| | | Re: DLR & REITs in general
It has only been the last four years that I have been an REIT investor, studying the sector and how best to value (or find those that are significantly undervalued). I learned early that PE's are not a good metric to value REITs.
This is because REITs are required to distribute at least 90% of their taxable income to shareholders in the form of dividends. As a result, REITs often have lower earnings per share than other types of companies. This can make PE ratios misleading, as they may suggest that a REIT is undervalued when it is actually fairly valued. I look at FCF, debt and distribution coverage. I also like to monitor BV but you need to back out the intangible assets (if any) but to me, it's an excellent value measure especially if the current price is significantly less than the stated BV.
The 3 most common metrics used to compare the relative valuations of REITs are:
Cap rates (Net operating income / property value)
Equity value / FFO.
Equity value / AFFO
There are also special situations based on property type (office, retail, single tenant), term of leases and debt structure (especially if/when debt has to be refinanced).
I have built a basket of these REITs w/ 3 special 'Value' situations Buys where I have been accumulating shares at price I think are significantly undervalued:
CIO w/ 15 Buys from 12/2022 to 6/2023. - stated BV = $19.82 (Price/BV = 0.32)
- positive FCF every quarter for the past 5 years
Market Cap only $218 million & sitting on over $600million of real estate
They own 62 properties (avg age 12 years), totaling 6.2 million sq ft. In the last 5 years CIO has invested $170 million in capital improvements; CIO's occupancy rate has remained above 90% in recent years
LXP w/ 17 Buys from 4/2022 to 6/2023 - stated BV = $8.07 (price/BV = 1.32)
- positive FCF every quarter for the past 5 years
On February 1, 2022, an investment group called Land & Buildings Investment Management made an unsolicited offer to acquire LXP Industrial Trust (LXP) for $16.00 per share in cash. This represented a premium of 22% over LXP's closing stock price on the previous day.
Land & Buildings is a New York-based investment firm that specializes in real estate investments. The firm is led by Jonathan Litt, who is known for his activist investing style. Litt has been critical of LXP's management in the past, and he believes that the company is undervalued.
MAC w/ 11 Buys 11/2020 (none in 2022) 4/2023 - 5/2023 - stated BV = $13.27 (Price/BV = 0.82)
- positive FCF every quarter for the past 5 years
Simon Property Group (SPG) made an unsolicited offer to acquire Macerich (MAC) for $91.00 per share in cash and Simon shares on March 9, 2015.
Macerich's board of directors rejected the offer on March 10, 2015, saying it undervalued the company. SPG then raised its offer to $95.50 per share in cash and Simon shares on March 20, 2015. Macerich's board of directors again rejected the offer, saying it was not in the best interests of the company's shareholders.
SPG withdrew its offer on April 1, 2015.
LXP & MAC had previous buy out offers that were rejected; CIO just looks like it is significantly undervalued based on it's market cap, 5 year capital improvement investment & 90% occupancy rate.
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REIT sector can be very cyclical (especially w/ leveraged debt, rising interest rates & the cost of new construction). Market valuations change significantly from peak to trough in the cycle along w/ special company situation (typically brought on by bad and/or greedy management or management w/ conflicts of interests w/ dual roles as operator paid fees & owners w/ special share class)
From your perspective, where do you find/see the value proposition for REITs in general?
FWIW, I flipped homes in Silicon Valley during the 90's & always valued real estate based on the cost to build new vs remodel. We bought our properties at distressed sales usually at court house auctions.
I see similar situations in some of these REITs especially CIO. added 10% today to my already oversized position. |
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