EPR Properties (EPR) expects better performance in the later part of 2013 in its specialty real estate assets, working around seasonality to produce more activity, says Daniel Altscher, Research Analyst and Vice President at FBR Capital Markets & Co.
“[A] name that I cover, EPR Properties, they are a little more unique specialty in the assets that they go after, more oriented toward movie theaters, recreation, charter schools. They had a little bit of a slower first quarter, but I think that was as expected, and you’re going to see the ramp in the second quarter,” Altscher said.
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Altscher says EPR has seasonality from the scheduling of movie releases and the scheduling of the school year, but he expects positive changes coming this year.
“Particularly in the charter schools, particularly in the movie theaters, there’s a little bit more seasonality around the actual schedules of movies or timing for school years, so I think you’re going to see the activity there ramp up pretty nicely into the second quarter and then also probably a bit into the back half of the year, too,” Altscher said.
DDR Corp (DDR) is considered a turnaround story with exposure to some of the largest retail powerhouses in the nation, holding precious real estate in a vertical where the building of new shopping space has yet to meet demand, says Alexander D. Goldfarb, Managing Director and Senior REIT Analyst at Sandler O’Neill + Partners, L.P.
“The Cleveland-based shopping center company. Not only is this a turnaround story — and the company’s been doing extremely well at delivering — but also they’re focusing on power centers, which are your Wal-Marts (WMT) and Home Depots (HD) and Lowe’s (LOW) and those sorts of shopping centers, where there’s very little space available for new big box tenants,” Goldfarb said.
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Goldfarb says this Cleveland-based REIT recently issue 3.4% for 10-year investment-grade debt, an attractive offering for some investors, and the company has a track history of being strong at delivering.
“The demand from the retailers is 150 million square feet this year and next year, which equates to about 500 centers, and there are very few even being built, so there’s far more demand than there is availability, and DDR continues to benefit,” Goldfarb said.
Spirit Realty Capital Inc (SRC) has the potential to double in size after its merger with a private REIT, and the company is expected to complete more transactions that will dilute tenant exposure and allow the it to grow, says Alexander D. Goldfarb, Managing Director and Senior REIT Analyst at Sandler O’Neill + Partners, L.P.
“[Spirit] a triple-net company; it’s a company that’s come out of bankruptcy, led by Tom Nolan, who was one of the key people to help turnaround General Growth (GGP), very smart guy. They are in the midst of doing a merger with a private REIT, which will effectively double the size of the company and dilute the tenant exposure,” Goldfarb said.
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Goldfarb expects Mr. Nolan to complete more transactions that will dilute tenant exposure and accelerate the company’s growth, and he points to the stock’s current inexpensive price as a reason behind his recommendation.
“There was a lot of concern about the 30% exposure to Shopko, which is an upper Midwestern retailer; this transaction basically cuts that exposure in half. And Tom’s not done yet. He’ll do more transactions like that, which will dilute tenant exposure, lower the firm’s cost of capital, and continue to grow. If you look on a valuation basis, it’s trading cheap to its two other public peers,” Goldfarb said.
SL Green Realty Corp (SLG) is adding value to its portfolio in secondary and tertiary activities around its core New York City portfolio, as Boston Properties, Inc. (BXP) is maintaining a high-quality portfolio in solid markets, making both stocks top investments in the industrial REIT sector, says David Toti, Senior Managing Director, REIT Analyst and Director of U.S. equity research at Cantor Fitzgerald.
“SL Green continues to add significant value in what I call secondary and tertiary activities around their core portfolio. By that I mean transaction activity, the structured finance portfolio, an increasingly larger redevelopment/development pipeline, but again, all wrapped around their core New York City portfolio. They are not straying that far from their core competency,” Toti said.
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Toti is also focused on Boston Properties in the industrial REIT space, as the company has a high-quality portfolio and has recently undergone positive management changes.
“We like Boston Properties as well. The stock has underperformed. High-quality portfolio, they are in all the right markets. They’ve had some recent management changes, which I think investors are a bit more positive about,” Toti said.
American Assets Trust, Inc (AAT) is leading its peers on a quarterly basis in same-store growth, occupancy and annualized base rents with the company’s high-quality properties in areas where barriers to entry are very high, says Robert Barton, Executive Vice President and CFO of American Assets Trust, Inc.
“On a quarterly basis, we track not only our retail occupancy, but also our annualized base rent, and what’s interesting is that you can have a high occupancy if you drop your rents, but if you have both high occupancy and high annualized base rent, this really speaks to the quality of the property. This is where people want to conduct business, shop, this is where sales are going to take place, and you can see how we continue to outperform our peers on a quarterly basis,” Barton said.
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AAT‘s retail portfolio has consistently outperformed their peers for the last 6.5 years, and Barton touts the company’s high-quality properties in areas that are difficult to build as reasons behind the AAT‘s outperformance.
“We have the Coastal Commission in California, and it makes it very difficult to get those entitlements to build. We own, for instance, Del Monte Center up in Monterey, California. There’s no way you could build that center today with all the Coastal Commission restrictions. It’s just down the street from Pebble Beach. Additionally, John just got the entitlement after 14 years fighting with the Coastal Commission to build an 80,000-square-foot office building with arguably the best office space in San Diego with unobstructed views of the Pacific Ocean. It’s a very special portfolio of properties that we often refer to as irreplaceable, and they are of very high quality,” Barton said.
Fidus Investment Corp’s (FDUS) recent approval of a second SBIC license brings the company’s liquidity up to $125 million, which FDUS is using to make calculated investments in its portfolio, says Edward H. Ross, Chairman and CEO of Fidus Investment Corporation.
“With the recent approval of a second SBIC license and the $75 million of debt capital that comes with it, we have well over $125 million of liquidity, which positions us well for making additional investments and growing our investment portfolio in a deliberate manner over time,” Ross said.
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Ross believes Fidus Investment Corp is well-positioned for future growth as the company looks to make investments in high-quality companies that have solid performance potential.
“As we look forward, our focus is on making investments in high-quality companies that are leaders in their respective niches, that we believe will perform well over the long term, that operate in industries we know well and that generate excess cash flow for both debt service and investment,” Ross said.
Two Harbors Investment Corp (NYSE:TWO) has posted strong book value growth and has diversified its asset base to include nonagency exposure and new production securitization and potentially mortgage servicing rights, leading Douglas Harter, Vice President at Credit Suisse Group, to think the REIT should trade at a larger premium.
“Two Harbors has been one of our favorite ideas for quite some time and remains that way. They put up very strong book value growth in the first quarter, and because of their nonagency exposure — nonagency prices quarter to date in the second quarter continue to go higher — their book value is likely higher as of today. So that probably puts them trading at only 2% to 3% premium today,” Harter said.
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Harter says TWO has a history of book value growth, and the way they diversify their risk makes for less volatile performance going forward, and the REIT has an outstanding management team in its industry.
“I think the combination of their track record, their hedging makes us feel very comfortable with that. Also, layer in that they have been active in terms of diversifying their investment base into new production securitization and looking to buy mortgage servicing rights. I think they are very much constructing a portfolio that should be able to have a stable performance going forward; again with a best-in-class management team makes us think that they should trade at a bigger premium,” Harter said.
Shenzhen International Holdings Limited (HKG:0152), an investment holding company engaged in the investment, construction and operation of logistic infrastructure facilities, has seen its stock price double in the past six months with more upside expected from its land ownership within the Qianhai project, says Kok Hoi Wong, Founder and Chief Investment Officer of APS Asset Management Pte. Ltd.
“[A] stock we like is Shenzhen International (0152.HK). When we bought the stock, it was selling at six times p/e and 0.3 times NAV, and was paying a dividend yield of 6%. The stock price has more than doubled in the last six months. We still like it, because the company owns a crown jewel in a place near Shenzhen, called Qianhai, which has been designated as the offshore renminbi center, which is a pet big project of the current president, Xi Jinping,” Wong said.
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Qianhai is a significant experimental modern service industries zone in Southern China, and the master plan for the new financial center is expected in Q3, Wong says. He believes Shenzhen International will see its stock rise even further from its investment in this area.
“Although the share price has more than doubled, I think the stock still has more upside, because the value of the land it owns in this area will rise further and hence attract more investor interest,” Wong said.
Fifth Street Finance Corp.’s (FSC) portfolio showed 11.4% weighted average yield last quarter, and the company has increased its net investment income per share consecutively in the past three years, while also exhibiting record levels of origination in the first half of this year, says Alexander C. Frank, CFO of Fifth Street Finance Corp.
“If you look at the last three fiscal years, net investment income per share was $0.95, $1.05 and $1.11 in 2010, 2011 and 2012, respectively. The first half of fiscal year 2013 we had record levels of origination, and I think our investors are currently receiving a strong yield on the stock. The weighted average yield of our portfolio is about 11.4% as of the quarter end March 31, 2013, which in this environment is an excellent return,” Frank said.
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Fifth Street is also seeing solid performance in portfolio investments in which they have partnered with private equity firms, Frank says. He believes there is more growth opportunity available for the stock and is optimistic about the company’s future.
“We have equity stakes in a number of portfolio investments where we partnered with private equity firms. Some of those companies are performing very well. We believe Fifth Street’s future is bright and are excited about the opportunity for NAV growth,” Frank said.
American Campus Communities (ACC) has recently underperformed the REIT index in the double-digits on fears this real estate investment trust would miss numbers, but the competent management team behind this college real estate company has a track record that suggests this underperformance presents investors with a buying opportunity, says Alexander D. Goldfarb, Managing Director and Senior REIT Analyst at Sandler O’Neill + Partners, L.P.
“While they did get behind with their preleasing, they also closed on about $1.6 billion of investments over the past year, so for a few months during the winter management was more focused on integration of those acquisitions versus the preleasing, but they’re back on the preleasing,” Goldfarb said.
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Goldfarb says ACC‘s management team has an outstanding track record going back almost a decade, and he expects this underperformance to be a temporary glitch in an otherwise stellar performance.
“It’s an extremely competent team that has a stellar track record since going public almost 10 years ago, and this magnitude of underperformance for a team that’s consistently delivered to us seems like a great buying opportunity. We think American Campus is a great company that’s been underappreciated by the market. The stock has underperformed the REIT index by roughly 20% year to date on fears that they’ll miss their preleasing numbers,” Goldfarb said.
