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Joseph Ori

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  • REIT Focus: Associated Estates Realty Corporation [View article]
    With all due respect there is a misunderstanding of CRE and corporate finance. The value of a REIT can be calculated in two ways, discounting the FCF and terminal value at the WACC or relative valuation using Cap Rate, EBITDA or FFO.

    In either of the above methods there is no adjustment for G&A or overhead costs.

    Since we don't have the requisite information to prepare a FCF analysis and REITs are comprised of individual real estate assets, we use a Cap Rate analysis. The value of a REIT then, is the value of its real estate assets plus the value of its property and executive management plus goodwill. In AEC's, case we adjusted the Cap Rate down from 6.5% to 6.25% to give value to its superior management, excellent growth and new development deals. If AEC did not have these attributes, we would have determined value using a 6.5% cap rate.

    In a FCF analysis, the WACC would be lower for REITs that exhibit stronger management, are better capital allocators, have higher growth, etc. This is why Boston Properties trades at a lower cap rate and higher FFO then say Hudson Properties or Simon trades at a premium to DDR.
    Mar 24 11:52 AM | Likes Like |Link to Comment
  • REIT Focus: Associated Estates Realty Corporation [View article]
    Our NAV for AEC is a going concern value not a liquidation value and therefore the G&A must be included in the operating costs to derive a value for the firm. This is no different than valuing a corporate company at an EBITDA multiple or FCF analysis. I used a lower cap rate of 6.25% instead of 6.5% to give credit to the future value from the development deals, the value of superior management and company goodwill.

    A good example is Essex's acquisition of BRE Properties for stock at about a cap rate of 6%. When Essex valued the firm it included the G&A costs in its valuation analysis as they are part of the operating costs of the firm. Some of the G&A will be redundant and can be reduced as it won't need two CFO's, office space, etc., however, it is still a cost that must be included in valuing a going concern REIT.

    When REITs enter into development deals this adds construction, lease up and interest rate risk to their business model even though they have guaranteed price contracts and may have been doing it for 20 years. Development is a lot riskier than buying completed, leased up properties and investors need to be cognizant of this.

    The hottest sector of CRE is apartments and cap rates have been compressed to nose bleed 4%-6% levels which is like buying Yahoo at $240/sh. in 2000 at the height of the dot com boom. If you buy or build apartments at these low cap rates and rates increase in the next few years, which is highly likely, you will be selling at a lot higher cap rate than you bought and that is one way to realize single digit returns on the equity or loose money.

    The same thing happened from 2004-2007 when many a firm bought apartments in the boom period only to sell at a loss or get foreclosed in 2009-2012.

    I like AEC as a company, but buying it at a $17 price or a 5% cap rate is too risky.
    Mar 21 11:42 AM | Likes Like |Link to Comment
  • American Realty Capital Properties Is The Newly Minted, Must Own, Blue-Chip Lease REIT [View article]
    ARCP and Schorsch remind me of Tyco and Dennis Koslowski. ARCP is on an aggressive Fed fueled low cost debt acquisition binge of more than $18B in assets during the last 15 mos. There's nothing wrong with an acquistion strategy to grow a company, however, something doesn't smell right as ARCP is just a simple net lease operation that is really a bond spread business by buying net lease deals at cap rates greater than the cost of debt capital. I always get nervous when a company is constantly buying/selling assets and with the latest spin-off of their shopping center business, I wonder if all this M&A activity is being done to mask the overpayment of net lease deals (most of the companies ARCP bought were around 6.5% cap rates when net lease deals are pricing at 7%-9% cap rates), potentially higher interest rates and operational issues. I do not own the stock, but would be very careful of buying it.
    Mar 20 08:35 PM | Likes Like |Link to Comment
  • REIT Focus: Associated Estates Realty Corporation [View article]
    My NOI includes adjusted G&A expenses of $17M and these costs have to be included when determining the value of this or any REIT. G&A expenses include personnel costs, office, overhead and other expenses. These costs are critical in operating a REIT and must be included in operating expenses.

    You are correct that the development deals are not valued except the book value of $9M because the developments are not yet complete. The problem with these new developments is the returns on cost are low at 5%-6.2% and development deals add new risks to the AEC including construction, refinancing and lease up risks.
    Mar 20 12:19 PM | Likes Like |Link to Comment
  • REIT Focus: Associated Estates Realty Corporation [View article]
    The article was written for our clients and to calculate the NAV of AEC. Our recommendation is that its a well run REIT with a good portfolio but too expensive to buy the stock at this time. HME is a better apartment REIT to buy.
    Mar 19 10:51 AM | Likes Like |Link to Comment
  • REIT Focus: Cedar Realty Trust, Inc. [View article]
    Our common share count of 68.8M shares is from the 9/30/13 balance sheet, 72.3M common shares outstanding less treasury stock of 3.5M shares or 68.8M shares. The three year old management team may be executing a turnaround, however, the company is still overpriced and has a poor investment and growth strategy and there are better retail REIT alternatives to invest.
    Jan 20 11:49 AM | Likes Like |Link to Comment
  • REIT Focus: Home Properties, Inc. [View article]
    All REITs have been under pressure from rising interests rates as the 10 yr t-bond went from 1.6% in May to a current rate of 2.8%. Also, many of the apartment REITs were overvalued at 5%-6% cap rates in the summer driven primarily by momentum investors. The July stock issuance was used to pay down debt and HME generates plenty of cash flow to cover the dividend and capital expenditures.
    Nov 22 12:22 PM | 1 Like Like |Link to Comment
  • REIT Focus: Home Properties, Inc. [View article]
    I would agree and the management team is one of the best in the business and why I like the stock.
    Nov 20 12:33 PM | Likes Like |Link to Comment
  • REIT Focus: Mack-Cali Realty Corporation [View article]
    The Q3 earnings and cash flow were basically in line with estimates but nothing robust. I believe this is a very undervalued REIT on an asset basis and once the job market improves and the company begins reorganizing their portfolio, the dividend and market value will increase.
    Oct 29 04:51 PM | Likes Like |Link to Comment
  • REIT Focus: Mack-Cali Realty Corporation [View article]
    Yes, they are buying apartment assets, but its a small investment in a $5B portfolio. The office market is continuing to improve with the economy which will help their occupancy and cash flow and management needs to prune the office portfolio of small and underperforming assets which will lead to higher stock price. I think the REIT is very cheap at a $21 price with a 5.4% yield.
    Oct 17 12:25 PM | 1 Like Like |Link to Comment
  • REIT Focus: Highwoods Properties [View article]
    I like the REIT and would be a buyer if the price backs up to around $30 or $31/sh. Let's see what happens today and in the next week or two with the Fed's tapering and interest rates.
    Sep 18 12:25 PM | Likes Like |Link to Comment
  • REIT Focus: Highwoods Properties [View article]
    Thanks for the comments, but I think a cap rate of 7.25% is too low due to the majority of their portfolio being office which is not performing well because of tepid job growth. Also, they are not buying any asset at a cap rate of less than 7.75% unless its a value-added deal or has below market leases rolling over.
    Sep 17 12:38 PM | Likes Like |Link to Comment
  • REIT Focus: Inland Real Estate Corporation [View article]
    Could be, but that's just the ebb/flow of the market. I would buy it all day long at $10 and collect my 5.4% dividend yield.
    Aug 20 11:55 AM | Likes Like |Link to Comment
  • REIT Focus: Inland Real Estate Corporation [View article]
    I also grew up in the northern Chicago suburbs and know Jewel and Sunset Foods very well. I think the dividend will be increased once they sell out of some of the joint ventures or the grow their asset base. It's a cheap stock at $10/sh. and you get a 5.4% yield while you wait for the growth.
    Aug 19 12:25 PM | Likes Like |Link to Comment
  • REIT Focus: UDR, Inc. [View article]
    Understand your comments, but disagree. Money is made in CRE when you buy not when you sell. Buying at low cap rates and holding long term for a bond like return makes no sense because of the risks in CRE discussed preciously. If that's a strategy, then the investor is better off buying corporate bonds at a similar yield without the risks.
    Jul 30 12:08 PM | Likes Like |Link to Comment
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