Managing Director At Stifel, Nicolaus And Co. Reveals His Top Property Stocks; Discover His Current Picks In The Sector
August 24, 2010 - The Wall Street Transcript has just published REITs Report offering a timely review of the Real Estate sector. This Special Report contains expert industry commentary through in-depth interviews with public company CEOs, Equity Analysts and Money Managers. Please find an excerpt below.
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Rod Petrik is a Managing Director at Stifel, Nicolaus & Co., Inc. He joined the Stifel Nicolaus research team in connection with Stifel's acquisition of Legg Mason's Capital Markets Group in December 2005. Mr. Petrik was also a Director of two public real estate limited partnerships, one investing in shopping centers and the other in a diversified portfolio of commercial real estate. He is a member of the National Association of Real Estate Investment Trusts, the Urban Land Institute and the National Multi Housing Council. Mr. Petrik holds a B.A. and an MBA in finance from Loyola College, in Baltimore.
TWST: Generally speaking, how are the REITs in those property groups performing today?
Mr. Petrik: Year to date, apartments are the leading sector, followed by storage and hotels. Hotels were the leading performer in 2009, and I think that's primarily attributable to the lease durations. Hotels have in essence nightly leases, and apartments are a year. So those rents tend to get marked to market a little bit quicker than the rest of the real estate sector, which means you're first into a downturn and you're first out.
TWST: Would they be one of your stock picks right now? For all three property sectors you cover, what are your favorite names?
Mr. Petrik: With hotels we like Starwood (HOT). We believe that hotels are a global business and a brand business. We believe that Starwood has some of the best brands in the industry when you look at St. Regis, W, Westin. They also have a real estate platform, which is a little bit different than Marriott (MAR), which owns very little real estate. While I believe that long term, Starwood moves more toward that Marriott model - actually owning some real estate here early in the recovery works to your advantage with the operating leverage. The real estate that Starwood owns is primarily upper upscale and luxury properties in major urban markets. When you look at some of the Ws and St. Regis, those were the properties that were hit the hardest last year and they're recovering the fastest, so I like having that exposure. Over 55% of their EBITDA is coming from international markets. Europe is slightly better than the U.S., and Asia and Latin America are much better. I think 60%, 65% of their growth is coming out of Asia, so their new hotels are primarily being opened up in Asia, particularly China and India.
So Starwood is our favorite hotel name. On the apartment side, we really have been focused on a range-based approach. There has been so much volatility with the apartments, so one of the things we try to do is calculate a net asset value and look at deals in the marketplace, market by market. You could argue that net asset value may be irrelevant today in most property sectors because of the lack of transaction data, but that's not the case with apartments. And while there is limited transaction data, you still have deals getting done. So what we've generally done is taken our net asset value, we do a little sensitivity, we'll go up 25 basis points, down 25 basis points to create a value range. I think it makes common sense; we like to buy below net asset value, so we buy at the low end of that range. Equity Residential (EQR), for instance, our value range at the end of first quarter was $40 to $48. We were looking to buy equity around $40 or below, and I think it's fairly full when it gets up to $48. So a couple of weeks ago, when Equity was trading at $40.57, we upgraded it, and it's performed pretty well. In any given period, we will look at where stocks trade in the range. One of our favorites today, as far as where they are in that trading range, is UDR (UDR).
We had a net asset value at the end of the first quarter of $22; that will get updated tonight with their earnings release, but they're still trading below our estimated net asset value. Where we're focusing our attention is where are jobs, where do we perceive jobs to be created? We think that the jobs are going to come in markets like Washington, D.C., and the Washington-Baltimore corridor. One of the leading employment drivers is the government and then a number of industries associated with the government, like defense, homeland security, Internet security, national security, which are all in the corridor. When it comes to the private sector, we move into technology, which is not evidenced there in a big way, but certainly when you look at biotechnology, education, health care, all are well represented. If you look at New York City, you've seen a pickup in the financial services jobs. It's a slow growth, and the jobs that are being created are lower-paying jobs than the jobs that were lost a couple of years ago.
But as an apartment owner, that's not necessarily a bad thing. You've certainly seen the stabilization in Boston, I think, a combination of financial and technology, and then you've seen pickups in technology, we believe, in the Bay Area, in San Francisco as well as Seattle. So when we're looking at that, a company like UDR has almost 30% of their NOI coming out of the Washington-Baltimore area, and to us that's a positive. Somebody like Home Properties (HME) has 50% of their NOI coming out of the Washington-Baltimore corridor, and we think that they outperform the rest of this year and into next year with the concentration in that marketplace. When we move out West, our favorite West Coast name continues to be Essex (ESS). There is a lot of volatility; our value range has been in that $95 to $110 range, and today Essex is fairly fully priced. We love the company, their markets, their submarkets, the way they've managed their balance sheet. I think they've been very opportunistic over the last year and a half. But certainly we would be looking for some volatility to create some entry points there.
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