REITs and/or Closed End REIT Funds

[JEast]

Anyone following this sector? Besides a few preferred items in the REIT sector that a few of use have mentioned, I have not heard from anyone. I understand as this is not the board's normal area of interest, but given the carnage one must go fishing where the values are located.

 

It would appear that after the Auction Market Preferred Shares and/or the Taxable Auctioned Preferred Shares that many funds are now redeeming to reduce their leverage is over, this sector should stabilize somewhat and produce some nice returns.

 

 

Cheers

(formally 653211)

[lessthaniv]

653211,

 

I starting picking up H&R below $5 in the November carnage. I have bought right up to the current $7 feeling value is closer to $15 -$18 long term. Also has a catalyst on April 9th that may give the stock price a quick push. (In what direction depends on the nature of the news, but I am betting that it's good news.)

 

I like the sector long term. Leverage tied to longer term maturities at current rates + tangible assets like property should do well in an inflationary enviorment. Good tennants/ long term leases/ long term fixed rate debt/ 99% occupancy/< 5X Forward AFFO/ 65% discount to NAV ... its appears to be a very solid collection of properties and tennants ... and ... I think the funding of The Bow project is as good as done now. As I mentioned above - Apr 9th is the due date for firm committments on the remaining syndicated debt.

 

<IV

[Junto]

I am in HRP and its preferred HRP-B and also looking at others in the sector. I agree on the inflationary comment and I would add that I think there has been an over reaction on the ability to refinance property which has driven REITs down.

[Partner24]

I know a very small REIT here in Quebec that pay a good yield (currently approximately 20% special dividend recently anounced included), has no debt and who's main client is Alimentation Couche-Tard (successful accomodation business here in Canada).

 

It's name is Becker Milk (BEK.B).

 

That being said, I haven't studied it seriously and deeply yet because I like very much what I already have in my portfolio.

[JEast]

Junto,

 

Why the HRP-B and not the HRP-D as they pay nearly the same but the Ds give you, in essence, a free call feature of 30+ months if not called.

 

If we do get inflation or hyper-inflation several years out, then maybe this is one of the sectors in what the Seth Klarman(s) of the world mean by buying inflationary protection.

 

 

Cheers

[Junto]

Junto,

 

Why the HRP-B and not the HRP-D as they pay nearly the same but the Ds give you, in essence, a free call feature of 30+ months if not called.

 

If we do get inflation or hyper-inflation several years out, then maybe this is one of the sectors in what the Seth Klarman(s) of the world mean by buying inflationary protection.

 

 

Cheers

 

My reasoning was based on the fact that the HRP-B is redeemable at any time and has already been partially called. I don't think that that the HRP stock price is going to trade over $13.00 anytime soon, but I could see the company calling the balance of the preferred B shares within the next couple of years.

[JEast]

From HRPT's 10-K, "Our series D preferred shares are convertible, at the holder's option, into our common shares at an initial conversion rate of 1.9231 common shares per series D preferred share, which is equivalent to an initial conversion price of $13.00 per common share". This is based on the original preferred that was floated at $25.

 

Given that the conversion now with HRP-D selling at roughly $9 would imply a synthetic call option at $4.68 not $13.00. Maybe HRP never trades above $5 again, but seems the D at least provides more wiggle room that does not cost any more than the B or C.

 

 

Cheers

[Junto]

From HRPT's 10-K, "Our series D preferred shares are convertible, at the holder's option, into our common shares at an initial conversion rate of 1.9231 common shares per series D preferred share, which is equivalent to an initial conversion price of $13.00 per common share". This is based on the original preferred that was floated at $25.

 

Given that the conversion now with HRP-D selling at roughly $9 would imply a synthetic call option at $4.68 not $13.00. Maybe HRP never trades above $5 again, but seems the D at least provides more wiggle room that does not cost any more than the B or C.

 

 

Cheers

 

Thanks for the correction JEast. I am gathering your reasoning.

 

[jasonw1]

How is HRP-D conversion price going to be adjusted when HRP spins off GOV? I assume HRP price will go lower, will HRP-D still be converted to 1.9 shares of common?

 

The other thing I noticed for HRP-D:

The preferred shares are convertible any time at the holder's option into 1.9231 common shares of HRPT Properties Trust (NYSE: HRP), an initial conversion price of $13.00 per common share. On or after 11/20/2011, if the price of the common stock exceeds 100% of the conversion price for 20 of any 30 consecutive trading days, the company may, at their option, force the preferred shares to be converted into common shares at the then prevailing conversion price.

 

Does this mean they can essentially cap the HRP-D price at ~25 through forced conversion when the commom stock stays >$13 for 20 days? So the call benefit isn't really there.

 

[JEast]

My intent here was not to focus specifically on HRP, but to get other board member's thoughts on the carnage in the REIT sector.

 

With respect to HRP-D though, the owner has a right to convert at any time prior to November 11, 2011 and also has a right to $25 if change of control (i.e. takeover). The debt is the responsibility of HRP the holding company so the potential IPO float of the Healthcare properties should not change any rights. However, I look at it as a positive (if it happens) as more cash surely helps and improves debt holders margin of safety.

 

 

Cheers

[StubbleJumper]

 

With respect to HRP-D though, the owner has a right to convert at any time prior to November 11, 2011 and also has a right to $25 if change of control (i.e. takeover). The debt is the responsibility of HRP the holding company so the potential IPO float of the Healthcare properties should not change any rights. However, I look at it as a positive (if it happens) as more cash surely helps and improves debt holders margin of safety.

 

 

Agreed.  The GOV IPO looks to be an equity carve-out, not a spin-off.  As a result, the parent should get a nice chunk of cash, and a ready market into which they can carve-out yet more equity.  In the short-term, the cash will provided greater certainty of liquidity and the GOV listing will provide flexibility going forward (just like Northbridge....).  This whole exercise probably reduces the IV of the common shares, but IMO makes the preferreds more attractive (ignoring the modest impact on the embedded option for the D-series).

 

I question whether any of this is really necessary for HRP.  Cashflow numbers are impressive and debt maturities in 2009 and 2010 look pretty manageable.  Do they actually need another $300m in cash?

 

SJ

[JAllen]

I have owned PLD since the November lows. 

 

The great thing about many companies now is that they are running them more like they always should have (low debt, expense controls etc.)

 

I haven't had time to go through others thoroughly but would like to learn more about others like FUR.

 

FOR isn't a REIT but is probably worth about 4-6 times as much with valuing their Oil and water interests at about $100M.

 

You get 11,000 acres of land at the junction of the second most traveled interstate connection in Florida (I-95/I-4) for free with CTO's stock price under 26.  Some activist activity there.  CTO is worth at least $50 continuing with business as usual.

 

 

[Myth465]

I am looking into this space because everyone is saying Commercial Real Estate is the next big shoe to drop.

 

I like FUR Common, LXP Preferreds and will look into HRP-D.

 

Thanks guys and lets keep the discussion going. FUR is well known and has a competent owner manager with plenty of skin in the game.

[ericd1]

The GMO 7-year forecast (9/30/08) had REIT's asset class real return pegged at 1.9% (w/inflation 2.5%). That's not very attractive compared to their top classes: US large high quality 7.2% and Emerging mkts 6.6%. The forecast is dated, but the subsequent market decline impacted most equity sectors about the same, so the 7-year forecast today is relative.

 

That said I think there are some bargains here...it's a matter of digging them out. I've added a couple REIT preferreds rather than the common because I don't mind being paid while waiting. 

 

Cedar Shopping Ctrs (CDR-A) is in my (small REIT) basket. It may be riskier than I think, but CDR-A currently yields ~25% (cummulative). They own 121 properties, which are mostly smaller and anchored with a major drug store, or supermarket (well diversified major chains). Bad debts running 2% and occupancy ~92%. Their credit lines are ok for '09, need to renew revolver in Jan '10.  Mgt reduced the 1Q dividend 50% to $0.1125 and issued lower FFO '09 guidance of $0.85 to $1.00 per share. If they don't go under I'll be happy to collect the dividend.

[cheapguy]

 

I am thinking about CBL-preferred D series ?

Anyone looked into it or have any opinion ?

[ericd1]

I took a quick look - they renewed their debt, but a back of the napkin pro-forma suggests their operations will not be profitable. They are disposing of properties, which adds back profits, but isn't necessarily a good sign. Leverage ~90%. 

 

I don't see enough margin of safety to get excited about the 20% (fully taxable) yield when BAC offers 16%+, or WFC 15% (QID).

 

 

[ericd1]

Biomed REIT Pfd (BMR-Y) looks interesting.  A 7.375% com. issue. Current yield 15.8%

 

They lease to lifescience companies. Diversified tenents, geography, etc. Leases expiring 2.6% '09, 4.7% '10. 90% occupancy. Financing appears ok through '10.

 

Q1 dividends on common and pfd at current rate.

 

Q4 Transcript - http://seekingalpha.com/article/120403-biomed-realty-trust-inc-q4-2008-earnings-call-transcript?source=yahoo&page=-1

 

Any comments?

 

 

 

 

 

 

[ericd1]

Most bank pfds are now yielding 10%-15%, while many REITs are still above 20%.

 

Although there's still risk in the industry, I am wondering if the fear factor and lack of hedge fund $ are causing the mispricing, similar to the banks 45 days ago. Since it's low on March 6th Vanguard REIT index is up 45.0% vs 26.8% for Vanguard 500 Index, but it is still down 50% over the last 12 months. 

 

With improving prospects in the loan/mortgage business I believe today's yields will be short-lived. I have a small basket with positions in HRPB & D (thanks Jack), FCH-C, CDR-A, FR-J, NRF-A and DDR-G.

 

Appreciate your comments and other REIT opportunities to consider.

[Junto]

I don't deal in some of these preferreds but both HRP-B and HRP-D have had great run ups over the past couple of weeks and the common stock has been up even more.

 

I might also dabble in this sector as I trim positions in the bank preferreds.

[lessthaniv]

653211,

 

I starting picking up H&R below $5 in the November carnage. I have bought right up to the current $7 feeling value is closer to $15 -$18 long term. Also has a catalyst on April 9th that may give the stock price a quick push. (In what direction depends on the nature of the news, but I am betting that it's good news.)

 

I like the sector long term. Leverage tied to longer term maturities at current rates + tangible assets like property should do well in an inflationary enviorment. Good tennants/ long term leases/ long term fixed rate debt/ 99% occupancy/< 5X Forward AFFO/ 65% discount to NAV ... its appears to be a very solid collection of properties and tennants ... and ... I think the funding of The Bow project is as good as done now. As I mentioned above - Apr 9th is the due date for firm committments on the remaining syndicated debt.

 

<IV

 

 

Yesterday, the catalyst I mentioned earlier on H&R was finalized. They have secured the financing of "The Bow" project. The market has recieved the news favorably taking the stock to a $9.85 high today. I still believe the intrinsic value is much higher. Current NAV by my math is around $18/share. The market is sitting around a 35% discount to NAV at the moment so I feel the stock could continue to around the $11-$12/share mark.

 

Happy Friday for me!

[SharperDingaan]

 

Partner24

 

Nice choice on the BEK.B.

I would expect that these things are closely held ? & that the common trades rarely - if at all?

 

Thanks

SD