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WK Gore

WK Gore
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  • We're Just At The Tip Of The Iceberg, Triple Net REITs Will Soon Be A Glacier Sector [View article]
    Agree ... one key challenge for the now-public NNN REITs is that investment grade credits and the bond market generally remain "overheated," with the inevitable material rise in rates yet to materialize . Hence, NNN investors are faced with buying lesser quality assets at relatively low yields with the virtual certainty that yield requirements will increase over time. As a result, expect more moves like ARCP's purchase of the non-credit fast food TrustStreet portfolio from GE Capital. Achieving the higher cap rates required to cover dividends implies acceptance of weaker credits, shorter lease terms, and lesser real estate quality/greater residual risks. Bluntly, the only "value creation" for the NNN REITs for some time has been increasing scale and declining cap rates due in large part to sovereign (Federal Reserve) intervention in debt capital markets. Dangerous to keep making a bet on those factors.

    The need to increase scale to find more cash flow in the face of declining fee income (i.e. less incidence of the insane fees associated with non-listed REIT fundraising activity) implies certain NNN REIT management teams generally may continue to favor aggressive moves for the sake of "scaling up" in lieu of long-term careful consideration of residual risk and lease-level value creation. Unclear what latest IAS/FAS Lease Accounting proposal will do to add to the uncertainty.
    Jun 3 11:43 AM | Likes Like |Link to Comment
  • We're Just At The Tip Of The Iceberg, Triple Net REITs Will Soon Be A Glacier Sector [View article]
    It is an error to compare NNN REITs to the overall equity REIT sector, inasmuch as NNN REITs are truly "bond funds" in disguise, albeit with greater risk (consider the fact that residual real estate values actually may decline if leases are not renewed). Hence, no surprise that the NNN sector has skyrocketed in the midst of a bond market boom, and will get crushed when (not if) UST yields rise closer to trailing 10-20 year averages. Outside of O, it seems that none of the current NNN REIT management teams have any experience in managing NNN assets through an adverse rate adjustment cycle, and none have any true "real estate" experience required to manage re-tenanting and repositioning of assets (like O, WPC does have legacy experience which deserves positive attention).

    Investing in a company which is a product of the post-financial crisis global hunt for yield (against a backdrop of record drops in UST yields), led by a team which effectively "folded" its prior effort in the face of that same financial crisis, and features a weighted average remaining lease term under 10 years, poses material basis and yield risk to the investor, and merits far more caution than the non-listed investors (who are now public equity holders) have exhibited to date. Too many investors are confusing dividend yield with overall yield, and have been buying (or were "sold") the dividend. As to the acquisition target - note that holding LSE from IPO to date has been a disaster vs. most (possibly all?) equity and bond indices, with a NEGATIVE 4.3% annualized return, or 0% annualized even assuming full reinvestment of all dividends (source = Bloomberg); hence, LSE management HAD to sell given its declining base lease term and asset profile, and should be scrutinized closely for being "lapped" by ARCT, ARCP, Cole, etc. even though LSE was "first to market" by many years. What makes anyone think "this time it's different" ?!

    O, WPC and STAG deserve some attention, but not more than MLPs (particularly midstream).
    May 30 02:07 PM | 2 Likes Like |Link to Comment
  • Gramercy Capital: A Former Mortgage Meltdown REIT Begins To Fire Up The Net [View article]
    This may be a case where you don't have certain data available to you which would suggest some of your conclusions might be different if you had the same information. Putting aside too much detail, can only suggest one focus on the flaws in the underlying leases which the original AFR team executed (many arguably were not "high quality assets"), and the CMBS transaction(s) used to finance those assets which that same team also executed, at least one of which "failed" its debt service coverage covenant and deprived AFR of some material cash flow as the major bank tenants started exercising their space give back rights well before AFR was sold. The concept and the tactics applied by the original management team at AFR appear to have been deeply flawed. Hence, as noted, that ship was already sinking; that GKK may have changed the leverage may indeed have made a bad situation worse, although at least some of the "new" leverage applied by GKK may well have been nothing more than restructuring debt already in place at AFR, in an effort to try to increase cash flow and prevent the defaults which ultimately occurred, anyway.

    Obviously not relevant to the potentially great story you note is unfolding at GKK, but arguably relevant to a different perspective or debate as to the qualifications of certain net lease REIT management teams and the net lease industry as a whole. Put differently, there are a number of industry observers and participants (myself included) who would consider GKK's current management to be better stewards for maximizing shareholder value than the management teams in place at certain competitors.

    Think you need to write a piece on net lease REIT equity IRRs from IPO to current date or sale date, vs. REIT indexed returns, S&P 500, and corporate and government bond returns!
    Dec 9 10:25 AM | 1 Like Like |Link to Comment
  • Gramercy Capital: A Former Mortgage Meltdown REIT Begins To Fire Up The Net [View article]
    Brad - great writing as usual, I am a big fan of Gordon DuGan and his team, and think the recent acquisitions are smart plays ... But must also note you appear to have missed 3 key points (many of which can be buttressed by looking at old AFR SEC filings, as well as some Trepp reports) and seem to have portrayed GKK as the entity which infected AFR, when the reality may have been the exact opposite -

    (1) the American Financial Realty (AFR) portfolio was a well leveraged (some might claim "mess") BEFORE its acquisition by Gramercy (http://bit.ly/RhecUg), as it featured several large master leases with BofA and Wachovia (now Wells) which had extensive and poorly conceived early termination rights which those institutions exercised in the midst of the financial crisis (and even before), and assets financed with a heavy dose of CMBS and other debt instruments which began to consume a material portion of cash flow, the result of which was that its share price had started to collapse before its sale to GKK, senior mgmt was changed before the sale, and AFR eventually was acquired by GKK at a meaningful discount to AFR's IPO price (in effect, GKK thought it was getting those assets on the cheap to diversify away from a loan-dependent strategy, and could fix an already sinking ship by acquiring another sinking ship, which proved impossible given the financial crisis to come);

    (2) much (not sure if all) of the AFR entity acquired by GKK went through a default and deed-in-lieu process with its lenders, with GKK retaining certain management rights and fees; and

    (3) the "core portfolio" acquired from KBS is the "good" remnant of the AFR portfolio which GKK had originally acquired, since KBS ultimately ended up with those remnants through the default process and subsequent loan and asset sale efforts (our firm has seen other "not so good" remnants offered for sale at times over the past few years - for example, want an empty multi-story former bank operations center in downtown Baltimore?!).

    Hence, smart play by smart management now in place at GKK to get a "round trip" on what is presumably the best part of what it had originally owned, and at presumably a much lower basis! No point extensively debating what happened with a dead company (http://bit.ly/VpPFbh), but is worthwhile to note that the "good part" of the old AFR portfolio has been written down and now effectively repurchased by GKK via a JV.
    Dec 8 08:56 AM | 2 Likes Like |Link to Comment
  • Spirit Spooks Me: No Trick, No Treat, Just A Risky REIT [View article]
    One has to wonder whether the recent spate of REIT IPOs – particularly in the Net Lease Sector – signals a “top tick” in investors’ never-ending quest for yield, to the detriment of a focus on value, residual risk, and overall safety. Somehow everyone forgot the mantra that returns are supposed to be risk-adjusted! Witness the Spirit offering, in which over 40% of the asset base consists of a small town grocery stores net leased to a private equity-backed entity, movie theaters net leased to a chain focused almost exclusively on small and mid-sized communities, and specialty lumber yards net leased to a company whose primary business depends on homebuilders. While those tenants may prove to be well-run entities (note that Carmike reported a record 2nd quarter this year, but still generated relatively low net income) or backed by savvy owners with strong resources (Sun Capital in the case of Shopko, and a Forbes 400 member in the case of 84 Lumber), in each case, the underlying assets would have very low residual value or appeal to other users in the event of non-renewals or credit defaults.
    Sep 20 08:05 PM | Likes Like |Link to Comment
  • A REIT That Could Yield 30% [View article]
    O's acquisition of ARCT proves again that "Tortoise beats Hare" ... and that falling cap rates can mask a lot of issues. Question now is if O price (>$43) and dividend yield (<4.5%) as of this writing reflect fair value. Great company, but unsure if a great stock investment at these levels. As Brad consistently notes, it's all about sustained dividend increases.
    Sep 7 12:21 PM | Likes Like |Link to Comment
  • Attention Dividend Shoppers: O What A Great Bargain For This Triple-Net REIT [View article]
    As noted repeatedly, ARCT management is a professional sponsor, not an operator (as Brad notes as well). Like any good sponsor, once the "fee well" runs dry, it's time to sell the well and dig another one (ARCP in their case). Does not make ARCT management "wrong"; just important to never forget their objective.

    Were I Cole, I would have tried to buy ARCT to reverse merge Cole Credit Property Trust II into that platform, effectively "going public" instantly. The FINRA "drumbeat" to push down (if not out) legacy non-listed REIT practices is not likely to abate, at the same time cap rates may be nearing a bottom.

    One key item not discussed in detail - note that O paid down $574 million of ARCT line/bank debt as part of the acquisition (important for O to maintain low leverage profile in any event). Further note that ARCT may have been paying out dividends in excess of available cash flow (CAD) and possibly FFO/AFFO, particularly during its time as a non-listed REIT. Thus, it appears that ARCT had been "borrowing dividends" using bank debt at times. Hence, is it possible that ARCT concluded that it HAD to sell to a larger player which could retire that debt, and get ARCT out of a situation which could not easily be resolved absent a sale of assets and/or the entire enterprise?

    Speculative, of course ... but any situation where Dividends>CAD, bank debt is growing or stagnant (not being paid down), assets are being added at falling cap rates and shorter base lease terms, and residual debt/interest rate exposures are growing, would lead any REIT entity to conclude a outright sale would be wise.

    I have never and do not own O (yet), but appreciate the efforts its management has undertaken to positively transform what was already a stable enterprise. In this case, it reinforces the concept that "Hare Beats Tortoise". The question worth pondering is if the O-ARCT deal means that other net lease REIT consider similar transactions since "size may matter".
    Sep 7 11:58 AM | 3 Likes Like |Link to Comment
  • A REIT That Could Yield 30% [View article]
    One cannot assess whether real estate is "subprime" merely by the credit of the tenants. For any given credit, some of the leased asets are clearly " prime" while others are less so - would one rather acquire a 12 year net leased asset to "BB" credit in NYC vs a 12 year net leased asset to a "A -" credit in western Montana (actually you still need more data to assess, including tenant's use of asset, contract vs market rents, ability of tenant to move elsewhere and not renew, etc.) ? By virtue of amassing net leased assets during a relatively short time frame featuring a near "feeding frenzy" by investors searching for yield without carefully considering residual risk, ARCT is more susceptible than O to accepting subprime real estate quality even if its tenants feature higher credit ratings.

    All of these discussions fall short of any consideration of residual real estate risk and value, inasmuch as that data is hard if not impossible to cull out of net lease REIT earnings releases and reports. Hence, I would argue that whether ARCT will prove to be a better or worse long term investment than O is impossible to ascertain as the tendency of these entities of late has been to accept shorter base lease terms, lower cap rates, rely on leverage featuring long amortization terms in excess of remaining base lease terms, etc., all of which may prove to make underlying real estate considerations far more critical to an investment analysis than a discussion of tenant credit rating, AFFO and payout ratios.
    Sep 2 12:21 PM | Likes Like |Link to Comment
  • A REIT That Could Yield 30% [View article]
    Another item missing from this debate - ARCT is a creation of a non-listed fund sponsor during a time of high fees, falling cap rates, and historically low interest rates. In any case where financing amortization terms exceed base lease terms, underlying real estate characteristics and not just tenant credit very much "matter". While the comparison of tenant creditworthiness is useful, arguably the residual risk posed by a bank branch leased to a "AA" rated institution acquired at a 6.25-6.5 cap rate at above market rental rates, and leveraged 50-60% on a low/no amortization basis, may often pose far greater residual and (therefore) long term yield risk to an investor than the office building leased to a "BB" credit acquired at an 7.5-8 cap rate at market or below market rental rates, and leveraged 30-40% on a 25 year amortization schedule. Not saying ARCT is filled solely with riskier underwriting outside of tenant credit rating than its peers, just noting that it may be a victim of "adverse selection" inasmuch as its entire portfolio has been amased during a time net lease assets have been a "hot sector" with rising prices and more aggressive underwriting the norm, all financed using low interest rates and amortization terms materially longer than base lease terms.

    For many parts of the net lease sector (perhaps all), capital is in much greater supply than pre-financial crisis, due both to the overall investor quest for yield and a dearth of alternative fixed income products. Non-listed REITs which compete with ARCT for investment product - including Cole, WP Carey, Inland, Wells and even ARCT affiliates - continue to raise significant cash in the face of a limited supply of viable net lease investment opportunities. Hence, cap rates may continue to be compressed, base lease terms will continue to shorten, and tenant credit quality may deteriorate. Note that payout ratios in some (many?) cases exceed 100% as some funds have effectively "borrowed the dividend" with repayment planned using future rent income increases. As noted previously, if (when) Treasury yields rise, residual risk will increase as leveraged net lease investors (by defintion, every net lease REIT mentioned on Seeking Alpha) are inherently not hedged against the mismatches among base lease term vs debt amortization term, and refinancing interest rate vs fixed base rent amounts.
    Aug 23 09:49 AM | 2 Likes Like |Link to Comment
  • A REIT That Could Yield 30% [View article]
    To add - the only downturn experienced by ARCT's management resulted in a virtual collapse of their original REIT - American Financial Realty (AFR) - which was sold to Gramercy Capital at a material discount to AFR's IPO price. Due in great part to this transaction, Gramercy flirted with bankruptcy, ultimately "lost" a significant portion of its net leased owned assets to its lenders, and changed its entire management team (ironically, Gramercy now merits a look as a speculative net lease play, given that its new CEO is Gordon DuGan, who served as CEO and was part of WP Carey senior management for many years).

    That noted, ARCT has a much more diversified investment strategy than AFR's sole focus on financial properties, which featured a heavy dose of bank branches and office space for which extensive "give back" rights were granted and later exercised by the likes of BofA and Wachovia (now Wells). Without question it appears that ARCT management has adapted quite well, presumably due in part to the lessons provided by AFR. Hence, following Brad's admonition and reinforcing the comments by Tortoise Investor, "only time will tell" with respect to ARCT.

    A very (very) troubling fact about virtually all of the net lease REITs (both listed and non-listed) is their propensity for leveraging 50%+/- with interest only or long amortization debt (e.g. amortization terms well in excess of base lease terms) in the face of historically low interest rates, and acceptance of relatively short (for the true net lease business) lease terms - begs the question of what happens if (when) rates rise, tenant renewals fall short of 100% and/or an economic downturn is prevalent on debt maturity dates. In our view, investors are "buying dividends" without considering residual risks and ultimate return of capital. Too often, investors confuse tenant renal options with landlord "put" options. That is not to say that bad outcomes are likely; rather, no meaningful analysis has been done on any of these portfolios to consider investor yields if rates rise 50-100 bps (or more), and/or tenant renewals fall short of expectations. Everyone looks good in a falling interest rate and cap rate environment!
    Aug 21 01:34 PM | 2 Likes Like |Link to Comment
  • ARCP: Take Some REIT Risk And Always Double-Down On A Soft 16 [View article]
    Perfect "anecdote" for describing ARCP's propensity for seeking higher risk, shorter term lease transactions i.e. not a true net lease REIT, but potentially an interesting risk play (as Brad has noted) ...

    AMERICAN REALTY BUYS FRENCH'S MUSTARD HEADQUARTERS
    CHESTER, N.J. — American Realty Capital Properties has closed on its purchase of the French's Mustard headquarters building in Chester for $10 million. The 32,000-square-foot building is fully leased to Reckitt Benckiser Group, the parent company of French's Mustard. The company has 5.7 years remaining on its leas
    Aug 20 01:35 PM | Likes Like |Link to Comment
  • American Realty Capital Trust: Knocking Down Another Quarter Of Free Throws With Nothing But Net [View article]
    ARCP is an opportunistic real estate play, with management which has (yet) to demonstrate an expertise in being opportunistic (should give them a chance; just important not to confuse ARCP with ARCT as Brad notes).

    ARCT is "barely" a net lease REIT in the classic sense, as its weighted avg. remaining lease term is closing in on 10 years. Like many of its net lease REIT peers (including the non-listed players), ARCT relies heavily on a 50% +/- leverage model to generate positive cash flow to support its dividend yield in an era of historically low interest rates, begging the question of what happens when rates rise, lease terms remain same (if they roll portfolio) or fall (if they do not roll). Arguably has significant residual value risk due to rate exposure alone, putting aside property/tenant quality and relatively short lease terms.Would be interesting to see an analysis of what would happen to their dividend yields and risk profiles if/when 10 year Treasury yields rise +100-200 bps from current levels, and the relationship between net lease cap rates and the 10 year Treasury yield (currently high) returns to its trailing 5, 10 or 20 year average.
    Aug 6 02:20 PM | 2 Likes Like |Link to Comment
  • In The Real Estate World, The Rearview Mirror Is Always Clearer Than The Windshield [View article]
    All good, as always!
    Jun 29 03:01 PM | Likes Like |Link to Comment
  • REITs That Build A Sound 'Margin Of Safety' With A Sustainable 'Hierarchy Of Needs' [View article]
    Clothing potentially will continue to be crushed by the internet. Shelter (multifamily) an overbought sector (just ask Sam Zell). Food arguably hedged (for now) from a real estate perspective. Hence, a great, well-reasoned approach to considering investment strategies (as usual for Brad!), and also applies to AMZN and the shares of any food/grocery concern. The threats of inevitable Treasury yield rise (perhaps 12-24 months out) and renewed economic downturn may indiscriminately hit all REIT share prices, however.
    May 7 12:12 PM | Likes Like |Link to Comment
  • American Realty Capital Trust: A Compelling Growth And Income Play [View article]
    Truly do agree with you fundamentally ... as noted, core issue is that NNN REITs have a "hidden cost" with respect to deferred capx, tenant improvement and leasing commission expenses likely to be incurred at the end of the base lease term, even if the initial tenant elects to renew. Hence, one should "mark down" the dividend yield to some degree. In the case of some of the legacy non-listed NNN REITs where early year dividends are "subsidized" via borrowings (i.e. where acquisition cap rates sometimes fail to cover dividend payouts, after taking into account incredibly high fee loads), this issue is fairly significant. An interesting article topic for you would be to compare NNN REITs on the basis of lavage (as you note, O is fairly low), dividend coverage ratio, weighted average remaining lease term, and weighted average credit rating. At their core, these are “bond funds” with both residual upside as well as residual risk.
    Apr 17 12:05 PM | Likes Like |Link to Comment
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