Malls Offer Discount That’s Not for Customers: Real M&A – Bloomberg 10-01-14

Salient to Investors:

  • DJ Busch at Green Street Advisors said the Washington Prime/Glimcher Realty Trust deal may spark further consolidation among owners of “B” malls as there are many benefits to scale.
  • Jerry Bruni at J.V. Bruni said lower-tier malls are a better bargain than pricey luxury properties, and owning the dominant mall in a smaller area insulates you from competition.
  • Jonathan Litt at Land & Buildings said something will break one way or another what with B-mall operators trading at discounts, as we saw with the Glimcher transaction.
  • Rich Moore at RBC Capital Markets said no large mall operator is going to buy operators with lower-quality properties, while B-mall REIT share prices are low and they don’t have the currency to make deals for each other. Moore said the Washington Prime/Glimcher deal was unique because Washington Prime needed a management team, which it gained with the acquisition – it is not a trend.

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Property ETFs Draw More Money Than in All of 2013: Mortgages – Bloomberg 03-06-14

Salient to Investors:

Inflows into real estate ETFs in 2014 are 43 percent more than all of 2013.

Bloomberg said in 2014, 31 percent of money going into US sector-focused ETFs was for real estate.

Jim Sullivan at Green Street Advisors said the bond market correctly indicates an OK environment for cost of capital, with enough economic growth to keep buildings full to allow landlords to push rents a little.

Gavin James at Western Asset Mortgage Capital said deep discounts coming into the beginning part of 2014 combined with dividends woke people up to the fact that these REITs were attractive.

The dividend yield on the Bloomberg REIT index is 3.6 percent, while single-tenant REITs yield 5 percent.

Rich Moore at RBC Capital Markets said the reaction on REITs to the rise in interest rate was way overdone, while a paucity of new construction is helping landlords.

Paul Curbo at Invesco said new construction is low by historical standards. 

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Why Mortgage REITs Deserve Some Love in 2014 – Bloomberg 01-15-14

Salient to Investors:

Mortgage REITs yield 13 percent versus 3.8 percent for T-Bonds.

In 2013 mortgage REITs lost 3 percent on average even after factoring in double-digit dividend yields – versus 30 percent for the S&P 500.

Michael Widner at KBW Bank said the average mortgage REIT trades at a 20 percent discount to book value, and expects mortgage REITs to return over 20 percent in 2014. Widner does no expect the stock market replicating its 2013 returns in 2014.

David Cohen at the Eudora Fund is not concerned about higher rates because mortgage REITs are not really bond funds, but are businesses that use complex hedging strategies to protect themselves from rate increases.

The spread between long-term rates and short-term rates determine a mortgage REIT’s profitability, and not a single interest rate, because REITs borrow short-term and buy long-term bonds. Cohen said the yield spread between 3-month Treasuries and 10-yr T-notes has almost never been wider in the last 35 years.

Any rise in long-term rates that results from Fed cutting QE would increase the yield spreads mortgage REITs can earn. Homeowners tend to pre-pay their mortgages when rates are low, which hurts mortgage-bond investor returns, while rising long-term rates discourage refinancings.

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U.S. Rate Rise Sends High-Dividend Stocks Lower: EcoPulse – Bloomberg 12-12-13

Salient to Investors:

Brad Kinkelaar at Pimco said:

  • The underperformance of many high-dividend stocks in the past 8 months shows a sentiment shift already is under way. If rates continue to rise through 2014, albeit gradually, telecom, utility and REITs should continue to underperform the market.
  • Look for stocks with attractive dividends, particularly that will benefit from global growth – half the companies in his funds are based outside the US.
  • Avoid the most expensive parts of the domestic market, including shares hardest hit by the increase in interest rates, like toll-road companies in China, Brazil and Italy and US retailers.
  • Money managers with dividend-paying strategies flocked into a scarce menu of attractive-yielding stocks in the US, causing their share prices to increase significantly, but the reverse is now happening.

34 percent of economists expect tapering in December. The median economist predicts the 10-yr T-yield will rise to 3.37 percent by the end of 2014.

Benjamin Brodsky at BlackRock said tapering is inevitable and very likely in 2014 so the key T-yield could rise to a fair value of 3.7 percent by the end of 2014, significantly surprise the market, and add volatility not only in Treasuries but to other asset classes. Brodsky said the Fed will be losing one of its essential tools to control the long end of the market amid signs the recovery is strengthening.

Rob Morgan at Fulcrum Securities said large-cap dividend-paying stocks will be hurt as yields on 10-yr Treasuries continue their rise since May, though swapping equities for fixed-income securities is not imminent.

Jim Stellakis at Technical Alpha said investors have become more aggressive about pulling money out of the dividend index, which is in a general downtrend relative to the S&P 500 total-return index, with lower peaks and troughs indicating people are becoming more impatient and selling sooner. Stellakis said the dividend index falling below the March 2012 trough will indicate further deterioration in investor sentiment.

Eric Teal at First Citizens BancShares said we are in a transition period as equity investors adjust to a rising-rate environment, and as the US economy moves into later stages of the expansion that began in June 2009, investors need to be more selective about the type of dividend-paying stocks they purchase, and differentiate between companies with high-dividend yields relative to the market and those whose payouts may be poised to increase. Teal seeks stocks with growing dividends that are leveraged to an economic recovery, especially on a global basis, like the industrials, which have expanded payouts in recent years. Teal said Treasuries approaching 4 percent will be a trigger for asset-allocation models.

James Bullard of the FRB St. Louis said any tapering should be modest to account for low inflation, and should inflation not return toward target, the Fed could pause tapering at subsequent meetings.

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Rising Dividends Help 2014 Market Match U.S. – Bloomberg 12-03-13

Salient to Investors:

Robert Gorman at TD Wealth said:

  • The 3-yr period of sharp underperformance for Canada is coming to a close
  • Dividend stocks will continue to rule but resource stocks will do comparatively better after showing signs of bottoming out.
  • The S&P/TSX Composite Index and the S&P 500 will both return 7 percent in 2014 including dividends, as economies in the US, Europe and China grow.
  • Expansion of US P/E multiples, now at 17 times, is unlikely to continue with the prospect of tapering.
  • Diversified miners producing coking coal and base metals are preferred over gold miners.
  • Energy producers with rising production and free cash flow are attractive, and preferred over oil stocks based on the expectation of a rising commodity price.
  • Stocks with a history of increasing dividends are preferred over stocks with high dividends that trade purely on yield, especially in an improving global economy that suggests a rise in bond yields, like utilities and to some degree any large REITs.
  • This will be the first year of synchronous global growth since the credit crisis and with significant favorable impacts throughout.
  • US and Canadian stock performance will converge.
  • The outlook for economic growth remains below-average.

The Canadian stock market is forecast to improve in 2014 to at least match the performance of the US for the first time since 2010, led by companies raising their dividends. The average economist expects 2014 will be the first year since 2011 when Canada, the US, China and Europe all post positive growth.

The average economist expects the global economy to grow 2.8 percent, the Canadian economy to grow at a 2.3 percent annualized rate, and the US economy to grow 2.6 percent in 2014.

Brian Belski at BMO Capital Markets said current US levels suggest it may be more difficult for the market to continue its impressive run without equally impressive earnings growth.

David Madani at Capital Economics said the better-than-forecast 2.7 percent growth in Canada’s Q3 showed continued weakness in exports and “one-off” rebounds in business spending following a flood in Alberta and the end of a labor strike in Quebec.

Ian Nakamoto at MacDougall MacDougall & MacTier, said Canada and other commodities-based markets will stay out of favor with investors until global growth accelerates past 4 percent as equity investors continue to believe commodities will not do much or go down, not up. Nakamoto said countries that consume commodities have been in favor and does not see that changing, and sees no broad-based uplift in Canada.

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Mall Owner Stocks Go From First to Last as Spending Slows – Bloomberg 09-13-13

Salient to Investors:

The Bloomberg mall REIT index has fallen 5.4 percent in 2013, the worst performing part of US property stocks, on sluggish retail sales and limited opportunities to expand, after posting the biggest increases from 2009 through 2012. Hoteliers and self-storage landlords are the top-performing REIT sectors in 2013.

Mall REITs reported the smallest increase in tenant-sales growth in 3 years in Q2 after strong growth since the credit crisis let them increase rents.

Benjamin Yang at Evercore Partners said fundamentals are good but slowing, and there appear to be more-attractive, better-accelerating core growth stories in some of the other sectors.

Keith Bokota at Principal Global Investors said the fundamentals are strong and results have been positive for mall REITs overall, but are overshadowed by the potential impact of rising borrowing costs on property valuations. Bokota said there continues to be robust demand for these high-quality and scarce assets.

Rich Moore at RBC Capital Markets said high-quality malls are so lucrative that they rarely come on the market, with publicly traded landlords owning most of the best-performing centers.

Cedrik Lachance at Green Street Advisors said mall owners may be cushioned from the impact of their tenants’ slowing sales because occupancies are as high as they have ever been.

Reis said regional mall vacancies fell to 8.3 percent in Q2 and rents rose to $39.62 a square foot.

Rich Moore at RBC Capital Markets said even if J.C. Penney got into more serious trouble, the impact on mall REITs would be minimal, and it is highly unlikely it will disappear. Moore said most landlords would love to get their J.C. Penney box back.

Craig Guttenplan at CreditSights said outlet centers are performing better than other retail-property types as consumers like bargains and are still cautious on spending.

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REITs Deepening Bond Losses as Leverage Forces Sales – BLoomberg 07-10-13

Salient to Investors:

JPMorgan Chase said REITs may have needed to sell about $30 billion of government-backed mortgage securities in just one week last month to maintain the amount of borrowing relative to their net worth.

Bryan Whalen at TCW said REITs have been one of, if not the biggest contributors to the underperformance and volatility in mortgage bonds.

Ken Hackel at CRT Capital Group said the industry relies on leverage, and REITs’ sales of mortgage bonds to meet margin calls and maintain leverage have absolutely been a factor in the slump in mortgage-bond prices.

Mahesh Swaminathan et al at Credit Suisse said higher interest rates could trigger further REIT sales, creating a key risk to their recommendation that mortgage bonds would outperform.

Scott Minerd at Guggenheim Partners said REITs and other investors that use leverage helped push up bond yields as they sold debt or added bearish bets on Treasuries as hedges, and rising rates will reduce housing affordability, and housing is the primary locomotive of US economic growth.

Steven Delaney at JMP Securities said investors have been overcompensating in selling REIT stocks while preparing for bond prices to fall further, increasing the discounts to book values at which REIT shares trade – on July 5 companies that invest in only government-backed bonds were trading at 88 percent of current book on average.

Daniel Altscher at FBR Capital Markets said mortgage REITs got undeservedly whacked and look attractive as a short-term trade.

Merrill Ross at Wunderlich Securities said she doesn’t see relative value in REIT stocks for the first time in 5 years due to the heightened risk that the only way to raise liquidity might be to disgorge bonds at fire-sale prices.

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REIT Rout Seen Curtailing Deals as Rising Rates Cut Share Sales – BLoomberg 06-27-13

Salient to Investors:

Property purchases by U.S. REITs are likely to be curtailed as a tumble in share prices makes a key source of capital costlier.

Jim Sullivan at Green Street Advisors said for most property types, we have hit the pause button and expect REIT executives to be very careful with respect to new acquisitions.

Purchases completed by US REITs through June 27 were double the year-earlier period.

A Green Street index of prices has recovered all of its losses from the real estate collapse and as of May was 4 percent higher than the previous peak in August 2007.

REITs attraction as an investment alternative with higher and steady returns is disappearing with rising interest rates, and their dependence on the equity and debt markets to raise money for acquisitions makes them vulnerable to jumps in interest rates.

Craig Guttenplan at CreditSights said REITs will be reluctant to take on debt as a replacement for stock sales because they won’t want to boost leverage and make themselves even less attractive to investors, whereas asset sales would be a better source of new capital.

Single-tenant and health-care REITs have been attractive to investors because of the stable cash flows offered by the long duration of their tenants’ leases, making them comparable to bonds, but since the slide in REIT shares began, the two sectors have been hit harder than other types of landlords.

Paul Adornato at BMO Capital Markets said the REITs will sit on the sidelines and it will take time for the dust to settle to see where they stand relative to the broader market and what the implications are for the cost of capital.

Sam Lieber at Alpine Woods Capital Investors said health-care and single-tenant REITs historically have grown through acquisitions to boost dividends and since their return is the spread between the cost of raising capital and the yield from property purchases, share-price declines and rising interest rates tend to increase the cost of capital, reducing returns. Lieber said they don’t offer a lot of growth.

Single-tenant and health-care REITs have less flexibility to raise rents because of their lease lengths, making other REIT types more attractive to investors. Paul Curbo at Invesco Ltd favors apartment, industrial and regional-mall properties because they have a greater ability to raise rents and grow internally.

Raymond Torto at CBRE Group says demand from investors across the commercial real estate industry remains strong and doesn’t see sellers changing their prices because there are 10 guys in line with the cash.

Sheila McGrath and Nathan Crossett of Evercore Partners say rising interest rates would be the result of an improving economy, which would benefit REIT shares, and says the recent selloff is a buying opportunity.

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Bubble, Bubble, Money and Trouble – Barron’s 06-01-13

Salient to Investors:

Marc Faber at the Gloom Boom & Doom Report says:

  • High-end assets from stocks to art to real estate are in a bubble caused by central bank money-printing. This money doesn’t increase economic activity and asset prices in concert, instead creates dangerous excesses in countries and asset classes. Money-printing fueled the stock-market bubble of 1999-2000, the housing bubble in 2008, and the commodities bubble.
  • Owns equities because easing money is flowing into the high-end asset market, including stocks, bonds, art, wine, jewelry, and luxury real estate.
  • The government bailed out S&L depositors in the late 1980s. Treasury and the Fed bailed out Mexico in the mid-1990s. The Fed-supervised bailout of Long-Term Capital Management in 1998 gave a green light to Wall Street to keep leveraging up. Neither Keynes or Friedman would have approved current policies.
  • In the fourth year of an economic expansion, near-zero interest rates will lead to a further misallocation of capital. The S&P 500 is a near a long-term top and could rally to 2000 in the next month or two before collapsing.
  • Money-printing leads to a widening wealth gap. In the Western  democracies, large numbers of people will at some point target the rich through wealth taxes or significantly higher tax rates. The rich have seen huge wealth accumulation in Asia in recent years but the middle class has seen diminishing purchasing power. Growing wealth inequality has always been corrected either peacefully, through taxation and wealth redistribution, or by revolution, as in Russia. European voters will turn against the arrogance of the bureaucracy.
  • China will not tolerate US interference long-term in their region.
  • 25% in equities – no US, some Asian shares and Singapore REITs.
  • Except for some high dividend stocks, Philippines, Indonesia, and Thailand markets are unattractive having quadrupled from post-crisis lows. Dislike Chinese equities unless conditions worsen and China prints money like crazy, when the currency will weaken and stocks will rise.
  • Japanese stocks made a generational low in 2012 and won’t go below that. Like Japanese REITs.
  • Vietnam exports are strong, and the people are hard-working. The beach between Danang and Hoi An will be a huge resort area in the future and is only an hour and 10 minutes by plane from Hong Kong, and two hours from Singapore. Likes stocks with yields of 5% to 7%.
  • Many rich Asian companies have been buying other Asian companies. Asia long-term economic outlook is good. Laos, Cambodia, and Myanmar are opening up, and Vietnam is reopening. Myanmar market is hot but like Vietnam near its peak in 2006-07, looks dangerous for investors.
  • The huge credit bubble in China won’t end well. The economy officially grew 7.7% in Q1 but in truth is growing 4% a year, at best. China reports export figures to Taiwan, South Korea, Hong Kong, and Singapore that are much larger than those countries report as imports.
  • Markets in Europe have made major lows so own European shares – and plan to buy more – and corporate bonds, and real estate. Money in European banks is no longer 100%.
  • Like Singapore REITs whose yields of 5% and 5.5% compare favorably with US REITs. If inflation picks up, REITs can raise their rents.
  • 25% in gold and add to positions every month. When the asset bubble bursts, financial assets will be particularly vulnerable.

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Armour Biggest REIT Share Loser as Fed Weighs Exit – Bloomberg 05-31-13

Salient to Investors:

Jason Stewart, an analyst at Compass Point Research & Trading Interest rates moving higher and Fed talk about tapering QE much earlier than the market thought have sent mortgage REITs lower.

Michael Widner at Keefe, Bruyette & Woods said the bond markets have over-reacted to Fed comments, and mortgage REITs have over-reacted to the bond market. Widner recommends buying while prices are low, but says the whole episode highlights risks and difficulties in predicting impacts of QE.

Merrill Ross at Wunderlich Securities said the exiting its eight-month domination in the agency mortgage market is not quite as straightforward for the Fed as entering the fray back in September 2012.

Christopher Donat at Sandler O’Neill expects reductions in dividends rather than increases in the next few quarters, and warned of risks of over-reactions and real risks to the stocks because so much of the ownership is made up of retail investors.

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Salient to Investors:


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