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Comments (19)

hpestes profile picture
Thanks for this article, @Jussi Askola.

What numbers are used to calculate a % capex for a particular property, say a mall or an apartment building? Are these numbers readily available?
Jussi Askola, CFA profile picture
Yes, you can get the numbers directly from earnings reports.
Thanks for the Interesting perspective.
ajspjs60 profile picture
Do tell the names of the new reits.
You mention that UMH is low CAPEX but the 7300 rental units would actually be in the middle to high CAPEX category in your write up. This is 30 percent of the 23000 lots. For the 25 percent of land that is undeveloped, it cannot become useful until they spend the CAPEX to add roads, utilities, and building pads. Then once they do that it takes years to fill the spaces unless you put more high CAPEX rental units on the spaces. UMH should be considered a middle CAPEX company.
Jussi Askola, CFA profile picture
Yes, so they have high capex on 7,300 of the 23,000 developed lots. Overall this is a minor part of the portfolio. Then they also have a lot of undeveloped land which has no maintenance capex.
You keep on saying it is a small part of UMH but look at the math behind it. For the first nine months of 2019 they spent $37000 per acquired site and $39000 for each rental unit. So rental units basically require double the investment as a site alone. Then they only rent the units for an average of $760 while a site rent averages $440. Rentals have lower return percentages. So now you have this high CAPEX getting you lower returns than the sites per dollar invested. When you look at how they fill some of their parks, it is almost totally with rental units. But the 7300 sites plus the rental unit sitting on it have about the same invested capital as the 15700 sites without rental units. So rental units taking fifty percent of invested capital is not small.
Jussi Askola, CFA profile picture
Growth capex is not the same as maintenance capex.

We are talking about maintenance capex in this article.

Yes, those properties have high capex, but they represent less than 1/4 of the portfolio. The rest is very low capex. UMH owns a lot of valuable land that produces no FFO today.
bluescorpion0 profile picture
How do you determine maintenance vs growth capex (ie development)?
Jussi Askola, CFA profile picture
@scorpion.north It is a case by case examination of the REIT and its assets. It is a lot of work because you must also keep in mind that capex is not consistent year after year. You must make estimates for the normalized annual average.
rickevantodd profile picture
Wouldn’t the useful life of the expenditure determine if it is maintenance capex vs growth capex ? I would think if the cash outflow is expensed in the current year than itis maintenance vs a cash payment being capitalized and depreciated over a multi year life would be growth.
Simplified perspective: maintenance CAPEX - you have to spend it to maintain your base cash-flow level = it has none to little payback. Growth CAPEX - expansion or improvement - you spend it to increase cash-flow, you can (should) calculate payback and you expect it to be accretive (it competes to your other capital allocation options).
Atlanta investor profile picture
Excellent report, and yes, as you point out the high-capex REITs are cheap and the low-capex REITs are expensive, and the question is how cheap should the high-capex REITs be compared to low-capex REITs? That is some hotel REITs sell at 2 to 8 times AFFO, while obviously some low-capex REITs can sell at 15-20 times AFFO. How much is it reasonable to assume a hotel should pay in capital spending, since that is not included in the calculation of AFFO -- is there a general rule? At what price does a high-capex REIT become so low that is attractive even with the characteristics that make it less profitable than low-cost REITs. Anyway, it is a fascinating discussion.
Jussi Askola, CFA profile picture
We discuss these topics in greater detail at High Yield Landlord, but it really depends from one case to another. Unfortunately, it is not possible to use general rules for something that is so complex.

Thank you for your comment. Our favorite low capex REITs are available here: seekingalpha.com/...
Jussi, well written. Yes, CapEx is a very important denominator and needs to be applied in an ever increasing % of GLA or gross revenues. The lifeline of an asset needs to be increased based upon R&M items as well as capital improvements. R&M can be typically amortized and capital items are expensed. My belief is to conserve cash flow to enhance the asset. Otherwise, you have a depreciating asset that is losing value daily.
Jussi Askola, CFA profile picture
Thank you for your comment @ClaimJumper
Yes, it is an important topic. Most REIT investors ignore it completely.
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