DNEWS: Top 3 REITs to Buy or Consider in June 2017 (US, Singapore and Canadian)

An Evolving Retail REIT (USA)

What’s going on?

“KILLED off by eCommerce” a common headline these days and a serious challenge that brick and mortar shops have to face.

Beyond the headlines, A.T Kearney’s research showed that Brick-and-mortar remain the foundation of retailing as evidenced by the fact that 90% of all retail sales are transacted in stores and 95% of all retail sales are captured by retailers with a brick and mortar presence.

And yet in the same breath, mentioned that many retailers are facing dire prospects, as evident by the fact that Macy’s announced it was closing 65 under-performing stores and Sears closing another 150 stores.

So where is the bulk of retail sales going to?

Three words ‘Discounts’ and ‘Outlet-malls’.

More and more Americans are heading to these places to shop, as a result… many traditional retailers now have more outlet stores and discount stores than full-price outlets. 

What is an outlet store?

An outlet store, also known as a factory outlet is a brick and mortar in which manufacturers sell their stock directly to the public, cutting out the middle-men. Hence the ability to offer better promotion and savings to visitors.

Unlike warehouse outlets, outlet-malls are more modern looking (although less upscale then a traditional retail mall), offer better variety and even new merchandises to visitors.

The overall retail industry in US may follow China, where outlet malls are booming! Setting to double in number by 2020.

The important point

Just as successful retailers must understand the value for survival, Retail REIT investors must also understand the secret to unlocking value in the Mall REIT sector.

What Retail REIT to look at?

The answer is Tanger Factory Outlet Centers (NYSE:SKT)

According to what was taught in the reit masterclass- using the A.L.M; here are the reasons why you should consider SKT:

     SKT has a portfolio of 43 upscale outlet malls operating properties are located in 22 states coast to coast and in Canada (Good coverage of the retail sector)

     Their malls are leased to over 3,100 stores which are operated by more than 500 different brand name companies (Well Diversified)

     The Company has more than 36 years of experience in the outlet industry Experienced

The only pure-play "outlet center" REIT as of May 2017; the only retail REIT focused entirely on outlet malls, has been a major recipient and benefactor of this trend towards outlet malls

Locations of the outlet malls fit the needs and wants of the people around the area –Signs of an exceptional reit 

Looking at the reit’s website, they seem to know their target markets very well, adaptive services (personal shopper), strong social media presence and proactive event initiator and management; to name a few noteworthy points  (Signs of an exceptional reit)

Looking at the numbers

SKT have been consistently giving out dividends and growing it 

Source: http://investors.tangeroutlet.com/CorporateProfile

As of 23^rd May 2017. SKT, has a BBB+ balance sheet, expected yield of 5.27% and market cap of 2.612B

SKT is currently trading at a fairly attractive valuation, both on an absolute level and based upon historical multiples (using Price to book ratios)

Balance sheet remains very well managed

Given what was stated so far, perhaps Tanger Factory Outlet Centers (NYSE:SKT) may warrant a further look, before the value investors start adding it into their portfolio.

Not Your Usual Industrial REIT (Singapore)

In the reit masterclass, we were taught how to spot exceptional industrial reits.

A quick recap, exceptional industrial reits...

Design their assets to cater to the needs of big ecommerce businesses

Strategically locate their assets near logistic ports and

Management that show signs of ‘adding value’ to tenants and open to change

That is why…

EC World REIT (SGX: BWCU), caught our attention. The new logistic reit that got listed last year in July 2016.

The REIT invests in china properties that cater to e-commerce, supply-chain management, and logistics purposes.

The REIT is huge. By huge I meant, it owns six properties in Hangzhou, China with a collective value of RMB6.4 billion (S$1.3 billion). These properties currently have a weighted average occupancy rate of 92.3%.

By the numbers…

EC World REIT has a market capitalization of nearly S$605 million. Its shares, currently trading slightly below their IPO price of 81 Singapore cents at 0.77cents, which gives the reit an expected annualized yield of 8.06%, has a price-to-book ratio of 0.85- NAV of 0.90.

Signs of being an exceptional reit

EC World REIT, with a portfolio that caters to high-growth e-commerce transactions (about 40% gross rental income comes from e-commerce) and has the ability to meet these specialized needs. For example it’s Hengde Logistics properties;

The reit describes the following

“Comprises two high-specification warehouses with the capability to store temperature and humidity sensitive goods and products, such as tobacco, wines, cosmetics and perishables”

And

“The properties have their own power generator onsite with an isolated power grid to reduce any risks of electrical blackouts affecting the buildings. The two complexes are also equipped with cargo lifts which are spacious and capable of accommodating forklifts.

In addition, there are containment areas and docking bays which facilitate efficient and effective loading and unloading of goods for transportation”

All these points to the warehouse being specialized assets that have on-the-ground delivery networks and customer collection points - all play a crucial role in connecting the industry's ecosystem and ensuring its smooth operation.

In addition all 6 properties strategically located; next to the National Highways and prominent expressways. Moreover their exposure to Hangzhou is another plus point.

Hangzhou is the logistics hub of Zhejiang province and the Yangtze River Delta. Known to many as China's e-commerce capital – ecommerce activities are expected to surge more then 50% from 110 million tonnes in 2016. 

Source: http://ecwreit.listedcompany.com/financial_highlights.html

Potential Upside

Apart from the 6 properties, EC World REIT also has opportunities for future growth as its sponsor “ForChn Holdings Group”. The latter is a key logistics operator in China.

In fact, ForChn Holdings is one of the founding members of Cainiao Network Technology Co. Ltd., a well-known logistics joint-venture with Chinese e-Commerce titan Alibaba Group. This means that EC World REIT’s sponsor has deep expertise on the logistics and e-commerce market in China.

According to interviews with the reit’s deputy CEO, we find him to be a person who is value focused, experienced and forward looking as such the REIT is also eyeing opportunities to diversify outside China, particularly in the high-growth ASEAN markets of Indonesia, Malaysia, Thailand, Philippines and Singapore.

Conclusion

Perhaps EC World is not just another industrial reit, given its one-stop, integrated logistics services for both domestic and international customers. 

Office REIT That Cannot Be Ignored (Canada)

And for our last recommendation. We look towards Canada.

Allied Properties AP.UN (TSE) a leading owner, manager and developer of urban office environment.

This reit has its properties located in major Canadian cities and metropolitan areas and they have clocked in an average annual return of 17% since 2003. That’s impressive for a REIT when you look at the performance of the S&P TSX (Canadian Board Market Index).

Source: alliedreit.com

What caught our attention?

While keeping ourselves updated on the situation about commercial companies moving their offices to industrial spaces, we chanced about Allied Properties’s “Class I” offices, essentially their offices are created through the adaptive re-use of light industrial structures in urban areas. In doing so, allowing for higher office ceilings, abundant natural light and exposure to structural frames and hardwood floor in their offices.

Though we do not see, bank or big financial institutions taking on this type of offices, we believe that these “Class I” Offices can satisfy the needs of most demanding office and retail tenants.

In a nutshell, these Class I offices offers:

+Lower overall  occupancy costs (relative to offices in Central Business District areas)

+Close proximity to CDB areas (signs of an exceptional office reit)

+Well-equipped telecommunication and other infrastructure (signs of an exceptional office reit)

+Options to different office space area (signs of an exceptional office reit)

Diversification

Other than a solid track record, the reit has the potential to also provide needed diversification to your portfolio. With over 150 properties with a total of 11.9 million square feet. Toronto and Montreal make up the bulk of its portfolio at 39% and 36%, respectively, of leasable area. These are all major Canadian cities and deemed to have less volatility due to the natural urbanization of economies around the world.

Along with its diversification across urban areas, its list of tenants is also widespread. Their top tenants include many technology companies as well. This includes

Equinix, a data centre operator, accounts for 3% of gross revenue; Ubisoft, a video game maker, accounts for 2.3%, and Visa Desjardins accounts for 2.3%. The remainder include a cloud service provider, National Capital Commission, Cologix, Entertainment One, Morgan Stanley, All Stream, and Bell Canada.

These companies only account for 19.2% of gross revenue, so Allied is not beholden to any one firm. All told, 28% is leased by telecommunications & IT and 29.7% is leased by business services and professionals.

If we look at Allied’s total occupancy, the company is doing well. In its major markets of Toronto, Montreal, and Calgary, its occupancy rate is 95.2%, 91.3%, and 85.2%, respectively.

Exciting future

Allied is not content with what it currently owns and has been making moves to expand and contract its portfolio.

In 2016, it spent a little over $376 million to acquire seven properties. It has 23,700 square feet in Calgary, 184,000 in Toronto, and a little over 1.1 million square feet in Montreal. Allied also sold a total of 122,000 square feet across Toronto, Winnipeg, and Victoria for $27 million.

Looking ahead, there will be many more development buildings in their pipeline, as seen from this picture below

The growth appears to be fueled by the acquisition growth in assets by Allied Properties.

What about the dividend?

At the time of this writing (24^th May 2017) the unit price of this reit is $37.48. Which gives an expected yield of only 4.0%. Unit price of Ailled Properties has ran up since Nov 2016 from $32.6. Perhaps it might not be a good time to invest in this reit. Recommendation, keep in view and buy when there is an opportunity. 

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Disclaimer:

All stock recommendations and comments are the opinion of writer.

Investors should be cautious about any and all stock recommendations and should consider the source of any advice on stock selection. Various factors, including personal ownership, may influence or factor into a stock analysis or opinion.

All investors are advised to conduct their own independent research into individual stocks before making a purchase decision. In addition, investors are advised that past stock performance is not indicative of future price action.