It's included in my analysis. I calculate a projected one year NOI and cap that at 7.5%. That is the enterprise value and from that the debt is subracted to arrive at the equity value and value per share.
I've been in commercial real estate for more than 25 years and have completed more than $2 billion in deals, so I know CRE very well including apt. values and cap rates.
Most of the street analysts are not from the CRE industry and frankly don't have experience in the industry and apply a multiple of FFO, which is currently 16 to 19 times, to determine NAV. Ten years ago these same analysts valued REITs at 12 times FFO.
REIT Focus: Piedmont Office Realty Trust, Inc. [View article]
Every office building owner says they own Class A properties to boast and make their portfolio look better. Class A office buildings are the top two or three buildings in a market, that have the highest rents, best locations and top notch tenants. Of the six properties in Chicago, two are downtown, with only the AON building considered Class A and four are in the suburbs and Class B. The LA portfolio is comprised of four Class B buildings in the suburbs.
REIT Focus: Piedmont Office Realty Trust, Inc. [View article]
Yes, they have some weaknesses but those are already reflected in the dividend and stock price and with a 4.5% yield, I see only upside on the stock. The management has not been proactive but I believe it will get its act together and try and grow the company. Most of the larger and better managed office REITs are trading at 5% cap rates with 3% yields.
REIT Focus: Realty Income Corporation [View article]
Yes, and even though I'm a CPA, I don't pay much attention to GAAP when it comes to real estate deals. I look at the cash flow, tenancy, strategy, NOI, purchase price, leases, etc. to value a transaction.
REIT Focus: Realty Income Corporation [View article]
I understand what you are saying but don't agree. When buying real estate or a company, there are two transactions, one is what is the price of the asset and in ARCT they agreed on a price of $12sh. and a conversion ratio of .2874 and the second is how do you pay for the transaction. I this case its a tax free merger and they are using their stock. Even if the stock was trading at $20sh. the only thing that would change would be the conversion ratio, but the dollar value of the stock exchanged would be the same.
Even though O's stock is overvalued, it is still buying a portfolio of net leases for $2.8B that only generate $165M in NOI. This will over time be dillutive to the stock and negative to its cash flow.
REIT Focus: Realty Income Corporation [View article]
The methodology for my NAV of $20sh. is shown in my analysis and being a real estate guy, I use a cap rate analysis to value the company.
The equity value of the ARCT acquisition at an exchange rate of .2874 shares and the current O price of $38sh. is approx. $1.8B plus debt of approx. $1B equals a total price or enterprise value of $2.8B. The projected NOI of ARCT one year out is approx. $165M and therefore the cap rate is 5.9%.
REIT Focus: Realty Income Corporation [View article]
My intrinsic value for O is $20/sh. per my analysis and more than 25 year career in CRE finance and investment. However, I would be a buyer of the stock if it pulled back into the twenties.
The quest for yield in a zero interest rate environment has pushed up the price of many REITs and O is no different. There is no magic in the net lease business. It's basically a yield arbitrage or spread game-that is, buying at 7.5% cap rates and financing a 5%. The majority of their tenant base are noninvestment grade and therefore those assets should be selling at an average cap rate of at least 7.5%.
The net lease business as we say in the biz, "has no ups", meaning that the leases are fairly flat and investors require a high up front cap rate to make up for the low rental growth rate.
I also think O's growth has plateaued, as it is difficult to move the return needle buying $10M net lease deals on a $5B asset base. This is why I think they are buying ARCT, even though at a 6% return, it is also way overpriced.
A favorite metric of the Wall Street analysts is the FFO multiple and with a projected 1 yr. FFO of $260M that equates to FFO multiple of 19x, way above the long term average of about 13x.
If you are buying the stock for the 4.8% yield, that's fine, but you are subject to capital loss risk as either their growth slows, market revalues the assets or interest rates begin to rise.
In general most REIT stocks are overpriced, however, I do like Apartment Investment & Management Co. (AIV) which is trading at about $26. I think a better play is to buy a REIT ETF like Vanguard (VNQ) or Dow Jones (RWR) where you can buy a diversified portfolio of REIT stocks.
Do Realty Income Shares Warrant A Valuation Premium Due To Exceptional Risk Management? [View article]
No, it should warrant a discount because the acquisition of ARCT is way overpriced. They're paying a 6% cap rate for Class B net lease assets that should trade at a 7.5% to 8.5% cap rate.
Cap rates have been compressed as they were back in 2007 and we know what happened to a lot of those deals. There is tremendous demand for core properties in core markets like Manhattan and cap rates are being pushed downd to the 4% area. To me, these low cap rates make no sense and the investor is not being compensated for the high risks in CRE. If have written often on the risk adjusted return in CRE and feel free to see the articles on my web site at Paramount Capital Corporation.
You are correct in that a number of core class A properties are trading for $500 or $600+ per sq. ft. but my comment was on class A&B properties in the $275 to $400 range. The last few comps are 14 Wall St. at $294 psf and 33 Maden Lane at $332 psf.
My CRE experience has been on the acquistion/finance/inv... banking side and I have completed more than $2 billion in deals. Again, feel free to contact me through my web site and I will forward the rest of my View of the Market newsletter.
My comments are as follows: 1. I've been in CRE for 30 years and believe cap rate valuation is the best metric. I also use the IRR on equity, but the cap rate is the most reliable. 2. The $375 sq. ft. is the gross real estate assets divided by the square footage. I mispoke in my earlier comment. 3. Adding up the debt and equity to calculate enterprise value doesn't work for a REIT because the assets have leases that generate cash flow. This is why its better to value the assets first using a cap rate or discounted CF methodology and then subtract the debt, PS and cash. Additionally, the market has pushed up the value of almost all REITs to unsustainable levels because of the thirst for yield. 4. Most nondistressed Class A&B office buildings in Manhattan are trading for $275 to $400 per sq. ft. 5. I would rather by a REIT fund or ETF like Vanquard or Ishares than individual REITs. One REIT I think is undervalued is Apartment Investment and Management Company.
The $375 sq. ft. is the revenue divided by the square footage owned, excluding the development and ancillary CRE. Its just an estimate based on the 10Q,
Enterprise value doesn't mean much for a REIT as valuation should be based on the NOI and cap rate.
They are leveraged more than most other office REITs if you compare the debt of $6.1B to the market cap of $7.3B or 83%.
SLG is a well managed REIT, but I would not recomment the stock due to the skimpy dividend, high debt level and asset concentration in Manhattan.
REIT Focus: Camden Property Trust [View article]
I've been in commercial real estate for more than 25 years and have completed more than $2 billion in deals, so I know CRE very well including apt. values and cap rates.
Most of the street analysts are not from the CRE industry and frankly don't have experience in the industry and apply a multiple of FFO, which is currently 16 to 19 times, to determine NAV. Ten years ago these same analysts valued REITs at 12 times FFO.
REIT Focus: Piedmont Office Realty Trust, Inc. [View article]
REIT Focus: Piedmont Office Realty Trust, Inc. [View article]
REIT Focus: Piedmont Office Realty Trust, Inc. [View article]
REIT Focus: Realty Income Corporation [View article]
REIT Focus: Realty Income Corporation [View article]
Even though O's stock is overvalued, it is still buying a portfolio of net leases for $2.8B that only generate $165M in NOI. This will over time be dillutive to the stock and negative to its cash flow.
REIT Focus: Realty Income Corporation [View article]
The equity value of the ARCT acquisition at an exchange rate of .2874 shares and the current O price of $38sh. is approx. $1.8B plus debt of approx. $1B equals a total price or enterprise value of $2.8B. The projected NOI of ARCT one year out is approx. $165M and therefore the cap rate is 5.9%.
REIT Focus: Realty Income Corporation [View article]
The quest for yield in a zero interest rate environment has pushed up the price of many REITs and O is no different. There is no magic in the net lease business. It's basically a yield arbitrage or spread game-that is, buying at 7.5% cap rates and financing a 5%. The majority of their tenant base are noninvestment grade and therefore those assets should be selling at an average cap rate of at least 7.5%.
The net lease business as we say in the biz, "has no ups", meaning that the leases are fairly flat and investors require a high up front cap rate to make up for the low rental growth rate.
I also think O's growth has plateaued, as it is difficult to move the return needle buying $10M net lease deals on a $5B asset base. This is why I think they are buying ARCT, even though at a 6% return, it is also way overpriced.
A favorite metric of the Wall Street analysts is the FFO multiple and with a projected 1 yr. FFO of $260M that equates to FFO multiple of 19x, way above the long term average of about 13x.
If you are buying the stock for the 4.8% yield, that's fine, but you are subject to capital loss risk as either their growth slows, market revalues the assets or interest rates begin to rise.
REIT Focus: Kimco Realty Corporation [View article]
Do Realty Income Shares Warrant A Valuation Premium Due To Exceptional Risk Management? [View article]
REIT Focus: Kimco Realty Corporation [View article]
I guarantee you that KIM is not buying food/drug and power centers at less than 8% cap rates.
Centers owned by KIM on ground leases should have higher cap rates in the 9%+ area due to the risk of not owning the land and the ground rent.
I agree, the div of 3.7% is attractive in today's market but you wouldn't buy a portfolio with that yield at a 6.5% cap rate.
REIT Focus: SL Green Realty Corp. [View article]
You are correct in that a number of core class A properties are trading for $500 or $600+ per sq. ft. but my comment was on class A&B properties in the $275 to $400 range. The last few comps are 14 Wall St. at $294 psf and 33 Maden Lane at $332 psf.
My CRE experience has been on the acquistion/finance/inv... banking side and I have completed more than $2 billion in deals. Again, feel free to contact me through my web site and I will forward the rest of my View of the Market newsletter.
REIT Focus: SL Green Realty Corp. [View article]
1. I've been in CRE for 30 years and believe cap rate valuation is the best metric. I also use the IRR on equity, but the cap rate is the most reliable.
2. The $375 sq. ft. is the gross real estate assets divided by the square footage. I mispoke in my earlier comment.
3. Adding up the debt and equity to calculate enterprise value doesn't work for a REIT because the assets have leases that generate cash flow. This is why its better to value the assets first using a cap rate or discounted CF methodology and then subtract the debt, PS and cash. Additionally, the market has pushed up the value of almost all REITs to unsustainable levels because of the thirst for yield.
4. Most nondistressed Class A&B office buildings in Manhattan are trading for $275 to $400 per sq. ft.
5. I would rather by a REIT fund or ETF like Vanquard or Ishares than individual REITs. One REIT I think is undervalued is Apartment Investment and Management Company.
REIT Focus: SL Green Realty Corp. [View article]
Enterprise value doesn't mean much for a REIT as valuation should be based on the NOI and cap rate.
They are leveraged more than most other office REITs if you compare the debt of $6.1B to the market cap of $7.3B or 83%.
SLG is a well managed REIT, but I would not recomment the stock due to the skimpy dividend, high debt level and asset concentration in Manhattan.
REIT Focus: The Macerich Company [View article]