CubeSmart (NYSE:CUBE) and Public Storage (NYSE:PSA) are two “buy”-rated storage real estate investment trusts, their strong fundamentals benefiting from better macroeconomic metrics for the next couple of years despite a rich valuation overall in this segment of the real estate industry, says David Toti, Senior Managing Director at Cantor Fitzgerald.
“In storage, we’ve had a strange call. We have two ‘buys’ and two ‘sells’ in storage, which most people look at and kind of scratch their heads, because all the fundamentals are relatively similar. CubeSmart has been our top pick in the group, just because over the past few years it’s been a relative value, and that stock has performed quite nicely. Our other pick is Public Storage, which has lagged a little bit, but it’s a stock that always trades at a relatively rich valuation,” Toti said.
FOR MORE INFORMATION ABOUT THIS INTERVIEW CLICK HERE.
Toti says that despite the storage stocks are more expensive that then apartments on an implied cap rate basis and a premium basis, making the group very rich and leading to analysts to downgrade stocks in the sector for the last few months, the sector is poised to benefit for conditions for the next couple of years.
“A lot of people are out there saying that the storage names are the new apartments, but I tend to disagree with that, because everything that ailed the apartment space — housing, supply — is actually really good for the storage space. If you have higher GDP growth, more employment, housing recovery, that’s all stuff that drives storage demand, so even though the stocks are expensive, we think their fundamentals are going to remain very strong for the coming year or two,” Toti said.
Petra Foods Limited (SGX:P34) is well-positioned in the Indonesian chocolate market with 50% market share and is poised to benefit as incomes rise in the country, allowing more people to afford the branded chocolates, says Amy Hu Sunderland, Senior Research Analyst at Grandeur Peak Global Advisors.
“It’s a Singapore-listed company that you could think of as the Hershey’s (HSY) of Indonesia, where they have about 50% market share in chocolates. They have been there for over 60 years. The Indonesia market is very interesting because the consumption of chocolate is very low, but beginning to grow. Petra has the distribution to many of the independent shops and markets, and as incomes rise, chocolate consumption increases,” Sunderland said.
FOR MORE INFORMATION ABOUT THIS INTERVIEW CLICK HERE.
Sunderland became positive on Petra’s long-term opportunities after visiting the company, as it is a well-known and trusted brand in Indonesia that consumers will come to when buying chocolate, Sunderland says.
“We’re more excited about the long-run opportunity, as only 10% of the local population can afford branded chocolates today. These guys are well-positioned to compete against Nestle and the other multinational chocolate companies, because they know the local market, the distribution network and the local consumers’ tastes better. The consumers know and trust the brand, much like we do with Hershey, Snickers or M&M,” Sunderland said.
Man Wah Holdings Limited (HKG:1999) is solidifying its leading position in China’s rapidly growing domestic market as it builds its brand, earns a higher margin and reinvests into its business to grow capacity, says Eric Brock, Portfolio Manager at Clough Capital Partners, L.P.
“Man Wah is the ‘La-Z-Boy (LZB) of China,’ and it started out as an export business. They make very high-quality leather furniture, reclining sofas and chairs. Again, this is sitting right in the middle of this discretionary spending boom we see in China where spending on durable goods like furniture is rapidly increasing,” Brock said.
FOR MORE INFORMATION ABOUT THIS INTERVIEW CLICK HERE.
Man Wah has up to five times of market share with its closest competitor, and is seeing large competitive advantages with its ability to advertise nationally and build its brand, Brock says.
“They have better access to distribution in terms of retail sales in China, and then as a result they earn higher margin. And they are able to reinvest in the business to grow capacity and continue to keep that lead, which is a very rapidly growing domestic market,” Brock said.
Taiwan Semiconductor Mfg. Co. Ltd. (TSM) remains one of the few companies in the world able to stay at the bleeding edge of semiconductor manufacturing, manufacturing chips for customers across the board and generating significant cash flow, says Daisuke Nomoto, Director and Senior Portfolio Manager at Columbia Management Investment Advisers, LLC.
“TSMC is the largest independent semiconductor company in the world. The industry is characterized by process orientation and scale. TSMC is the only company in the industry with ample financial resources to continue to invest in process technologies, capital equipment throughout the business cycle. TSMC manufactures chips for hundreds of different customers globally with a wide variety of end-market applications, including automotive, cell phones, etc. Cash flow generation has been robust,” Nomoto said.
FOR MORE INFORMATION ABOUT THIS INTERVIEW CLICK HERE.
Nomoto is positive on Asian equities overall in the longer term. As part of his strategy, he keeps an eye on the Chinese growth’s recovery, Japanese macroeconomic policy and the ASEAN countries, especially the Philippines and Thailand, saying the growth of the middle class could provide investors with opportunities in the whole region.
“We hold our positive stance on Asian equities overall from a long-term prospective given the region’s structural attractiveness relative to other geographies,” Nomoto said. “We remain very positive on Asia from a long-term prospective, but we think that the speed of share price appreciation will be somewhat moderated in the near term. What we are currently watching out for is how China’s growth recovers and how its continuing official commitment to rebalancing the economy plays out going forward.”
Toyota Motor Corporation (TM) will enjoy more flexibility on pricing and a low-cost advantage if Japanese monetary policy continues devaluing the national currency; and if Abenomics works effectively, a further rerating of the Japanese market could be expected, says Daisuke Nomoto, Director and Senior Portfolio Manager at Columbia Management Investment Advisers, LLC.
“Toyota has gained market share due to its really high-quality product coupled with generally attractive gas mileage and affordability. Toyota has increased its international production as more sales have been generated away from Japan, including joint ventures in China. Foreign currency does matter on Toyota’s accounting profits, and if this yen decline continues, Toyota will have much more flexibility on pricing and enjoy low-cost advantage,” Nomoto said.
FOR MORE INFORMATION ABOUT THIS INTERVIEW CLICK HERE.
Nomoto says the Japanese equity market currently behaves in a very volatile fashion, which could create some buying opportunities. He also considers the recent sell-off in the Japanese market to be a healthy correction, and he says that Abenomics are just a first step in a longer campaign to fix the Japanese economy.
“The Japanese equity market is very volatile these days, as you know, but it seems to me that the recent sell-off is a healthy correction after almost 70% share price appreciation since the victory of the LDP, Liberal Democratic Party, in December 2012,” Nomoto said. “Some people say that Abenomics doesn’t work, or too much easing will cause significant problems in the long run. I wouldn’t disagree with that argument, but people will soon find that Abenomics is just at the beginning, it’s just like a first inning in a baseball game, in my view.”
Prince Frog International Holdings Ltd (HKG:1259) is benefiting from the growth of disposable income in China as families are spending more buying products specifically for their children, says Eric Brock, Portfolio Manager at Clough Capital Partners, L.P.
“Inside of our consumer themes we like a company called Prince Frog. Now, Prince Frog is one of the leading providers of children’s lotions and shampoos. And as we talk about the consumer, there is one theme what we are trying to focus on, which is the growth of disposable income. It’s well-known that income growth has been very high in China, but it’s less appreciated that disposable income growth has been even higher,” Brock said.
FOR MORE INFORMATION ABOUT THIS INTERVIEW CLICK HERE.
Prince Frog is an example of a company that is selling what was once a luxury item that is now becoming a staple, Brock says, and the company is building a solid brand within this transition into higher discretionary income for China’s families.
“Spending power for premium products is enhanced with smaller families in China. In the past, people would just use the same soap or shampoo they use for themselves, but now because they have the ability to spend more, they are actually buying products specifically for their kids. Prince Frog is a big beneficiary of that trend and is building a very nice brand,” Brock said.
CapLease, Inc. (LSE) is making progress with controlling its leverage within the triple-net REIT space, and the stock is valued up to 13 times FFO for 2013, says Daniel Altscher, Research Analyst and Vice President at FBR Capital Markets & Co.
“My favorite name within the triple-net space is CapLease (LSE). This company had some issues before with being excessively levered, but I think you’re seeing the company make a lot of progress with controlling leverage, and making some new investments in the second quarter at pretty attractive cap rates,” Altscher said.
FOR MORE INFORMATION ABOUT THIS INTERVIEW CLICK HERE.
Altscher has LSE valued more favorably than other triple-nets in his coverage, with LSE standing at 13 times FFO for 2013, and with the stock being relatively small cap, it is drawing interest from other REITs, Altscher adds.
“The stock being relatively small cap, roughly $570 million give or take, they’re basically one of the smallest public companies out there in the space, and there’s been a lot of interest from other REITs that are involved in the space to be acquisitive. I think a lot of investors think that this stock could be a takeout candidate, which I think is reasonable,” Altscher said.
Samsung Electronics Co., Ltd. (KRX:005930) has transformed itself from a lower-end tech device manufacturer into one of the top smartphone manufacturers, taking market share away from some of the established giants and developing its own consumer brand, says Edmund Harriss, Investment Director and Fund Manager at Guinness Atkinson Asset Management.
“In the consumer area, it is the smartphone business that is generating the most interest and the highest level of sales. Samsung Galaxy is a handset that has performed extremely well. They have taken extra market share away from Apple (AAPL). They also have considerable strength in their memory business, in their TV business and in other consumer durables,” Harriss said.
FOR MORE INFORMATION ABOUT THIS INTERVIEW CLICK HERE.
Harriss says the idea of Asian companies being great manufacturers but bad developers of consumer brands is outdated, and he says Samsung is now competing with more established brands with designs that carry pricing power, and the company is not relying on just manufacturing scale.
“In the past, Samsung produced rather lower-end consumer goods. You’d much prefer, as an individual, to go and buy something from Sony (TYO:6758) or Panasonic (TYO:6752). That is no longer the case. Samsung produces some stylish designs, and they have benefited on the back of that from very high sales and high pricing power, which is brand-based, not simply based on ability to manufacture in scale,” Harriss said.
Lenovo Group Limited (HKG:0992) has become the number two notebook PC manufacturer in the world after the acquisition of IBM’s notebook business in 2005, and the company has sales in North America, Europe, Latin America and the Asia Pacific region, especially in China, where the technology company has its highest margins due to room for expansion and for increased penetration, says Edmund Harriss, Investment Director and Fund Manager at Guinness Atkinson Asset Management.
“In the U.S., however, they are also gaining considerable traction. They place a lot of importance on attaining market share of around 10% or so, because at that point, that’s where they see economies of scale kicking in. In the U.S., they have just about achieved it. And we have seen margins improve pretty significantly as a result of that. Their smartphone business is the new higher growth area, they are focusing very much more on China at the present. But that is a big growth area in China as consumers are finding that smartphones are affordable,” Harriss said.
FOR MORE INFORMATION ABOUT THIS INTERVIEW CLICK HERE.
Harriss says Lenovo is one one of his favorite stocks, having been a very strong performer, a very strong executor of product development and geographic expansion, as well as generating significant amounts of cash flow.
“So Lenovo is one of our top picks. It has recently performed extremely well, and when I say performed extremely well, its operations have performed extremely well across product lines and across geographies. So this is a company that is managing its business very well by seeking to protect the markets where it is generating the most cash flow and using those cash flows to attack new markets where they are pushing to gain market share,” Harriss said.
Franklin Street Properties Corp (FSP) has seen its leased percentage increase to 94.4% in the most recent quarter, and the company anticipates continued growth in same-store rents and funds from operations, says George J. Carter, Chief Executive Officer, President and Chairman of Franklin Street Properties Corp.
“Our most recent quarter continued to see our leased percentage increase from 94% of the portfolio in the fourth quarter to about 94.4% leased at the end of the first quarter. That is a fairly high percentage for office portfolios like ours in the marketplace, and we actually believe that the possibility, going forward between now and year end, of that leased percentage getting higher is excellent,” Carter said.
FOR MORE INFORMATION ABOUT THIS INTERVIEW CLICK HERE.
FSP saw same-store rent growth at 5% in 2012, and is expecting more growth in this area due to new leasing in the second half of 2013, Carter says. He also anticipates continued FFO growth for the remainder of the year.
“We had about 5% same-store rent growth in 2012, and in the first quarter of the year we had continued same-store rent growth of about 1%, and we have done some leasing that will come online in the second half of this year that we believe will continue our growth in same-store rents. And lastly, our year-over-year funds from operation growth grew over $1 million dollars; that was exciting, and we anticipate continued FFO growth for the balance of this year as well,” Carter said.
