As I alluded in a recent article, my first career in commercial real estate was development where I learned to create value literally from “the ground up”.
Arguably, being a developer is one of the riskiest forms of investing. You have to take outsized risks to purchase land, find a tenant, borrow money, and rely on the laws of nature such that the final product is constructed on time and on budget.
Assuming all of the ingredients come together, the rewards can be quite satisfying.
That’s the subject of my upcoming book on Donald Trump. As I have informed many of my friends and followers, I’m not writing on Trump, the presidential candidate; I’m writing on Trump, the businessman. Certainly the two paths intersect, and hopefully my book will provide insight into the true wealth that has been generated by the legendary real estate developer.
But how can an average investor like you or me take advantage of the outsized returns that are generated in the public REIT sector? What are the best development REITs?
Take a shovel and put on your hard hat…and begin reading about REITs That Derive Value From The Ground Up!
Agree Realty
Agree Realty (ADC) is a Net Lease REIT that is based in Michigan. The company was founded in 1971 by Richard Agree (Chairman) and is now run by his son, Joey Agree (CEO). ADC went public in 1994 and the company has a 40-year track record rooted in development. ADC is a preferred developer for many best in class retailers and the portfolio has a large composition of national (74%) and super-regional (13%) tenants. ADC’s development business (around 10% to 15% of growth per year) produces returns that are around 100 to 150 bps above a typical acquisition opportunity. In addition, because ADC’s development projects are brand new the leases are typically 15 to 20 years (longer the typical duration of an acquired property). ADC has a market cap of $584 million and the company’s dividend yield is 5.8%. Shares are trading at $32.15 with a P/FFO multiple of 13.5x.
LTC Properties
LTC Properties (LTC) is a Healthcare REIT that focuses on skilled nursing (58%) and assisted living (35%). The California-based REIT has a pipeline of around 23 development projects that consist of over 104 million square feet. LTC has an impressive balance sheet that consists of no secured debt and the company’s development proficiencies allow the company to produce exceptional profits margins (of around 300 bps compared with the company’s weighted cost of capital). Like ADC, LTC is a smaller REIT (market cap of $1.578 billion) and the disciplined management team has orchestrated a successful development business with a high degree of dividend predictability. LTC shares are trading at $44.37 with a dividend yield of 4.9%. The P/FFO is 16.2x and I consider that Fair value, perhaps a pullback is appropriate for now.
Taubman Centers
Taubman Centers (TCO) has a long history of development and even though the mall sector has slowed down considerably, the company has managed to continue creating value from the ground up. Since 2001 TCO has generated over $3.5 billion in development value and the company’s pipeline – around $2.15 billion through 2016 – is also quite robust. In the US projects are underway in Honolulu ($465 million to open in August 2016) and Sarasota (recently opened). In China and South Korea TCO has almost $2 billion underway in various JV deals. TCO owns 22 properties today and the company boasts the highest sales per square foot ($818) in the Mall sector. TCO’s share price has become more luxurious of late, trading at $78.50 with a P/FFO multiple of 23.5x. I’m glad I took advantage of the previous pullback since there is less excitement with the current 2.9% dividend yield.
CyrunsOne
CyrusOne (CONE) is one the smallest data center REITs with a market capitalization of $2.4 billion. I was attracted to this REIT because of its development spreads – around 17%. CONE operates in 7 US markets and in 2015 the company expects to build around 1.7 million square feet (was 1.2 million square feet in 2014). The profit margins are extremely robust and of course the earnings growth is also robust. CONE is trading at $35.32 per share with a P/FFO multiple of 16.8x. I would wait for a pullback though, the 3.6% dividend yield is less exciting as the profit margins.
Tanger Factory Outlets
Tanger Factory Outlets (SKT) was founded over 20 years ago and this North Carolina-based REIT has over two decades of development experience. In fact, SKT was a pioneer of the outlet center concept and over the years the company has grown into a name-brand outlet landlord of choice. SKT has recently completed several new projects – Savanah and Foxwoods in Connecticut – and two are under construction – in Memphis and Columbus. Also, SKT is active in Canada, partnering with RioCan on two projects in Ontario. SKT shares have begun to heat up (glad I got in on the bargain) as the P/FFO multiple is 16.5x. Shares are trading at $35.90 with a dividend yield of 3.2%.
Alexandria Real Estate
Today I wrote an article on Alexandria Real Estate (ARE) and the company’s clustered urban science and technology campuses. ARE’s uniquely positioned platform is a moat-worthy operation in which the company collaborates with highly innovative tenants to attract world-class talent. ARE’s buildings are world class and the businesses consist of Life Science (21.2%), Pharma (22%), Public BioTech (25.9%), Private BioTech (7.6%), Institutions (20%), and Traditional Office/Tech (3.3%). By focusing on disciplined capital allocation, investors benefit from the highly visible pipeline of value creation (the development pipeline represents around 12% of assets). ARE is trading at $90.90 per share with a dividend yield of 3.4%. I would look for a pullback (and I regret the opportunity when shares hit $83.00 a month ago).
The author owns shares in LTC, TCO, CONE, and SKT
Source: SNL Financial
Brad Thomas is the Editor of the Forbes Real Estate Investor and writes for Forbes.com and Seeking Alpha. He is also a frequent guest on Fox Business and he is currently writing a book, Trump: It’s ALL Business, about U.S. presidential candidate Donald J. Trump.
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