A Few Wicked-Cheap REITs

Summary

• I can’t say the REITs in this article are danger-free. There are reasons why they’re so inexpensive.
• It’s just I don’t think those reasons warrant the very low valuations.
• So peruse the following menu at your leisure and tell me what you like.
• This idea was discussed in more depth with members of my private investing community, iREIT on Alpha. Get started today »

There are just some meals that are perfect for cold, wintry days.

They’re hot. They’re comforting. And, let’s face it, they’re filling in more ways than one. They satisfy our appetites and add a little more padding to our bodies to make it through the long, cold days.

That’s why, when you Google “best winter meals to make” or some such variation, you’re bound to get hundreds of thousands of hits. For instance, a link I ended up clicking on out of curiosity was from Taste of Home.

Admittedly, that might have been foolish considering how many meals I now want to make, like:

• Turkey biscuit stew (which looks very much like pot pie)
• Ravioli lasagna
• Bavarian apple-sausage hash
• Contest-winning Bavarian meatball hoagies (toasted in the oven, incidentally)
• Blue cheese-crusted sirloin steak (I’m not sure how that’s a winter-specific meal, but sign me up anyway)
• Skillet mac & cheese…

The list goes on from there considering how it’s titled “100 Easy Dinners to Try This Winter.” Don’t check it out unless you plan on making a very long grocery list afterward.

You’ve been warned.

With that said, out of the dozens and dozens and dozens of delicious recipes included, the ones that really stand out for winter-specific occasions are the soups. Of which there are seven mentioned:

• Slow-cooker split pea
• Potato
• Chunky creamy chicken
• Bacon cheeseburger
• The ultimate chicken noodle
• Satisfying tomato
• Cheesy ham and corn chowder

It’s something somewhat similar to that last one that got me thinking about “wicked-cheap REITs.”

Source

New England Clam Chowder vs. Manhattan?

Technically, I had this article idea for a week now. So it wasn’t that particular site or recipe that made me think of wicked-cheap real estate investment trusts (REITs).

Instead, I was sitting down to a perfect bowl of New England clam chowder (in Charleston, S.C., last Friday with my two daughters).

Just writing that probably has a number of my New York readers scowling. As such, let me at least assure you that I’m not claiming one version is better than the other here.

Creamy or brothy. Either way, it can be delicious. (And if I do have a preference, I’ll never tell. At least not in this geographically mixed company.)

Incidentally, did you know there’s an entire Wikipedia page dedicated to “clam chowder?” It’s longer than many historical figures’ entries. Probably a few celebrities’ too.

That’s how much people care about the topic here in the U.S., where it originated.

As much as I try to steer clear of Wikipedia as a source, I had to check it out in this case. And if the writeup is to be believed, there’s actually three types of clam chowder: Tomato, cream, and clear.

From there, tomato clam chowder is broken up into Menorcan or Portuguese – the latter of which could be of the Rhode Island or Manhattan variety. The cream kind is either New England or Delaware, and the clear category is either South Country or Hatteras clam chowder.

But this is what really stood out to me: “It is believed that clams were used in chowder because of the relative ease of harvesting them.”

In other words, they were cheap. Anyone could get their hands on them.

An Investment Opportunity in the Making

Clams were cheap, that is. Back then.

Today, it’s hardly the most expensive food ever. But it's an ultimate moneymaker that adds to many a food-oriented business’ bottom line. In fact, I know of people who don’t live in New England yet drove all the way to Boston just to try some New England clam chowder.

Imagine if you could have been early-in on harnessing the financial power of that culinary appeal?

That opportunity is pretty much long gone, we know. But there are plenty of other cheap investment ideas out there – wicked cheap, even.

By wicked, I of course mean the New England understanding of the word: “Really” or “very." You don’t have to worry about selling your soul for these bargains.

Even so, feel free to be suspicious. You should be wondering why they’re selling at such low, low prices. Because, let’s face it, you don’t want to pick the wrong clam.

There might not be a pearl inside if you do, only food poisoning waiting to happen. In which case, who cares how cheap it is.

I can’t say the REITs in this article are danger-free. There are reasons why they’re so inexpensive.

It’s just I don’t think those reasons warrant their very low valuations. They’ve got a lot more potential than what they’re being priced at.

So, peruse the following menu at your leisure and tell me what you like. Just don’t wait too long to make up your mind. There’s no guarantee these bargains will last.

In fact, I’m betting that they won’t.

Cheap REIT #1

City Office (CIO) owns 62 high-quality office properties in 18-hour cities in the Southern and Western US, such as Orlando, Tampa, Dallas, Denver, Phoenix, San Diego, Portland, and Seattle. The 5.4 million square feet portfolio has in-place occupancy of 90.6% with an average remaining lease term of 4.5 years.

The appeal for CIO is the fact that the company invest in “18-hour cities” with a high-quality urban living experience and in markets with low or no state taxes. These cities have educated workforces and are considered low-cost centers for businesses to operate. COVID-19 has accelerated efforts for many companies to relocate from urban markets to these so-called “18-hour” cities.

As CIO’s CEO, James Farrar, explained on the recent earnings call,

“In 2020, this business thesis was put to the test. Our exceptional results for the year indicate that our investment niche is well suited to endure and succeed in a challenging environment…

In 2020, we collected over 99% of contractual base rent. We completed over one million square feet of new and renewal leasing, the largest amount of leasing completed in any year in our company's history.

We achieved positive same-store cash NOI growth. We executed a well-timed share repurchase program and bought back $100 million of common stock at accretive prices. And last, our 2020 core FFO of $1.22 per share exceeded our initial pre-pandemic guidance, and did so with lower leverage employed.”

That’s rather strong, I can’t say that for many REITs in our coverage spectrum.

Over the last 18 months, CIO has generated more than $300 million in gross proceeds from either capital raises or property sales while only deploying $100 million into its stock buyback. This has reduced leverage to a low level and has positioned the company to take advantage of growth opportunities as market conditions improve.

At the end of Q4-20, CIO’s total debt was $677 million and net debt, including restricted cash to EBITDA was 6.9x. CIO did cut the dividend by 36% in March 2020, and now the payout ratio is healthier at 50% (based on FFO per share).

In Q4-20 CIO reported core FFO of $14.1 million or $0.32 per share and AFFO was $7.5 million or $0.17 per share. The largest impact to AFFO was a $2.2 million leasing commission paid on the 10-year Ally lease renewal that lowered AFFO by approximately $0.05 per share. In 2021 CIO expects its FFO run rate to be approximately $0.32 to $0.34 per share.

CIO has returned -23% since Jan. 1, 2021, and shares remain cheap based on all metrics: P/FFO is 8.3x (vs. five-year average of 11.8x), dividend yield is 5.9% (vs. office REIT peer average of 4.7%), and average industrial P/FFO multiple is 11x. Shares are ~20% below our “buy below” price and we maintain a Strong Buy.

Source: FAST Graphs

Cheap REIT #2

Our next cheap REIT is SL Green (SLG), an urban-office focused REIT with 84 properties containing around 29 million square feet. According to SLG’s CEO. “the financial and tech sectors in NYC, which account for over half of the office space demand, are doing extremely well and added 5,000 office-using jobs in December.”

NYC is forecasting a significant amount of new office jobs in 2021, and according to the CEO, the city “would return to pre-pandemic office employment levels by the fourth quarter of this year, recouping all of the 165,000 office jobs lost at the outset of the pandemic.”

Keep in mind, we have been covering SLG for over a year; we upgraded to a Strong Buy on June 28, 2020 as we were convinced “opportunity for those interested in exposure to one of the most valuable, liquid, and popular commercial real estate markets” would eventually serve as a catalyst.

Demand drivers remain strong as investment activity is picking back up. More stimulus also will serve as a catalyst and tech continues to drive leasing.

In Q4-20 SLG generated pro forma FFO per share of $1.56 that matches the average analyst estimate and declined from $1.75 per share in Q3-20. Occupancy in the Manhattan same-office portfolio was 93.4%, inclusive of leases signed but not yet commenced, at Dec. 31, 2020, vs. 94.2% at the end of Q3-20.

SLG has collected gross tenant billings, including rent and other billable expenses for the full year 2020 of 94.8% overall. Collection rate was 97.9% for office and 80.8% for retail. In Q4, the same-store cash NOI (including SLG's share of same-store cash NOI from unconsolidated joint ventures) fell 5.9% Y/Y.

Year-to-date SLG shares have increased by 12% and analyst estimate growth at -6% in 2021, and then +6% in 2022 and +4% in 2023. We find shares attractive based upon the following valuation metrics: P/FFO is 9.6x (vs. five-year average of 14.2x) and the dividend yield is 5.3%. Shares have returned over 52% since we first purchased (in June 2020) for the Cash is King portfolio.

Sharesight

Given the price runup over the last few weeks, we have moved SLG from a Strong Buy to a Buy. However, we see plenty of room left to run.

Source: FAST Graphs

Cheap REIT #3

The last “cheap” REIT on our list is Plymouth Industrial REIT (PLYM), an industrial REIT based on Boston with a portfolio of 141 industrial buildings with 23.3 million square feet across 11 states. The company focuses on these key markets: Chicago, Indianapolis/South Bend, Jacksonville, Atlanta/Savannah, Cleveland, Columbus, Cincinnati and Memphis.

Similar to STAG Industrial (STAG) – also based in Boston – PLYM is differentiated for its focus on secondary markets where it has less REIT competition. PLYM looks to invest in markets with access to large pools of skilled blue-collar workers in the main industrial, distribution and logistics corridors of the U.S.

Since its IPO (June 2017) PLYM has accessed multiple forms of capital, including preferred equity, common equity through ATM activity and marketed offerings, debt refinancings and unsecured credit facilities. The company announced a $150 million equity joint venture with Madison International in October 2020 to pursue value-add and opportunistic industrial properties.

In all of 2020, PLYM collected 99.6% of rents billed during Q4, and in Q1-21 (through Feb. 23), PLYM has seen a 97.5% rent collection rate. The only rent deferral agreements established were in mid-2020 and the tenant has paid in full and no others have been granted since last year.

PLYM’s net debt to adjusted EBITDAre ratio at Q4-20 was 6.7x and the overall composition of the balance sheet has continued to improve with nearly 35% of debt now unsecured. The company has ample liquidity including $16 million of cash on hand, an additional $5 million in operating expense escrowed, and $135 million of capacity on the line (another $200 million available under the accordion).

In June 2020 PLYM cut the dividend by 47% and we had a Hold on shares at the time, based upon the dangerous payout ratio. Currently PLYM distributes $.20 per share ($.80 annual) that represents a current yield of 5.4%. The company recently issued full-year 2021 guidance for core FFO of $1.72 and AFFO of $1.46 at the midpoint.

Although we have not been impressed with PLYM’s growth (-6% estimate for 2021), the dividend cut provided a more attractive margin of safety and analysts estimate the company returning to growth of around 5% per year in 2022 and 2023.

We have holds on most other industrial REITs due to valuation and PLYM represents one of our few buys in the Intelligent REIT Lab. Shares are trading at 13% below our "buy below" price.

Source: FAST Graphs

Sometimes They’re Cheap For A Reason

In a few days, I will be writing on a few “Value Trap” REITs, that is, REITs that are “cheap for a reason” and in which they trade at low valuation metrics for an extended period of time.

A value trap can attract bargain hunters relative to historical valuation multiples, but the danger presents itself when shares languish. Identifying value traps can be difficult, but we will provide readers with our fundamental-based research and 3 textbook examples.

Now it’s time for a break and another bowl of New England Clam Chowder…

Analyst’s Disclosure: I am/we are long CIO, PLYM, SLG. 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.

Author's note: Brad Thomas is a Wall Street writer, which means he's not always right with his predictions or recommendations. Since that also applies to his grammar, please excuse any typos you may find. Also, this article is free: written and distributed only to assist in research while providing a forum for second-level thinking.