Tight state budgets and a lack of available capital are resulting in limited student housing, creating investment opportunities as post-secondary education enrollment and attendance are on the rise, says Ted W. Rollins, CEO of Campus Crest Communities, Inc. (CCG).
“There are more kids going to college. They’re staying longer. And although the Baby Boom‘s children, the Echo Boom, growth is dipping slightly over the next few years, this attendance is still at record levels. In addition to that, if you look at total enrollment, growth is continuing because the graduation rate at high schools is up,” Rollins said.
Rollins says Campus Crest Communities focuses on creating a higher-quality living experience within the limited supply of student housing, CCG has tremendous buying power and continued year-over-year improved performance and the company is currently engaging in a pipeline of 80 potential projects.
“If you look at our first-quarter FFO, we made $5.1 million. We have great positive cash flow. We pay an annual dividend, which produces a yield of about 5% for our shareholders. This is in the higher end of the range for what most companies pay. In addition to that, we’re lowly leveraged. We only have somewhere on the order of 30% leverage,” Rollins said.
Given the current interest in environmental sustainability, timber production presents investors with a way to earn stable returns from real estate and tap into the emerging green markets of carbon credits and bioenergy, says Daniel S. Fulton, CEO & President of Weyerhaeuser Co. (WY).
“The biggest trend we’ve seen across the board at all of our businesses is increased interest in being green and sustainable,” Fulton said. “We manage the land to ensure clean water for both animals and humans, and provide extensive areas for wildlife habitat in our timberlands.”
Fulton says Weyerhaeuser is structured as a REIT and manages softwood timberlands. He says current demographic trends point to increased demand for building materials, with domestic producers having the upper hand, and the REIT structure gives shareholders more tax-friendly returns.
“The primary benefit of the timber REIT structure is that we enjoy tax savings on qualified timber income at the corporate level,” Fulton said. “Being an REIT puts us in a position where we are both more efficient on an operating basis, and positions us to grow our timberlands business.”
A quarter of newly originated residential mortgages are expected to be denied, creating a more than $300 billion market for mortgage and trust deed lenders despite slow real estate and lending recovery, says Alim Kassam, CEO of Rama Capital Partners LLC, and Managing Member of The Rama Fund.
“[Fannie Mae expects] a little over $1 trillion of residential mortgages to be originated nationwide. Furthermore, Ben Bernanke came out and said that one out of four mortgage applicants today will be denied,” Kassam said. “We are trying to fill that void in the market and trying to help those people who otherwise wouldn’t be able to get financing.”
Kassam says The Rama Fund, which he manages, pools borrowers and lends to them without investing in real estate directly, and pays an average of about 0.81% a month net returns to investors. Kassam says the Fund manages against the risk of nonpayment by rejecting about 95% of loan applications.
“We’ve been paying our investors 10.2% a year on average, net of all fees. When you stack that up against other asset classes, I think that’s a very good absolute return,” Kassam said. “We’re lending on average around 42 cents on the dollar, based on what a property is worth today.”
After over six months of searching for a new CEO to replace former CEO Dirk Meyer, who resigned back in January and had been 
rumored to be forced out due to his lack of vision, AMD NASDAQ has finally chosen a new CEO. AMD has selected Rory Read, Lenovo’s President and Chief Operating Officer to lead the firm as its new CEO. AMD’s search for a new CEO has been painfully difficult. The semiconductor firm, which has managed somewhat of a resurgence while under the direction of former CEO, Dirk Meyer, and its current interim CEO, Thomas Seifert still has a difficult road to true recovery and long term survival. While AMD has been reasonably successful in the PC world as second banana to Intel, the company has very far to go with regard to processors for mobile phones and tablets the current growth generators. AMD has been through rough waters for sometime and many potential candidates have chosen not to be considered for the CEO position. Throughout the CEO search process a number of potential candidate names have been rumored under consideration including Tim Cook, Apple’s soon to be new CEO after Steve Jobs made his dramatic resignation, Mark Hurd, Oracle’s co-president and former HP CEO, Pat Gelsinger the Carlyle Group Chief Operating Officer and others have all supposedly turned down AMD.
Read’s selection to run AMD is a positive, the company has finally found someone to take on the challenge. While Read has an impressive background while at Lenovo as well as significant leadership work while working at IBM for twenty three years he has a monumental task ahead of him. AMD’s press release announcement contained a terrific spin on Read’s selection. we will just have to wait and see. At least company now has a new leader and get to work on addressing many of the firm’s future needs and strategic direction.
Investors need to closely monitor what Mr. Read does upon taking the reigns and going forward.
Gateway-city office REITs have outperformed other real estate investment trusts in the first half of 2011, and are expected to grow earnings and pricing power into 2012 as employers seek locations in metropolitan hubs to attract best-qualified workers, says John W. Guinee III, Managing Director at Stifel Nicolaus & Co. Inc.
“There are numerous examples of relocations from suburbs into more urban, public-transportation-oriented locations in both New York City and the Washington D.C. MSA. Therefore, our focus is on companies which have the highest concentration of assets in submarkets where we think there is a chance to grow rents,” Guinee said.
Guinee likes Boston Properties (BXP), one of the largest office REITs with significant presence in Boston, Midtown Manhattan, San Francisco and Washington D.C. Guinee says pricing power in the office REIT sector is limited to well-known metropolitan areas like the ones BXP has presence in.
“We think that within the office and industrial world, ability to grow rents is very, very limited to some of the well-known office markets, such as Midtown Manhattan and Midtown South,” Guinee said. “And the metro-oriented submarkets within Washington D.C. and some of the better submarkets in San Francisco, Boston and Los Angeles, specifically, Back Bay in Boston, West L.A. and the South San Francisco Financial District.”
The shift from owning to renting, limited supply and the ability to handle volatility have moved multifamily REITs to produce net operating income in the mid- to high-single-digit ranges, which is expected to continue as occupancy and rental rates rise, says David Toti, Managing Director and Group Head of REIT research at FBR Capital Markets.
“Despite the rising rent increases, we are not seeing occupancy numbers fall and move-out turnover is still dropping, which is highly counterintuitive,” Toti said. “The renter is still very tolerant of price increases and resistant to move, resistant to bear the transaction costs of moving.”
Toti rates AvalonBay Communities (AVB) an “outperform” stock in the multifamily real estate sector. The stock has been rated “outperform” since last year, and although the REIT is a consensus favorite, Toti says peer valuations do not include sizable contributions from the development pipeline.
“When we launched on the name in December, our thesis was this: By the end of 2011, we expected AvalonBay‘s development pipeline to be significantly larger, and expected that investors would increasingly ascribe higher value to the pipeline. Seven months into the year, that is pretty much how it has played out,” Toti said.
Low Treasury yields, a positive spread between the cost of buying and financing, and increased consumer spending are boosting revenues for commercial REITs, says Alexander D. Goldfarb, Managing Director and Senior REIT Analyst at Sandler O’Neill + Partners LP.
“There are companies, just generically, where we’re looking at 10%, 15%, 20% dividend increases next year,” Goldfarb said. “It’s really a function of, one, a lot of companies cut their dividend back, so now they’re raising them once again; and two, the real estate [market] has recovered a lot stronger than any of us would have imagined.”
Goldfarb points to Developers Diversified Realty Corp. (DDR) as a key “buy” pick among commercial REITs. Goldfarb says DDR has divested itself from bad investments over the past two years, has gotten its balance sheet back in order and is engaging in long-term plans that align the shareholders’ and the management’s goals.
“[DDR is] investment-grade rated by Moody’s, and they’ve done all the heavy lifting to get the investment-grade rating from either Fitch or S&P. It’s just a matter of when those agencies come around to upgrading DDR back to investment grade,” Goldfarb said.
Mortgage REITs are expected to deliver dividend yields in the midteens range, driven by steep yield curves on the agency side and wide credit spreads on the nonagency side, says Douglas Harter, Vice President at Credit Suisse Group.
“The level of return is sustainable given the weaker economic data points we’ve seen, which should leave the Fed on hold at least until midyear of next year and probably longer than that. So that’s the near-term positive for the group,” Harter said.
Harter mentions Two Harbors Investment Corp. (TWO) as one of this favorite hybrid mortgage REITs. He says the equity markets have opened themselves to Two Harbors, and the REIT has raised $700 million between May and July, and also raised capital in the first quarter.
“Two Harbors invests in both agency MBS and nonagency residential mortgages. They tend to focus on more-credit-impaired nonagency bonds. They like subprime. They like option ARMs. They feel like those offer better risk/returns given what the assumptions they are able to price into those bonds,” Harter said.
Potash is the favorite nutrient in a generally positive environment for fertilizers, with farmer economics growing three to four times higher than the 10-year average, while fertilizers remain at half the levels of 2008, says Ben Isaacson, Director of Scotia Capital.
“We’re focused more on the outlook of potash, which we believe will be the only one of the three nutrients, the others being phosphate and nitrogen, that will see continued positive price development through the next several years, until new supply comes on in the back half of the decade,” Isaacson said.
Isaacson points to Potash Corp. of Saskatchewan (POT) as the best potash play in the market, and he rates it an “outperform.” He also says PotashCorp was one of the few producers that invested in new capacity during the financial downturn, which will allow if to have the lowest cost per ton as the markets recover.
“About two-thirds of its EBITDA is potash, half of which represents offshore potash exposure. We think there’s more upside in the offshore potash market than domestically,” Isaacson said. “It’s bringing on 50% of all new brownfield capacity over the next half decade, which we like that a lot.”
Africa’s growth is catching up to the rest of the emerging markets and the industrialized world, and it is expected to surpass their growth rate in the longer run, says Larry Seruma, Chief Investment Officer and Managing Principal of Nile Capital Management. Seruma identifies three key themes in African growth that guide his investment strategy:
1. Natural Resources: Global industrialization — especially from Asia — relies on African natural resources. “Africa is going to continue to supply the rest of the world with natural resources. As a result, many companies in Africa that supply natural resources or provide services for natural resource companies stand to benefit,” Seruma said.
2. African Consumer Growth: Africa contains about 1 billion people, a population that grows faster, is younger and has a higher potential for productivity than developed markets’. “You are going to see huge growth in demand for goods and services as opposed to more developed countries, where entitlement and demographics put a heavy burden on the rest of the population,” Seruma said.
3. African Infrastructure Development: African industrialization necessitates all the physical infrastructure that is vital in a thriving industrial geography. “There is more and more demand for physical infrastructure services like water or electricity, and also digital infrastructure such as communications. So we are finding opportunities in industries all the way from cement to software or mobile network operators — all that infrastructure spending is going to be a key driver for the next 20 years,” Seruma said.
