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Tal Davidson
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Tal Davidson, MBA I'm a research-driven individual investor. I’ve started investing in 2003 as a hobby, and since it has grown to be my passion. I have been studying the works of Ben Graham, Buffett, Howard Marks, Martin Whitman and many more thought leaders. I believe that the human mind is... More
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The Inspiration Fund
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  • ROIC Is A Superior Company, But Better Opportunities May Be Available

    My first 200 ROIC shares were bought in November 2010 at 9.77$, and I've been adding since, making it eventually a 10% position in my all-around value-oriented portfolio. My average purchase price is about 10.50$ vs. 15$ these days.

    ROIC's story is spectacular - stellar management, led by CEO Stuart Tanz (more on his track record here), coming together with a favorable macro trend - the emergence of the West Coast's retail properties from a multi-year recession.

    I've been wondering lately, roughly three years after I've started accumulating shares of ROIC, How well have my ROIC investment fare compared with other shopping center REITs? or in other words, was picking ROIC any better than a investing in a random basket of shopping center REITs?

    Instead of digging up data, I used the readily available NAREIT's REITWatch monthly reports, available from REIT.com. Since ROIC started reporting as a REIT only in 2011, I've selected the two year period from November '11 to November '13. With that data, I've made a simple back-of-the-envelope table, trying to figure out which factors correlate with shopping center REITs' stock appreciation. This is somewhat an anecdotal, non comprehensive analysis, and almost a sure way to mistake correlation for causality. The fact is, that even if two factors correlate, it does't mean that one is causing the other. Nevertheless, it provides some insights. Here's the data:

    "Relative Performance (%)" refers to the price appreciation (or depreciation), excluding dividend yields (%), relative to average the peer group, which is 28.4%. Dividend yields were excluded for simplicity (as yields range in a comparatively narrow range of 3%-5%). The start date is November 30th 2011, and the end date is November 30th 2013. The more greenish the figure, the better. Larger changes in annual FFO are greener, and so are larger decrease in debt levels.

    My first finding was that shopping center REITs' performance had varied significantly. The highest performing REITs returned 12%, 14%, 26% and even 40% above the average of 28.41%. Lowest performing REITs destroyed 12%,13%, 17% and even 54% of November '11's share prices. And how well did ROIC fair? Well, slightly about average, with almost a 30% price appreciation.

    The interesting question to answer is thus, should I stick with REIT or switch to other trusts with better prospects (given that I'm determined to have a shopping center REIT in my portfolio, which is not necessarily the case)?

    To attempt answering, I then aimed to find which factors correlate with price performance. I ran a series of correlation studies using the data-analysis add-in of Microsoft's Excel software. It may not be a surprise to my readers that the P/FFO ratio at the start date, and the change in FFO since, had the highest correlation with returns. Considering these two factors only, I received the following results:

    Price Change (%) = 0.48 + 0.004 x [change in FFO(%)] - 0.034 x [P/FFO Nov'11]

    Statistical significance is satisfactory to this kind of analysis, with R-squared = 0.6.

    If past behavior is indicative of the future (which is highly arguable), what are the prospects for ROIC? Let's look at valuation multiples today (as of November 30th '13):

    ROIC's multiple of 17.8 is about average. Its FFO growth of 18.6% in two years is above the average of 13.6% but not in the high range of its peer group. It is reasonable to believe that as ROIC is growing and maturing, it's FFO growth will not accelerate. Based on these anecdotal factors alone, ROIC's future performance may be average or a little above that. In contrast, a few lower valuation options exist, such as Inland Real Estate Corporation (NYSE:IRC) at P/FFO of 11.5, Kite Realty Group Trust (NYSE:KRG) at 13.6, Ramco Gershenson Properties Trust (NYSE:RPT) at 13.9 and Excel Trust, Inc. (NYSE:EXL) at 13.7. The former three grew FFO nicely over the last two years. If such growth persists, or even deteriorates a bit, they may be the top performers in the next two years.

    For an investment to be considered an investment, and not merely a speculation, so our master postulated in his 1934 classic, it must be based on thorough analysis. I see the exercise described above as a starting point for a more thorough analysis of the individual companies. Note that this exercise is simplistic, and does not factor in key aspects, such as: debt position and creditworthiness; leases portfolios and their expiration dates; opportunities to develop the asset base; warrants and their dilutive potential (ROIC still have many of those); and many other.

    My TODO list grows as I'm adding the following tasks:

    • Research IRC, KRG and RPT individually

    • compare to ROIC and consider a switch.

    Disclosure: I am long ROIC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

    Additional disclosure: I'm considering selling part or all my position.

    Tags: EXL, IRC, KRG, RPT, ROIC, reits
    Dec 31 7:24 AM | Link | Comment!
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