Democrat incumbent Barack Obama won re-election on Tuesday over the Republican contestant Mitt Romney, reported the Associated Press. Obama obtained at least 303 of the required Electoral College votes over Romney’s 206, with the required number for victory at 270. Democrats also maintained their Senate majority while Republicans kept the majority at the House of Representatives.
The Democratic presidential victory brings attention to natural gas pipelines. The President in the past has praised domestic natural gas as a cleaner energy source, as reported by Reuters.
In a recent interview, Deutsche Bank Securities Analyst Curt Launer shared his top oil and natural gas pipelines. Launer is an Institutional Investor Best Analyst of All Time and a Hall of Fame member.
Kinder Morgan (KMI) is one of Launer’s top picks. “KMI, I think, has extraordinary and visible growth for the next several years based upon its recently completed acquisition of El Paso. What El Paso brings to Kinder Morgan is $17 billion worth of assets that qualify for MLP treatment that will be dropped down from KMI to KMP, the Kinder Morgan-related master limited partnerships. This generates, in turn, large growth and distributions at KMP and significant cash flows to KMI through the operation of the MLP and the incentive distribution rights structure,” Launer said.
Launer also says his models show KMI growing its common share dividend at “13% per year for the next several years, very visibly, very reliably and without much commodity risk at all.” His target price is $45.
He highlights Enbridge (ENB), the largest transporter of oil in and around North America and the largest transporter of oil from Canada to the U.S, saying ENB is moving the majority of the oil out of the Bakken Shale. “All of these things translate into Enbridge having a $15 billion backlog of projects to build to move that oil in pipelines around North America, and the largest percentage of that capital investment is going on a strictly long-term contract fee-for-service basis, making double-digit earnings growth and strong dividend growth at Enbridge very reliable. The stock is currently about $41 and our ‘buy’ rating target is $46.”
Waste Management (WM) has turned around its business, improving its corporate governance and becoming a pioneer and leader in waste to energy, becoming a long-term ESG holding in a growing industry with high barriers to entry, says Todd C. Ahlsten, Chief Investment Officer and Portfolio Manager at Parnassus Investments.
“[WM] over the last decade has made incredible strides. And first of all, Waste Management now has very good corporate governance, where 10 years ago, they had some issues on the board. Now, we like the board, we like management, so corporate governance has vastly improved,” Ahlsten said.
Ahlsten says Waste Management is the largest recycler in the United States, which is growing and profitable, and also they have made significant investments in capturing methane from landfill sites, and they are producing liquefied natural gas and CNG — all of this while improving worker safety in having fewer accidents and less downtime.
“We like the stock’s range of outcomes. The stock is in the low $30s, and we see downside into the mid-$20s if there’s a recession, and upside to well over $40 a share in the next three years if they execute on their plan, so we like the range of outcomes. The stock also has a dividend yield about 4%,” Ahlsten said.
The market has not yet fully appreciated Discovery Communications (DISCA) given its pricing power and the upcoming contract renewals for its content, making the stock an important holding in the investment strategies for James M. Landreth, Managing Director, Portfolio Manager and Research Analyst at North Capital, LLC.
“Given the fact that [DISCA is] going to be repricing pretty much 100% of their contracts over the next several years, maybe over the next five years, we feel that the market doesn’t appreciate the full extent of their pricing power. This is where we feel the stock is mispriced, that the repricing of these contracts is going to be meaningfully higher than what the Street anticipates,” Landreth said.
Discovery Communications is one of the largest providers of nonfiction contact predominantly to the cable TV industry with over 1.8 billion subscribers around the world, with some of its most famous channels being the Discovery Channel, the Learning Channel and Animal Planet, and Landreth says the stock should benefit as operators seek to maintain these channels in their line-up.
“The stock is trading at 20 times, so it’s probably an appropriate multiple. However, we think we will see better-than-expected earnings upside surprises over the next several years as they reprice these contracts. So it’s just another name we’re excited about in our portfolio,” Landreth said.
Hybrid mortgage REITs and names with prepay-protected portfolios like Invesco Mortage Capital (IVR) and American Capital Mortgage (MTGE) are preferred over agency-only REITs with more exposure to refinance activity and rate moves, says Douglas Harter, Vice President at Credit Suisse Group.
“We have two preferences. One is we prefer the hybrid mortgage REITs over the agency only, and we like the investment flexibility that that hybrid offers you so that you can invest in both agency and nonagency,” Harter said. “The second preference is we prefer, within the agency portfolios of these companies, companies that have more prepay protected portfolios.”
“So fitting into those two themes, I would say the two names that we like the best right now would be Invesco Mortgage and American Capital Mortgage,” Harter said.
Harter further says REITs are expected to continue double-digit dividend yields over the next couple of years. He says that, “while we are past peak returns, I do think that that level of low double-digit returns should be sustainable for the next two-plus years. And in this low rate environment, that remains attractive.”
Medidata Solutions (MDSO) provides the clinical-research area with a software-as-a-service-based solution in the electronic-capture area, and this potentially undervalued company has been building its full suite of electronic solutions for the health care industry, making it an important holding for James M. Landreth, CFA, Managing Director, Portfolio Manager and Research Analyst at North Capital, LLC.
“It had been a good little company for a while driven initially by a particular point solution in the electronic capture area, a niche business. But over the last couple of years, they have been building out an entire product suite into areas like clinical-design management, data analytics and intelligence capture, really a broad set of solutions to improve the efficiency of and lower the cost of running and managing a clinical trial,” Landreth said.
Landreth says MDSO recently announced its first first multiyear-, multimillion-dollar deal, which was “basically the soup-to-nuts solution set.” He says this was Medidata’s first and largest contract to date, and it was with a large pharmaceutical company.
“We don’t believe investors appreciate the fact that this is the first of many of these types of deals to be done. If you look at where the world is moving, it’s away from the paper-and-pencil-based method to one that’s really online, whether it’s electronic medical records or it’s the delivery channel, which is the software as a solution, or the SaaS-based, business model. This firm is really the only provider for that the broad suite for the clinical research category,” Landreth said.
DDR Corp. (DDR) and Post Properties (PPS) have turned around their businesses and emerged with stronger balance sheets and geographical distribution of their real estate, says Alexander D. Goldfarb, Managing Director and Senior REIT Analyst at Sandler O’Neill + Partners, L.P. These REITs appear to be undervalued, he says, and they are his top picks for the industry.
“[DDR‘s] management has been on a roll over the past year, since there was a restructuring at the management level back in 2009, and since then they have shed a lot of legacy investments and delevered the balance sheet. In fact, they just regained their investment credit rating with S&P. And despite all that, the company still trades at a discount to NAV,” Goldfarb said.
Golfarb says Post Properties has been able to deliver very strong results without the usual competitive supply. He says PPS focusing on upscale, Class A apartments in the Sunbelt has driven NOI, which has led to beating consensus estimates continuously.
“[PPS] just had a credit upgrade from S&P to BBB, and management continues to deliver with a very simple story,” Goldfarb said. “There is a lot to like about the story, but on top of it, you get a company that’s trading at close to a 20% discount to NAV. To us, that’s pretty attractive.”
Duke Realty Corp. (DRE) and CubeSmart (CUBE) may offer investors opportunistic value plays with dividend yield. These REITs have improved their exposure to to industrial property for DRE, and balance sheet for CUBE, the self-storage leader, and they both are top picks for Paul E. Adornato, Senior Analyst at BMO Capital Markets.
“We like Duke because they have increased their exposure to industrial property, which has historically been the bread and butter focus for Duke. Over time, they had amassed a significant suburban office portfolio, but just in the last year they sold that portfolio to Blackstone and redeployed the proceeds into industrial in a very efficiently executed series of transactions. I think that the market is still digesting the financial impact of this, and therefore we see an opportunity for investment at this time,” Adornato said.
Regarding CUBE, Adornato says the REIT is a leader in its niche and may realize more upside that its peers, “because it has more vacancy to fill, and therefore, more potential to increase NOI within their existing portfolio,” Adornato said. “Also, they have yet to fully realize the benefit of substantial balance sheet improvement. They recently obtained investment-grade credit ratings and have tapped the unsecured debt market for $250 million in June of this year.”
Regarding REITs as a whole, Adonato says there is little new construction in the real estate space, which benefits REITs as whole. He also says they have good access to capital.
Trevor P. Bond, President and Chief Executive Officer of W. P. Carey Inc. (WPC), talked to The Wall Street Transcript about his company.Click here to read the complete interview.
TWST: W. P. Carey has been in business for almost 40 years now. The company has made a big change in switching to the REIT structure recently, but before we get to that, would
you describe the company’s history and business focus?
Mr. Bond: I think it’s important to note that we’re new now as a public REIT, but actually we’re not a new company. As you pointed out, we’ve been in this business for 40 years. While it’s an important change in form for us, and it was appropriate in our evolution, it doesn’t actually change who we are and what we do.
The way that I like to describe it is that Bill Carey didn’t invent the concept of sale-leasebacks — that’s a financing technique that’s been around for some time, and Bill had been doing one-off sale-leasebacks as early as the late 1950s. But early in his career, he saw the wisdom of the concept of giving retail-type investors access to this form of investment, which they otherwise wouldn’t have access to, which is single-tenant real estate.
He started the business first with limited partnerships, and then it evolved into what’s now our Corporate Property Associates series of funds. We’re now on our 16th of those funds; 14 of them have come full cycle, where the capital has been returned to the investors, obviously with a profit. So we have this 40-year track record, which is an extremely important part of who we are, part of our brand.
And I think another aspect of our history, which is important, is that we do have a very durable investment premise that’s enabled us to provide steady, rising dividend income over many cycles. It’s a cycle-tested track record. The CPA funds go back to 1979, and the premise is pretty simple. We buy a company’s most important real estate, and then we lease it back to them for a long period of time, 15 to 25 years typically. During that time, the contract includes rent increase provisions, typically those would be CPI-related, but not always. Sometimes they’re fixed rental increases. So we get the benefit of that rising income over time, and that’s where you get your cycle resistance, because no matter what’s happening in a local market at a given time, if the tenant continues to pay rent as they’re expected to, then you’ll have rising income.
But at the same time, because it’s a triple-net lease structure and the tenant pays the taxes, the insurance and the operating expenses, the investors are not exposed to cost inflation. We’ve had low inflation over the past two years, and so maybe some investors have forgotten what the impact of that can be. But over time, I think that’s been a real strength of our investments, that we don’t have exposure to the cost inflation. That helps a lot when we look at other markets as well. When we invest internationally, where you’ll have perhaps some inflation risk in a given market, not having that exposure is a good investment premise. I think that when you marry this investment premise with some other key factors — we put these in a diversified portfolio, and we use conservative leverage, so the diversity gives you the safety and ring-fences individual risk, and we typically use nonrecourse debt as well. Over time, it results in very good risk-adjusted returns for our investors.
Richard A. Smith, President and Chief Executive Officer of FelCor Lodging Trust Incorporated (FCH), talked to The Wall Street Transcript about his company.Click here to read the complete interview.
TWST: Please start by introducing readers to FelCor with a company history and an overview of the business today.
Mr. Smith: Today, FelCor owns 69 primarily upper-upscale hotels across the country. When I arrived here in 2005, there were really two overhangs on the company. One was the overall quality of the portfolio, and the other was the balance sheet. When I started putting the plan together, there were a number of things that needed to change to fix that. We had about 125 hotels at that time. A number of those hotels were hotels that a REIT with a long-term focus shouldn’t ever own. They were in secondary and tertiary markets, side-of-the-road hotels with no barriers to entry. If you’re private equity or a private group that is buying at the low end of the cycle and selling at the peak, then you can make a lot of money. When you are in a long-term hold model, such as an REIT, those types of hotels are problematic.
For example, you own a 25-year-old hotel in a market, and it could be performing fine, but if someone comes in and sets a new Hilton Garden Inn or Courtyard or something like that next to you, it greatly diminishes the value. So one of the things we had to do from a strategic perspective was to fix that. By selling those hotels and acquiring upper-upscale quality hotels in markets where we weren’t represented, we could fix both problems. We could get the overall quality of the portfolio where we needed it — which it will be after we finish the last of the asset sales — and by using the proceeds from those sales, we could restructure the balance sheet and get not only our debt level where it needs to be, but also the coverage level, our maturity profile staggered and pushed out long term, and so totally restructure the balance sheet.
The other couple of things I found that were really problematic were in asset management. We asset managed back then, much like most other guys asset manage, and we were very good on the cost side. But we had four asset managers handling 30 to 40 hotels apiece, and they were aligned by brand, not by region. Therefore, we were in a situation where our guys were handling too many hotels, and they were spread all over the country. They didn’t travel much, and so they didn’t know their markets well enough, they didn’t understand demand generators, key feeder cities, comparable nature of product, quality and location against their competitors. So they weren’t able to understand the mix of business that is available in the submarket and the optimal mix of business to us relative to our competition based on those factors. We completely changed that. Our asset managers now handle about 15 hotels and are aligned by region. They are in their markets all the time. They completely understand all of those factors now, so we can optimally mix manage our business.
The other thing that we had to change, tremendously, was that our hotels weren’t in great shape from a capital perspective. Quality wise, they were ranked number four or five, out of five, in their competitive sets. So we spent about $0.5 billion between 2006 and 2008, getting our core hotels where they needed to be so that they could compete in the marketplace. Once we did that, they were number one or number two from a quality standpoint in their sets. So then we had all the tools in place, operationally and quality wise, to compete. That, coupled with strategic changes in the portfolio repositioning and the balance sheet restructure, is what we had to do to complete the turnaround here at FelCor.
Things have been going extraordinarily well. We have completed most of what we’ve had to do. The only things we have left to do is sell the remaining assets, pay down debt utilizing the proceeds from the asset sales and refinance two pieces of debt. Most of the execution risk is gone, and we are in tremendous shape, although that hasn’t been factored into our stock price.
From an execution-risk standpoint, all of the harder stuff — all the changes we initially made that I described — was much, much more difficult than selling the remaining assets and refinancing two pieces of debt. So we feel really good about where we are, and we certainly have more room to move the needle than any of our hotel REIT peers, and that’s not because we’re necessarily better than them: it is simply because we had more room to move the needle by virtue of making the corrections and getting the company on the right track versus where we were.
Applied Materials (AMAT) may double in share price in the longer term, with possibilities to reach $25, says Todd C. Ahlsten, Chief Investment Officer and Portfolio Manager at Parnassus Investments. He says AMAT is currently one of his key holdings, and the stock shows a wide moat and long term potential.
“We think [AMAT has] a good management, and they’ve built the business for the long term,” Ahlsten said. “Regarding valuation, we think the stock is at undervalued levels, trading at $11 per share, and we see downside to the $8 level and upside to $25. So the range of outcomes looks positive for us.”
Ahlsten says Applied Materials makes process equipment to manufacture computer chips, which is increasing in relevancy as computer devices require faster and longer-lasting chips that are increasingly more difficult to build, and the company also manufactures materials required for the solar industry.
“The wide moat is that there’s only a few companies in the world that know to make these process chambers, and when they get designed in at Intel (INTC) to build computer chips, usually those contracts last for years, and it’s really hard to displace people,” he said, and he adds. “Applied Materials meets our relevancy, moat, management and range of outcomes, and also has a really unique opportunity long term to provide critical leading-edge technology to the solar industry.”
