The deterioration in the fundamentals depends on economic growth and the job market. The main reason CWH's portfolio is only 90% leased is the softness in job growth. There has been little white collar job growth during the last five years and this has hurt all office buildings, especially, suburban ones. It looks like the economy and job growth are starting to pick up, which will result in higher occupancy and cash flow for CWH.
I agree that the current management structure is terrible, however, for a REIT entity with income and cash flow that is fairly constant with long term leases, it matters less that a normal operating company. Even though the management structure is poor, the company has value at $20/sh., 8% cap rate 5% yield. Alternatively, an investor can buy Boston Properties, one of the best managed office REITs, at $112/sh., a 4.5% cap rate and yield of 2.3%. My contention is that CWH provides a better risk adjusted return.
I agree with your comments on the Portnoy's and RMR and this REIT would be worth $30/sh. plus without RMR and an experienced internal management team. However, on a current real estate value basis it is cheap at $20/sh. with a 5% yield. The dividend has already been cut from $2/sh. to $1/sh. and the risk of further cuts is remote. Therefore, its a cheap value play with a 5% yield and see what happens with the buyout/proxy fight and other changes RMR is being forced to make by the market to increase the stock price.
REIT Focus: Essex Property Trust, Inc. [View article]
Its just the markets thirst for yield that is pushing up the price of many REITs including ones like Essex in the apartment sector. Its a good company but the stock is way overpriced and will come back to reality when the apartment market softens and rates start ticking up. I like Piedmont Realty Trust, CBL & Associates and Commonwealth REIT a lot better.
Silver Bay Realty Trust - A Business Model Doomed To Fail [View article]
I have been in CRE investment and finance for more than 25 years and agree that investing in SF housing on a large bulk basis does not produce appropriate risk adjusted returns. I have looked at the business model and it only produces an IRR in the high single digits which is way too low for the risk associated for SF real estate investments. There are diseconomies of scale as costs for management, operations and maintenance are very high, higher vacancies than apartments and at sale time, the seller has to sell in pools or in bulk at sizeable discounts. I usually ask people who want to get into the business by acquiring hundreds or thousands of SF homes, whether they would like to own either a 300 unit apartment building or 300 homes spread over five states and they always choose the former. I do however, think it is a profitable business if done on a small scale, locally by buying, rehabbing, renting and then flipping the homes.
REIT Focus: Hudson Pacific Properties, Inc. [View article]
I always recommend that individuals have a 10%-15% allocation to CRE for portfolio diversification purposes and the best way is to invest in a REIT ETF like Vanguard-VNQ or DowJones-RWR.
Greenstreet uses a cap rate model to value the real estate and then makes various adjustments for CA and CL, vacant land, JV's, deferred taxes, etc. and finally subtracts the debt and preferred stock. This is their equity value in which they divide the number of shares to arrive at a NAV per share.
I do a similar analysis except my main metric is the cap rate and NOI and I only adjust the real estate value for major CRE items as the net working capital items are usually nominal. I also use a 3.5% inflation factor for a one year pro-forma NOI. From my capped value, the debt/preferred is subtracted and this amount is divided by the shares O/S to arrive at NAV per share.
Both methods should produce fairly close valuations depending on the various assumptions made.
My comment regarding Valuation Methodologies is that most of the Wall Street analysts use an FFO or AFFO multiple in valuing REITs and calculating the NAV per share. Greenstreet, which is a very good firm and does in-depth analysis and I use a cap rate analysis to determine the NAV per share.
I use a cap rate analysis because that's how real estate is bought /sold and what I have been using for more than 25 years. I don't use the FFO multiple because its includes interest expense and valuation should be done on CRE free and clear and its a moving target. Ten years ago, Wall Street valued REITs at 10-12 times FFO, today its 16-19 times.
I respectively disagree with some of the comments on apt valuations, especially in the "high beta" markets like Tampa, Dallas and Phoenix.
Yes, some newer class A properties are selling for 4%-5% cap rates but they are overpriced and whoever is paying those prices will probably lose money, just as they did buying at those same cap rates in 2004-2007. Just because an asset trades at a high price doesn't mean that its intrinsic value.
CRE has many risks including; tenant, economic, lease, interest rate, market, ownership, liquidity, etc, and a buyer paying a 4%-%% cap rate is not getting compensated for these risks. The risk adjusted return via a cap rate should be in the 6% to 9% for apts depending on the location, quality and income growth. This is what it has been historically until the last few years of zero interest rates. Many apt investors buying at low cap rates are betting on high income growth and in some markets that its true. However, there are more than 240,000 units coming on stream in 2013 and the apt markets can go from 98% to 94% occupancy real quick.
I would be a seller, not be a buyer of apts at these low cap rates.
1. I'm not sure where you are getting the shares o/s, but my 84M comes from Yahoo Finance and Macroaxis. 2. The operating expense amount in my one year proforma includes the 9/30/12, Equity in Income of JV's of4.7M (as a credit) and therefore is included in the valuation. 3. I would agree that some apts are selling at 6% or less cap rates in some of CPT's markets, however, as noted in my analysis, most of their portfolio is in "high beta" markets and at those cap rates they are overpaying for the assets. Just like from 2002-2007 when the Fed pushed down interest rates and cap rates compressed and many of the apt deals bought at 4%-6% cap rates ended up in foreclosure. 4. My valuation is independent and real estate centric, while most of the firms you mention use a market metric with a FFO multiple valuation of 16-19 times. As I said before, 10 years ago the street was valuing REITs at 10-12 times FFO, now its up to 18 times. Most of those firms also do a lot of business with REITs, so I would be suspect of their analysis. Finally, I have completed more than $2B in real estate transactions including numerous apt deals all over the country and if you buy apts at 4%-6% cap rates, you are not getting a proper risk adjusted return. This is no different than in the year 2000, when analysts assured me that Yahoo was worth $240/sh.
Apartments are the hottest CRE sector due to the growth in rents and positive outlook. Most of the major apt. REITs are way overpriced as fund and momentum investors have poured into these stocks for yield in a zero interest rate environment and pushed up the price and lowered the yield. None of the apt. REITs would buy an asset for the 4%-5.5% cap rate that their company's are trading at.
My valuation methodolgy is simplistic but this is how to value CRE assets. I could have done a more in-depth analysis using a 5-7 NOI proforma, discounted at CPT's cost of capital, but I don't have the information for that analysis. Either way, the valuation would be the same.
You are correct, that a public REIT has goodwill value in management, low cost of capital, diversification of assets, etc., however, that value is very small, maybe 5% of the stock price and is included in the cap rate. I use a slightly lower cap rate in valuing a REIT to account for these intangibles.
1. The operating expense portion of the forward NOI includes equity income of JVs and therefore are included in the valuation. 2. The current market cap is 84M shares at $69/sh or $5.8B. 3. The debt is $2,394B and is 41% of a $5.8B market cap. 4. I only value the common shares because the preferred units were redeemed in 2012. 5. The FFO in my analysis is from page 32 of the 2011 10K.
REIT Focus: Commonwealth REIT [View article]
REIT Focus: Commonwealth REIT [View article]
REIT Focus: Commonwealth REIT [View article]
REIT Focus: Essex Property Trust, Inc. [View article]
Silver Bay Realty Trust - A Business Model Doomed To Fail [View article]
There are diseconomies of scale as costs for management, operations and maintenance are very high, higher vacancies than apartments and at sale time, the seller has to sell in pools or in bulk at sizeable discounts.
I usually ask people who want to get into the business by acquiring hundreds or thousands of SF homes, whether they would like to own either a 300 unit apartment building or 300 homes spread over five states and they always choose the former.
I do however, think it is a profitable business if done on a small scale, locally by buying, rehabbing, renting and then flipping the homes.
REIT Focus: Hudson Pacific Properties, Inc. [View article]
REIT Focus: Camden Property Trust [View article]
REIT Focus: Piedmont Office Realty Trust, Inc. [View article]
REIT Focus: Camden Property Trust [View article]
I do a similar analysis except my main metric is the cap rate and NOI and I only adjust the real estate value for major CRE items as the net working capital items are usually nominal. I also use a 3.5% inflation factor for a one year pro-forma NOI. From my capped value, the debt/preferred is subtracted and this amount is divided by the shares O/S to arrive at NAV per share.
Both methods should produce fairly close valuations depending on the various assumptions made.
REIT Focus: Camden Property Trust [View article]
My comment regarding Valuation Methodologies is that most of the Wall Street analysts use an FFO or AFFO multiple in valuing REITs and calculating the NAV per share. Greenstreet, which is a very good firm and does in-depth analysis and I use a cap rate analysis to determine the NAV per share.
I use a cap rate analysis because that's how real estate is bought /sold and what I have been using for more than 25 years. I don't use the FFO multiple because its includes interest expense and valuation should be done on CRE free and clear and its a moving target. Ten years ago, Wall Street valued REITs at 10-12 times FFO, today its 16-19 times.
REIT Focus: Camden Property Trust [View article]
Yes, some newer class A properties are selling for 4%-5% cap rates but they are overpriced and whoever is paying those prices will probably lose money, just as they did buying at those same cap rates in 2004-2007. Just because an asset trades at a high price doesn't mean that its intrinsic value.
CRE has many risks including; tenant, economic, lease, interest rate, market, ownership, liquidity, etc, and a buyer paying a 4%-%% cap rate is not getting compensated for these risks. The risk adjusted return via a cap rate should be in the 6% to 9% for apts depending on the location, quality and income growth. This is what it has been historically until the last few years of zero interest rates. Many apt investors buying at low cap rates are betting on high income growth and in some markets that its true. However, there are more than 240,000 units coming on stream in 2013 and the apt markets can go from 98% to 94% occupancy real quick.
I would be a seller, not be a buyer of apts at these low cap rates.
REIT Focus: Camden Property Trust [View article]
1. I'm not sure where you are getting the shares o/s, but my 84M comes from Yahoo Finance and Macroaxis.
2. The operating expense amount in my one year proforma includes the 9/30/12, Equity in Income of JV's of4.7M (as a credit) and therefore is included in the valuation.
3. I would agree that some apts are selling at 6% or less cap rates in some of CPT's markets, however, as noted in my analysis, most of their portfolio is in "high beta" markets and at those cap rates they are overpaying for the assets. Just like from 2002-2007 when the Fed pushed down interest rates and cap rates compressed and many of the apt deals bought at 4%-6% cap rates ended up in foreclosure.
4. My valuation is independent and real estate centric, while most of the firms you mention use a market metric with a FFO multiple valuation of 16-19 times. As I said before, 10 years ago the street was valuing REITs at 10-12 times FFO, now its up to 18 times. Most of those firms also do a lot of business with REITs, so I would be suspect of their analysis. Finally, I have completed more than $2B in real estate transactions including numerous apt deals all over the country and if you buy apts at 4%-6% cap rates, you are not getting a proper risk adjusted return. This is no different than in the year 2000, when analysts assured me that Yahoo was worth $240/sh.
REIT Focus: Camden Property Trust [View article]
REIT Focus: Camden Property Trust [View article]
My valuation methodolgy is simplistic but this is how to value CRE assets. I could have done a more in-depth analysis using a 5-7 NOI proforma, discounted at CPT's cost of capital, but I don't have the information for that analysis. Either way, the valuation would be the same.
You are correct, that a public REIT has goodwill value in management, low cost of capital, diversification of assets, etc., however, that value is very small, maybe 5% of the stock price and is included in the cap rate. I use a slightly lower cap rate in valuing a REIT to account for these intangibles.
REIT Focus: Camden Property Trust [View article]
My answers to your comments are as follows:
1. The operating expense portion of the forward NOI includes equity income of JVs and therefore are included in the valuation.
2. The current market cap is 84M shares at $69/sh or $5.8B.
3. The debt is $2,394B and is 41% of a $5.8B market cap.
4. I only value the common shares because the preferred units were redeemed in 2012.
5. The FFO in my analysis is from page 32 of the 2011 10K.