my thoughts. on the expensive side. generally ****ed when rates rise.
overall i would stay away, but REITs specific to certain markets/asset types could be compelling i.e. Multifamily in Houston would interest me at the moment
happen to know ev/ebitda multiples say 2007 to 2009? compared to now. thxx
why Houston? Cause of the depressed oil markets
mainly supply constraints since Harvey - vacancy rates are near zero now and a market that previously had some slack with concessions that were fairly high, is now in need of supply and concessions are gone.
if you are talking more P/FFO we are about in line with 2007 in a normal range, 2009 was the bottom when cap rates were massively increased & valuations on everything was depressed significantly.
There is a big misconception about what happens with REITs / real estate when rates rise. It certainly increases borrowing costs and _ can _ make yields on properties less attractive. If landlords can increase rents, particularly at a high clip without a corresponding spike in operating expenses (e.g. maintenance, taxes, etc…), then rising rates is less of an issue. For shorter duration type real estate (e.g. apartments, storage, hotels), then rising rates is even less of a problem as rents are reset much more quickly. What really impacts rents are new supply of competing real estate and demand for that type of real estate.
As far as valuations, I would say REITs generally look expensive. However, cap rate spreads are historically wide so the sector still looks favorable to some. As such, if you’re going to play in the space, find REITs that own strong portfolios, low to modest leverage, some asset management / operational platform edge, and are not stretching on dividends (see payout ratio on AFFO).
no interest whatsoever. i was just curious on multiples is all. i know reits are generally pretty levered, so borrowing is certainly a big issue.
Actually many REITs are not that highly levered. Generally most are about 35-45% debt/TEV, which is very low when most private real estate investors can get easily 65-90% LTV (essentially the same metric as debt/TEV). I consulted a hedge fund on this very topic as they were very concerned about the debt. Debt for real estate is a bit different than for operating businesses: 1) real estate is a tangible asset and thus recovery rates tend to be quite high for NPLs; 2) cash flows are generally more predictable; and 3) there are multiple avenues to access low cost financing, particularly for anything housing related.
Where you get into trouble is when leverage is too high (duh) and the underwriting is aggressive (i.e. rents growth is too strong, occupancies are too high, minimal capex, etc…).
work in CRE lending and yes people get nervous on our side when people want to push the leverage >70/80% depending on the type of market & cycle timing as well as the assumptions getting more aggressive (which is a function of reaching for deals to generate deal flow, generally correlated to the cycle as well)
Recovery rates are fairly high as most lenders will underwrite the asset looking as significant downside compared to sponsor assumptions, and go on the opinion they may get stuck with the asset & have to exit on their own.
I’d think that REITs with 1x1 kind of leverage would be fairly hedged against interest rates. Their real estate holdings should be short interest rates, but since they are short bonds (borrowed money), the REIT should be long interest rates on that financing. Presumably, the risk will change if they have more unconventional financing, or if they are one of those levered securtized REITs that rely on short term funding to finance long term yields.
vast majority of floating rate direct CRE debt have requirements for caps associated with them, so while the financing is impacted by rates - only to a certain extent.
Enterprise value could be inflated, though. I think Nerdyblop argued that the equity seems expensive, so a Debt/TEV ratio is/may be using an inflated denominator.
Equity investment REITs are effectively leveraged bets on commercial real estate prices. You can clip a divvy along the way but considering all of the debt, if CRE values go down it is really hard on equity. Yes, the debt is often backed up by tangible, cash flow producing assets so in downside scenarios owning the debt should be OK but that isn’t the point. I agree with what you say about recoveries on NPL’s but we’re talking about equity here.
Debt has been cheap capital for REITs (low interest rates) and they are investing in projects with high values (low interest /cap rates). This has encouraged a lot of leverage and you’ve got Debt-to-EBITDA multiples in the 7x to 8x range for some shopping REITs, and if anything EBITDA has a bias toward the downside in retail. Yes, they have hard, cash flow producing assets so EV-to-EBITDA multiples should be above market average but equity is going to start to get squeezed on over-leveraged balance sheets.
I’m really not as schooled on this industry as others but I think it is fair to say there is significant financial leverage in this industry.
if you have LT fixed rate financing on a stabilized asset though it would likely not be as hurtful to you as if you had variable transitional assets.
In the end it comes down to the acquisition and making sure the underwriting was done not overly aggressive so you have a comfortable basis and are able to stomach a downturn that wont force a default via cap rates expanding and LTV’s shooting up.
Its pretty widely accepted we are late cycle here, someone is going to over pay for something massive get wiped out and itll spook the market for a while.
in terms of stability of cash flows. how would you rate:
vs say a consumer defensive stuff like hmmmmm heiny.
Stability of cash flows for reits can really depend… In the current environment:
Mall reits. While your big reits (SPG) are getting wrecked in the market, the portfolios are stable except for a few of the sizable tenants, but overall as retail weakens malls see less traffic. Your ‘A’ rated malls will continue to hold higher value and attract further replacable tenants vs. B/C grade malls
Multifamily is relatively strong
Hotel reits are doing rather poor with the rise of AirBnB and other similar concepts, but some do own strong portfolios
Healthcare REITs aren’t bad, primarily based on private pay (self-pay) or public pay (insurance, medicare/medicaid). If you see cuts in medicare/medicaid, then you can except that the public pay providers for HC reits would get wrecked
Office REITS are a good buy, business cycle is strong so businesses will expand and continue to seek growing rental space. Especially in your stronger markets
Storage REITS are a good play, as the general population grows
Industrial/Data Center REITS - probably the best play you can make over the next 10 years (coupled with maybe some of the mall REITS that are on a fire sale and will recover after this retail disaster subsides). Rise of big data and data maintenance, and eCommerce make these 2 property asset types attractive IMO
Would say the CF stability is potentially better in REITs due to the nature of the contracts and ability to hike up rents every year vs. a consumer defense company like KHC/P&G. They are, at the end of the day, at the whim of the consumer preferences.
i wouldnt want to be near any mall REIT at this point. Certainly there is value in certain shoppiing centers but a sizable amount of these are worthless in their current format and wont survive.
I would say Office in certain markets if you have long term credit worthy tenants and leases that roll off fairly evenly in markets where you can push the rents and dont have to offer ridiculous concessions.
A lot of people dont care for Hotels due to the higher cap rates and possibility to have significant dips in RevPAR from prior years and difficulty in dealing with turnover/mgmt but in the right markets you can make a killing with them.
Dont know too much about healthcare/storage. Im not super bullish on multi-family in general, homeownership rates are at very low levels and while i dont necessarily see that changing any time soon any mean reversion on that could drive significant cap rate expansion with people trying to get out of the space.
In RE market is key though, office may suck in a market while Multi/Hotels work great. Its so market dependent.
Capitalism on point. Good analysis
datacenter REITs are interesting. looked at them few months back.
need to replace MORL
I like the concept of MORL and BDCL, the ETNs that use leverage to juice the yields higher. The issue is the beta decay that arises due to the structure/leverage. I own some BDCL, but I’ve mainly seen my principal be eroded at the sake of the dividend. Which, if I just bought BDCLs biggest component (ARCC) at the same time, I would be boasting capital gains while still getting a 10% dividend yield vs. bdcl 16%.
I have been looking at SKT though, in terms of a retail REIT that looks like it is getting hammered just because. Yet the major tenants of the portfolios aren’t even at risk. Pretty diversified tenant base, and outlet malls are easier to fill vacancies with.
lol these multiples are shitty like really shitty.