Asset Management Group
Real Estate Sector
Overview
Analysts | Jordan Goss, Michael Miller & Derek Bannister
Table of Contents
I. Introduction
II. Industry Overview
III.Recommendations
Introduction
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3
Background
History, Types, and Specifics
History
The real estate sector used to be a sub sector of financials, but became the 11th sector to
be added to the S&P 500 in July 2016
The sector consists of Real Estate Investment Trusts (REITs) and real estate management
& development companies
Types
Mortgage REITs
Lends money for mortgages to real estate owners, purchase existing mortgages, or
mortgage backed securities commercial/residential real estate
Still part of the financials sector
Equity REITs
Acquire and develop properties, then lease the space within the structures for rent
Subsectors of REITs - Retail, Industrial, Office, Data Center, Healthcare, Storage,
Tower, Timber, Residential, and Lodging.
Specifics
90% of a REITs taxable income must be distributed as dividends--but does not act the
same as bonds
Depending on the structure of the REIT, some valuations (DCF, comps) may not work
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Source:
4
Current Events
California Housing, Hurricane Victims & Other News
California Housing Crisis
Rising rents, overcrowded higher margins more need for construction
Texas and Florida Victims
Hotel/Apartment REITs soared as alternative living situations
M&As and IPOs
M&A Forest City Realty Trust Inc.
Considering a merger to boost shareholder value
IPO Singapore Investment
KBS Realty Advisors LLC to IPO $ 500.00 MM in Singapore
In talks with Keppel Corporation to form a joint venture
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Source: https://www.wsj.com/articles/american-real-estate-firm-
5 plans-500-million-singapore-ipo-1504680737
Industry Overview
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6
General Overview
Performance against SPX and TNX
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Source: REIT.com
7
Drivers
Indicator & Subsector-Specific Movements
Indicators
Construction activity, occupancy, delinquency rates, vacancy reports, remodeling, rent per square foot, interest
rates, debt-maturities, area economics, consumer sentiment, supply/demand, acquisitions, FFO, NOI, and growth
Subsectors
Residential - Home sales, apartment vacancy/delinquency rates, possible oversupply within the cities
Retail - shift in property focus due to e-commerce on lifestyle centers, performing very poorly
Healthcare - Baby boomers population will increase the demand for these facilities, healthcare reform
Office - Job outlook, growth aspects in urban are larger than suburban
Industrial - The e-commerce and global expansion significantly increases demand for logistics
Data Center - News related to cloud and new technology updates (virtual reality, computing, streaming)
Lodging - Faces competition from recent home sharing services (Airbnb), consumer sentiment,
Timber - Lumber demand, housing market, Canada imports and contracts
Tower - Telecommunication companies, mobile device speed and usage, emerging markets on growing mobiles
Storage - Business model makes it easy for oversupply, increased demand due to hurricanes
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Source: REIT.com
8
Key Metrics
What To Look For
Valuation Techniques:
Funds From Operations (FFO) takes property depreciation out of expense line
Adjusted Funds From Operations (AFFO) accounts for certain capital expenditures ignored in FFO
Price/FFO - Share Price over FFO, use to compare relative companies
Net Asset Value (NAV) Market value minus debt
Intrinsic Value NAV divided by the number of shares
Capitalization Rate Annual operating income divided by acquisition cost
Debt-to-Equity A ratio used to determine how much leverage a REIT is using and (therefore) how
susceptible it is to market swings
Debt Coverage A ratio that explains how much a REIT is making for every dollar that it borrows
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Source: The Motley Fool
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Recommendations
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10
Potential
WellTower, STAG Industrial & Digital Realty Trust, Inc
WellTower (HCN)
High barrier to entry in major urban markets
Strong management and business plan
Aligned to take advantage of population trends
STAG Industrial (STAG)
Macro trend of e-Commerce expansion and logistics demand
Aligned for sustainable long term growth
Fundamentals
Digital Realty Trust, Inc (DLR)
Large scale acquisitions and expansions
Aligned to take advantage of cloud computing and tech markets
Superb debt management
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Source: SeekingAlpha
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