Forbes Expert Eyes REIT Trio

05/01/2017 2:50 am EST

Focus: REITS

Brad Thomas

Editor, Forbes Real Estate Investor

I have some battle scars as a result of some painful losses that I experienced as a real estate developer. However, because of the losses, I have become a much more disciplined REIT investor, explains Brad Thomas, editor of Forbes Real Estate Investor.

It took some mistakes, but I now fully comprehend the words, “protect your principal at ALL costs.” Today I wanted to provide a list of 3 REITs that are trading at a discount.

Kimco Realty (KIM) is the owner and operator of the largest publicly traded portfolio of neighborhood and community shopping centers in North America. The company was founded in 1958 and listed shares in 1991. In 2006 Kimco was added to the S&P 500 Index.

As of Q4-16, KIM's well-balanced portfolio consists of 524 U.S. shopping centers comprising 85 million square feet of leasable space across 35 states and Puerto Rico. KIM focuses on major U.S. metropolitan markets.

Over the years and since the last recession, KIM's has boosted Net Asset Value creation through redevelopment, select ground-up development and active asset management.

KIM's vision — referred to as the 2020 vision — is to create long-term shareholder value by focusing on the building blocks of growth, reducing leverage and maintaining a cost efficient capital structure.

KIM has positioned its portfolio to be defensive in nature with long-term leases that have significant mark to market opportunities upon lease expiration or recapture. Each redevelopment takes the advantage of these opportunities to unlock the highest and best use.

KIM is rated BBB+ (by S&P) and based upon the 2020 Vision, it appears that the company could become an “A rated” REIT during the next year or two. KIM has similar ratings with Moody’s and Fitch.

KIM is now trading at a discount to its closest peers (FRT 23.4x, AKR 20.7x, REG 19.9x, and ROIC 19.3x). The average P/FFO multiple for these 4 peers is 20x and KIM is trading at 14.7x. KIM’s dividend yield is 4.9%.

Tanger Factory Outlets (SKT) is not a traditional Mall REIT. Instead, the North Carolina-based company owns 42 outlet centers in the U.S. and Canada. I have a BUY rating on shares that are trading at a dividend yield of 4% and a P/FFO multiple of 13.8x.

Tanger commenced operations over 33 years ago when the company opened a clearance center in Burlington, NC. Back then, the "outlet industry" was unknown, and the business model was more of a clearance center to assist manufacturers with getting rid of excess merchandise.

This concept — aimed to connect bargain-hunting consumers with brand-name manufacturers — was a pioneering platform that was the spark for the flaming retail sector that shoppers commonly refer to as the outlet center sector.

Uncommon to malls that are costly to build (upwards of $100 million) and with significantly higher operating costs, Tanger set out to create a differentiated retail model that could provide both scale and low-price brand recognition, aimed to meet the demands of the bargain-hunting consumer. Tanger is the ONLY "pure-play" outlet center REIT.

Gramercy Property Trust (GPT) is a New York City-based REIT that owns a large majority of Industrial and Office buildings. Back in September 2015, the company outlined a plan in phase one and phase two to sell $1.1 billion to $1.2 billion of assets, very largely office assets at a 6.7% to 7.2% cap rates.

The company is now closing in on $1.6 billion and way ahead of its goal — actually a year ahead of schedule. As a % of the wholly-owned portfolio NTM Cash NOI, Gramercy has grown its industrial portfolio from 47% to ~70% in the past year.

The goal by the end of 2017 is to have 75% of NTM NOI coming from Industrial, 15-20% from Office and 5-10% from Specialty Retail.

In 2017, Gramercy should see the benefit of reduced complexity, with fewer moving pieces. The company sold approximately 25% of its asset base in 2016, and as the CEO, Gordon DuGan, explained on the Q3-16 earnings call, “that puts a lot of noise through the income statement. There will be much less noise as we go into a growth model.”

Many of Gramercy’s peers have higher payout ratios, indicating the company has a much safer yield and plenty of room to grow (the dividend). Shares are now trading at 13x P/FFO with a dividend yield of 5.3% (plenty of capacity to grow).

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