There are all kinds of statistics with which we can evaluate the properties and finances of a company, but to ascertain the quality of management requires a deeper look. In this article, we will be examining various forms of excellence displayed by management teams, and how it affects investors.
Beyond the actual decisions made, management has influence over how the company is seen by the public. Financially identical companies can trade at significantly different prices depending on the adeptness with which management can create the company's image.
How it affects investors:
From a value perspective, any reputation that is already priced in has little effect on the investment so long as the reputation remains constant. The stock of companies or management highly esteemed by investors will usually trade at a higher FFO multiple, much as the poorly reputed trade at low multiples. Since this effect on the multiple remains only so long as the reputation is upheld, we can take advantage of impending changes if we are able to predict them. In many cases a prediction of changed esteem can be rooted in the falsity of a current perception.
· Laurence Geller of Strategic Hotels (BEE) has a certain charisma which seems to have enchanted shareholders. At REITWEEK 2012 and other presentations, he so eloquently describes the high barrier to new supply among luxury resorts that investors are instilled with undue confidence. In fact, without even paying a dividend on the common it trades at a price/FFO of 22.8, the highest in the hotel sector. Given the company's recent struggles to pay the accrued preferred dividends, the market price can easily be attributed to investor's perceptions. Unless Strategic Hotels can make some major financial progress, Geller's lovable arrogance may not carry its market price much longer.
· Income Realty (O) has carefully branded itself as "The Monthly Dividend Company" and the market responded. However, there is a disjoint between the widely accepted firm belief that it's a great dividend and the facts. It would seem reasonable that O's reputation as having an exceptional dividend will decline over time as people begin to look past their marketing and at the actual facts. There was a time when a majority of people thought the earth was flat, but eventually more accurate information takes over. While I suggested above that a negative change to reputation would be associated with a decrease in stock price, O's recent intelligent acquisition, which I will describe later on in this article, seems to make up for any lost reputation.
· Whole Foods Market (WFM) has developed an extreme loyalty among both its customers and its investors. This has driven solid earnings growth and inflation of market price. Is such an extremely high perception sustainable or simply a trend?
We must also consider companies with negative reputations.
· CommonWealth REIT (CWH), Hospitality Properties (HPT) Select Income REIT (SIR) and a slew of others are all managed externally by RMR which is possibly the most tarnished management team among REITs. Yet, it seems to have no desire to improve its reputation, so I suspect its esteem will remain at these low levels. However, a takeover of any of its companies would functionally replace RMR's reputation with that of the new company's and most likely play favorably for the consistently undervalued stock price.
Some management teams have a specialized ability to acquire properties which allows them to get superior deals. Consequently, the respective companies have excellent growth potential. Each of these companies has a specific mechanism it uses to circumvent bidding wars.
· Whitestone REIT (WSR) has been consistently acquiring properties at going in cap-rates around 8-9% evidenced here. It uses its connections in local markets to snipe distressed properties before they even go to the market. In essence, it provides the seller with capital sooner, and WSR with a cheaper price.
· Management of STAG Industrial (STAG) has acquired sufficient knowledge of a niche market (class B properties in secondary markets) such that it can beneficially acquire properties that many other buyers do not want. Due to less bidding competition STAG has been able to acquire properties at cap-rates of 9% or higher going in as evidenced here.
· Gladstone Commercial (GOOD) has the acquisition expertise of David Gladstone at its disposal. Many other companies are precluded from buying properties with tenants of unrated credit, but GOOD can independently rate their credit. In many cases, unrated tenants are reliable and GOOD can scoop up the properties at cap-rates well above market.
· Much like STAG, Medical Properties Trust (MPW) acquires from a market that has far less competition. While SNFs and nursing homes are popular among REITS, the acute and extended-stay facilities that MPW buys are mostly untouched by REITS. The lack of competition allows MPW to attain cap-rates ranging from 9-11% going in as seen here.
· Investors Real Estate Trust (IRET) has the distinct advantage of being headquartered in Minot, ND. This location, along with its already established footprint in the area gives it a direct access to the booming oil economy.
Managers who can spot good deals usually want to buy them, so it is very common to see frequent equity issuance initiated by the talented acquirers. Look to pick some of these up very cheaply around the time of a secondary offering.
Realty Income notably used a different method to make an accretive acquisition. On 9/6/12 O announced the purchase of American Realty Capital Trust (ARCT) for $2.95B. While this is an ok acquisition price, what made it so accretive was the use of $1.9B in direct equity issuance to pay for it. Essentially, O was able to trade its high FFO multiple stock on an equal cost basis with the much lower FFO multiple of ARCT to gain FFO. In fact, O is estimated to gain around $0.14-$0.16 per share in AFFO from the transaction. Perhaps if O can make more strong decisions and apply the benefits to its dividend, it might actually live up to its reputation as "The Monthly Dividend Company".
In summary, when considering investment in a company, it is just as important to evaluate management as it is assets or the balance sheet. Look for management whose actual performance is in parity with or better than their perceived performance.
Disclosure 2nd Market Capital and its affiliated accounts are long WSR, STAG, GOOD, MPW, and IRET. This article is for informational purposes only. It is not a recommendation to buy or sell any security and is strictly the opinion of the writer.