so than real estate.

Maybe, but they did very well between 1995 and 2007 where we had inflation of 4-5%. And when we get a recession and long term yields go down these REIT's will probably outperform bonds over 2-3 years. I wouldnt use Realty income in that sector because its already too big and they need big aquisitions to move the needle. But a small underlevered REIT like EPRT that has a great model is where i want to be. Stable predictable cashflows and safe dividends that can be reinvested.

[Dinar]

2 hours ago, thepupil said:

 

also relevant to rising rates/ cap rates. At a constant exit cap rate (a key assumption), it is better to buy at a higher cap rate, and lever with higher cost debt, than to buy at a low cap rate and lever with low cost debt. A big landlord on twitter did a poll on this to illustrate it and 63% of people answered "incorrectly".

 

Now it's more complex than that, but the public market allows us to buy MF at 6% cap rates with 3% in place debt (ie the best of both world's) but with too little leverage (ie overly safe). Because of this low leverage, cash flows to equity aren't as exciting as one would like (call it 6% ish) 

 

 

https://twitter.com/MRossG199/status/1603445100939341824?s=20&t=TwL6ugvNPveI5hNSwlhk2A

https://twitter.com/c_huss/status/1603454080403357698?s=20&t=TwL6ugvNPveI5hNSwlhk2A

If you want 6%+ MF cap rates + 3% leverage, buy Clipper (I am long.)

[Dinar]

33 minutes ago, frommi said:

Maybe, but they did very well between 1995 and 2007 where we had inflation of 4-5%. And when we get a recession and long term yields go down these REIT's will probably outperform bonds over 2-3 years. I wouldnt use Realty income in that sector because its already too big and they need big aquisitions to move the needle. But a small underlevered REIT like EPRT that has a great model is where i want to be. Stable predictable cashflows and safe dividends that can be reinvested.

I am sorry, but where do you get average inflation 1995-2007 = 4.5%?  According to US CPI figures, average inflation was around 2.7% per annum in that period.  

[tede02]

I found this wide ranging discussion on commercial real estate very interesting. One theme here is you can't really generalize on this topic. There are so many types of real estate, markets, etc. 

 

 

[frommi]

9 hours ago, Dinar said:

I am sorry, but where do you get average inflation 1995-2007 = 4.5%?  According to US CPI figures, average inflation was around 2.7% per annum in that period.  

https://www.multpl.com/10-year-treasury-rate/table/by-year

True, but interest rates were not. I except inflation to come down a lot this year, long term yields are signaling this since october (gone down from 4%->3.5% already)

Edited January 7, 2023 by frommi

[no_free_lunch]

20 hours ago, Spekulatius said:

The tripple net landlords will get destroyed when higher inflation persists. Their rent escalation is typically 2% annually which means you are buying a bond more so than real estate.

 

I don't mean to argue with you but for my own benefit, where do you get this from?  When I look through Realty Income's reports/presentations they say increases are either fixed percentage or inflation driven, but they don't provide any details.  They also say that cap rates tend to follow interest rates with a 1 year delay, although perhaps that only applies when properties come up for renewal.

Edited January 7, 2023 by no_free_lunch

[crs223]

18 hours ago, Dinar said:

If you want 6%+ MF cap rates + 3% leverage, buy Clipper (I am long.)

 

Im sorry to be so naive, but how do you get 3% leverage?

 

CLPR has $1.2B in assets, $1.2B in debt, and $44M in equity.  If assets drop by 3 percent, all equity is wiped out.

 

 

[Dinar]

2 minutes ago, crs223 said:

 

Im sorry to be so naive, but how do you get 3% leverage?

 

CLPR has $1.2B in assets, $1.2B in debt, and $44M in equity.  If assets drop by 3 percent, all equity is wiped out.

 

 

When pupil said leverage at 3%, he meant debt bearing 3% interest, and that's what I responded to.  We both used sloppy language.  Clipper has debt paying about 3-3.75% per annum, but leverage as in Debt/Assets is obviously much higher than 3%.  Debt / Assets (marking assets to market in my opinion) for Clipper = 55-60%.  

[crs223]

12 minutes ago, Dinar said:

When pupil said leverage at 3%, he meant debt bearing 3% interest, and that's what I responded to.  We both used sloppy language.  Clipper has debt paying about 3-3.75% per annum, but leverage as in Debt/Assets is obviously much higher than 3%.  Debt / Assets (marking assets to market in my opinion) for Clipper = 55-60%.  

 

Thank you.  you are “marking assets to market” because real estate is carried on the balance sheet at purchase price (minus depreciation)?  Does the REIT offer a “mark to market” asset value?  or do investors have to make it up themselves?  If the latter, do REITs offer the addresses and cost basis of all their properties so you can look it up on zillow yourself?  Sounds like a lot of work!

 

thanks again, and again i apologize for the naive questions.

[crs223]

5 minutes ago, crs223 said:

and cost basis

 

d’oh: you don’t need the cost basis  to compute MTM asset value…

[Spekulatius]

41 minutes ago, no_free_lunch said:

 

I don't mean to argue with you but for my own benefit, where do you get this from?  When I look through Realty Income's reports/presentations they say increases are either fixed percentage or inflation driven, but they don't provide any details.  They also say that cap rates tend to follow interest rates with a 1 year delay, although perhaps that only applies when properties come up for renewal.

Read the disclosures in the 10-Q or 10-K for same store revenues. You will be surprised. They do supply these details. I haven’t checked Realty Income recently but have checked on other NNN Reits and they typically are in they 2-3% range. Rent increases may have an inflation clause but they are capped.

 

NNN is about the worst asset class you can own as Reit in times of high inflation. They are really much more a bond than real estate.

 

 

 

[Gregmal]

Triple net is for senior citizens so it’s not really exciting but it’s also not that bad in an inflationary environment. Inflation and a hot economy generally go hand in hand. So the general NNN or NN stuff is run of the mill retail. Your structure and land greatly appreciate even if the rental check becomes below market. Eventually it resets and a good team staggers the maturities. 
 

What really sucks in any environment is office. Secular decliner with much longer fixed rate. And significantly more capex.

[Dinar]

4 hours ago, crs223 said:

 

Thank you.  you are “marking assets to market” because real estate is carried on the balance sheet at purchase price (minus depreciation)?  Does the REIT offer a “mark to market” asset value?  or do investors have to make it up themselves?  If the latter, do REITs offer the addresses and cost basis of all their properties so you can look it up on zillow yourself?  Sounds like a lot of work!

 

thanks again, and again i apologize for the naive questions.

Yes, I am marking up assets to markets.  Generally REITs do not, the only exception to that rule that I know of are REITs in UK, France, Hong Kong and Singapore which do, possibly Belgium and Spain as well.    Investors have to do their own NAV calculations.   Depends on the REIT, Clipper does offer excellent disclosure, including addresses and cost basis for each of their properties, as well as rental income, expenses, and net operating income.  

[Gregmal]

Guys I might have found a 6 cap all the experts predicted! A 1960 built collection of 1 bed 1 baths in Delaware County PA!

first they said “rate hikes will move cap rates 1:1”

 

then “it’s a lagging effect, just wait”

 

then the goal posts moved to “cap rates are off 50 bps after 300 bps on FF, I knew it!”

 

what a hilarious serious of events this all was

As always the winners are the owners of good assets, not the pindickers trying to cause short term panic

Edited January 11, 2023 by Gregmal