Seeking Alpha

Michael Stubben

 
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  • Hotel REITs: Time To Check In [View article]
    The purpose of this article is to highlight the current hotel property and capital markets, which are critical factors impacting the returns on both listed and non-listed REITs. Particularly with non-listed REITs that have an extended capital raise, market timing is one of the keys to long-term performance.

    With regards to the Apple REITs, Apple has a proven track record in limited service hotel investments. No commercial real estate investor was immune to the 2007 commercial real estate pricing bubble or the subsequent recessionary phase in commercial real estate property markets. Apple has 4 closed non-listed REITs (non-listed REITs that have completed their fund-raising) that they currently manage. Apple 6 & 7 are performing very well (covering their dividends, minimal balance sheet risk), Apple 9 is struggling to cover their current dividend (however operations are improving), and Apple 8 reduced its dividend from 7% to 5%. Apple 8 now covers its dividend from FFO. Our research highlighted the need for this dividend reduction a year in advance of the reduction. And, Apple has taken several prior REITs full-cycle (through a liquidity event) at strong returns for their investors. The aggregrate returns on all of Apple's REITs would compare favorably with any other non-listed REIT sponsor, but market timing - which I highlight above as critical to understand - has hurt two of their closed REITs.

    As far as leverage, Apple has some of the most conservatively leveraged non-listed REITs. Their leverage ratios range from 7% to 22%, much below the non-listed REIT average of 43%. Much of their debt is assumed on the acquisition of its hotels.

    And, I'm aware of the FINRA complaints against David Lerner about their sales practices, but the complaints have not been through a final settlement. Per FINRA, the issuance of a disciplinary complaint represents the initiation of a formal proceeding by FINRA in which findings as to the allegations in the complaint have not been made, and does not represent a decision as to any of the allegations contained in the complaint.

    But, to reiterate the point of my article, the hotel capital and property markets point to growth in the hotel sector. Investors in REITs, whether listed or nonlisted, should be aware of the underlying market fundamentals in making their investment decisions. Given the market fundamentals, the hotel REITs above can provide a good yield with near-term growth for a suitable investor.
    Feb 29 06:29 PM | 1 Like Like |Link to Comment
  • Hotel REITs: Time To Check In [View article]
    You bring up a good point - as rising fuel prices can potentially impact hotel demand and operating costs. This bigger concern would be hotel demand, as a significant rise in fuel prices could weaken both leisure and business travel. However, we typically see a summer rise in fuel prices, which Smith Travel factors into their forecasts. If we do see a more significant fuel rise, we could see occupancies impacted; however, occupancies would be expected to still grow but at a much more moderate rate due to the hotel property market recovery and the current economic recovery.
    Feb 29 06:40 PM | Likes Like |Link to Comment
  • Understanding Balance Sheet Risk In REITs [View article]
    O has the most conservative leverage of the publicly-traded REITs listed above. A key to strong returns with publicly-traded REITs is solid revenue growth. An exposure to short-term or variable rate debt risk could have a negative impact to a REIT's revenue growth. So, given the many attractive options among publicly-traded REITs, I would focus on those REITs that have minimized their financing risk with conservative, long-term financing. O has done this effectively by predominately using long-term unsecured debt to finance its assets.
    Nov 29 12:14 PM | Likes Like |Link to Comment
  • Cap Rate Spread: Leading Indicator For Non-Listed REIT Performance [View article]
    Brad,

    For 2Q11, ARC had a 8.08% implied cap rate and 5.35% average interest rate, which results in a 2.73% cap rate spread. Their cap rate spread is consistent with the five non-listed REITs in the article. I didn't include them in this article, as ARC has closed to new investors.

    You bring up a great point that underscores the importance of understanding balance sheet risk. A REIT can inflate the implied cap rate or interest rate by taking on additional risk. On the investment side, a REIT could get shorter lease terms or weaker credit to boost their implied cap rate. And, on the financing side, a REIT could utilize short-term debt to lower their interest rates. All of these strategies result in greater risk.

    In our research, we highlight balance sheet risk to provide potential investors with a greater understanding of the degree of risk in the REIT. And, the five REITs that I highlighted have low balance sheet risk.

    Mike
    Nov 13 01:46 PM | Likes Like |Link to Comment
  • Non-Listed REITs Provide A Diversity Of Investment Opportunities [View article]
    NREITs provide limited liquidity, and this factor should be considered in deciding whether nREITs are an appropriate investment for a portfolio. NREITs will have liquidity provisions that are capped at 3% or 5% of total shares per year, and nREITs have the right to remove these liquidity provisions, as has occurred with several nREITs that are closed to new investors.

    NREITs continue to be a growing investment option, as not everyone believes that owning traded stock in a real estate company is the best and only way to diversify into commercial real estate.

    With nREITs, as with any investment, an investor should understand the investment - including the fee structure, risks, and expected return - and determine its appropriateness. The same applies to publicly-traded REITs.
    Oct 31 05:32 PM | Likes Like |Link to Comment
  • Non-Listed REITs Provide A Diversity Of Investment Opportunities [View article]
    NREITs aren't traded on Pink Sheets. NREITs are distributed through independent broker-dealers, and nREITs are also required to make regularly filings with the SEC, just like publicly-traded REITs.

    Investors can also acquire shares in nREITs through the secondary market. Companies like Central Trade & Transfer facilitate secondary market transactions for nREIT shares.
    Oct 31 05:17 PM | Likes Like |Link to Comment
  • Non-Listed REITs Provide A Diversity Of Investment Opportunities [View article]
    NREIT shares are considered stocks that are not traded on a public exchange. As a result, nREITs have limited liquidity and investors should consider the limited liquidity of these investments in determining their suitability.

    As far as nREITs vs. publicly-traded REITs, investors should not make an either-or decision. nREITs and publicly-traded REITs are different types of investments with their own unique risk profiles. While most analysts would point to limited liquidity and high costs as risks with nREITs, publicly-traded REITs are subject to stock market volatility and uncertainty regarding true underlying asset values.

    Both nREITs and publicly-traded REITs invest in commercial real estate, which is an under-invested asset class by most investors. Commercial real estate can provide yield and add diversity to a investment porfolio. With either REIT structure, investors should understand the commercial real estate property cycle and the REIT's investment strategy. Neither REIT structure is perfect but the associated risks should be understood by the investor prior to investment.
    Oct 30 04:17 PM | Likes Like |Link to Comment
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