STIFEL: Office/Industrial REITs - Conference Call 9/7/16 - Value Creation or Destruction and Lease Economics Analysis. SLIDES ATTACHED. Dial-in Info Below.

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FULL REPORT

 

Conference Call 9/7/16 - Value Creation or Destruction and Lease Economics Analysis. SLIDES ATTACHED. Dial-in Info Below.

  • We are hosting a conference call on Wednesday, September 7 at 11AM ET. Dial in numbers are as follows: (888) 267-2848 (Domestic); (973) 413-6103 (International); Conference ID: 987648;

 

  • A replay of this conference call will be available through September 21, 2016 - Replay dial in numbers are as follows: (800) 332-6854 (Domestic); (973) 528-0005 (International); Conference ID: 987648

 

  • We believe the best way to determine a company's ability to create (or destroy) value is to 1) review its Net Asset Value at a static cap rate, 2) adjust for dividends paid, 3) evaluate the lease economics and then 4) overlay projected property market conditions, portfolio expectations and development-driven value creation.

 

  • The body of this report reviews each company under our coverage and its Net Asset Value plus dividends paid during (in most cases) 2006-1H2016. In our summary of each company, we also provided a projection given the current strategy, development pipeline and lease economics.

 

  • Additionally, we have compared and contrasted the Lease Economics Analysis for the Office & Industrial REITs under coverage. We recently started this analysis to provide a forward look at expected portfolio performance based on the re-leasing spreads combined with the re-leasing costs. Evaluating one without the other is similar to a PB&J without either the PB or the J.


Pricing as of 9/6/16

 

  • Our primary conclusions: 1) creating value without the benefit of cap rate compression is not easy, 2) asset re-cycling and portfolio re-positioning appear to be working, 3) the dividend is vital over the long term, 4) quality development worked, while commodity development, plus high land inventories, proved disastrous, 5) the 2009 re-equifications were painful, 6) prudent, proactive equity raises were helpful, 7) quality assets and submarkets usually ruled the day, 8) high re-leasing costs and marginal re-leasing spreads result in value erosion

 

METHODOLOGY -- No Cap Rate Geniuses

 

  • Our methodology was to hold the cap rate fixed for the time period reviewed to determine share value creation or destruction absent cap rate fluctuations (no "cap rate geniuses" allowed), and add the dividend paid in order to determine portfolio value created or destroyed and total shareholder return.

 

  • For some companies with major portfolio re-positioning strategies, we adjusted the underlying cap rate.

 

  • This captures, from a valuation perspective, hard-to-detect nuances such as 1) excess capex and re-tenanting costs, 2) cash costs for balance sheet management, which were real costs in spite of being excluded from FFO, 3) real re-development returns, 4) the importance of the dividend in total return to shareholders, and 5) stock based compensation.

 

  • Note that we usually annualized our NAV estimates as quarterly estimates have often been volatile historically.