Executive turnover continues in a positive direction despite a slowdown in a few of the key categories. The trend in executive turnover continues to correlate with the continuing positive news related to job growth in the American economy and the declining overall unemployment rate. On July 3, the U.S. Department of Labor’s Bureau of Labor Statistics (BLS) announced the June Employment Report and, as anticipated, the numbers were quite positive. According to the BLS Report,
Andrew M. Alexander, President and CEO of Weingarten Realty Investors (WRI), was very pleased with his company’s first-quarter earnings results.
“Even though occupancy was down slightly from year-end, it was still way better than plan, way better than it was a year ago. Renewals, we are seeing really strong rent growth. The same-property NOI at 3.3% is our ninth consecutive quarter in excess of 2.8%, and an average of over 4% since January of 2012,” Alexander said.
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Alexander says that the anchored shopping center business is historically a steady one, so he is confident with Weingarten‘s NOI results as well as its dividend yield.
“You are never going to see wild swings, so to be able to produce at the 3% to 4% range, we are very pleased with that and think that a dividend yielding somewhere in excess of 4% offers investors a very good risk-adjusted return,” Alexander said.
Senior Analyst Paul Adornato of BMO Capital Markets says that the manufactured home segment is doing quite well, and that one of the biggest names in the sector, Sun Communities Inc (SUI), is poised to benefit from renewed interest from customers.
“We have it rated [Sun] an ‘outperform.’ Sun caters primarily to families or all-age communities. This is basically the lower-end demographic of the single-family housing market,” Adornato said.
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Adornato says that since the single-family housing bubble in the U.S., mortgage underwriting has become more stringent, resulting in customers turning toward manufactured housing.
“The typical resident of a manufactured home community, folks who were given a mortgage to buy a $150,000 or $200,000 house during the bubble, are no longer being offered that mortgage, so they are returning to the manufactured home communities. This is a very, very strong driver of Sun‘s business — the return of the core customer,” Adornato said.
Analyst Daniel Altscher of FBR Capital Markets is seeing an expanding business model trend within agency mortgage REITs such as Annaly Capital Management, Inc. (NLY).
“You’re seeing names that were pure-play agency mortgage REITs — just owning agency MBS — now expanding the business model to do things outside of that,” Altscher said. “You’ve seen that with a name like Annaly.”
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Altscher says Annaly is expanding by making acquisitions and announcing initiatives with other REITs to diversify its business model.
“In 2013 they purchased CreXus, which is a commercial real estate lender, so they took on a bit more of that commercial mortgage REIT platform within the agency shell,” Altscher said. “And you’ve seen them now diversify the business model even more, forming a venture with Inland (IRC) to buy net-lease assets, to actually own the property and own the equity. That’s a very different strategy than what Annaly has done historically and what the business model was before.”
Analyst Daniel Altscher of FBR Capital Markets & Co. says Two Harbors Investment Corp (TWO) is an interesting investment, as it is a beta play on credit, a pioneer in the mortgage REIT industry, and has an attractive risk/reward profile.
“Credit is something that I want to own right now. Delinquencies are still falling on the residential side, home prices are still rising…from our perspective I’m getting access to a legacy portfolio of mortgage bonds that I think are trading substantially below where the actual cash flows will reside at and where the actual fair values will reside at. And so from that perspective I feel like a stock that trades at 95% of book value is really attractive,” Altscher said.
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Altscher also likes that Two Harbors Investment is a company that helps create the market. He has seen it branch out to become more of a mortgage finance company that happens to be in a REIT shell.
“You’re seeing this through the purchase of MSRs, you’re seeing this through the creation of an origination network to purchase whole residential mortgage loans and get a securitization platform in place, you’re seeing this through new initiatives to look into how to exploit non-QM lending as that starts to take hold, you’re seeing this through accessing the FHLB to get long duration, cheap financing that can finance the portfolio both on securities and whole loans and for securitizations for a warehouse facility,” Altscher said.
Altscher adds that as a stock that trades at 95% book value, he can’t think of a better name that has a chance of trading above book value.
Analyst Daniel Altscher of FBR Capital Markets says CYS Investments Inc (CYS) is one of his “outperform”-rated stocks, as the company is trading at about 90% book value, offers a 14%-plus dividend yield and is in line with his thesis on rates.
“The stock and book value has been a little more beta to rates, and you can see it in the stock movement, you can see it in the book value movement,” Altscher said. “But my overall call on rates is that we are not going to see a substantial move up in rates over the next several months or so, even with the risk of taper ending. So from that perspective, I’m fine owning a little more beta on rates and owning a little bit more beta on book value, because I feel I’m getting paid a substantial risk-adjusted return to take on that risk.”
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Altscher says that for someone who agrees with his thesis or is looking for a bear market hedge, CYS can be a very interesting investment.
“We’ve obviously had some issues in Ukraine, we’ve had talks about further QE from the ECB; there is reason to think that the world is not a jolly, improving place in some respects. And so in that case having a bear market hedge, if you will, in a portfolio that provides you income and you basically get paid to be short the market in some respects, I think that’s a good name to own,” Altscher said.
Managing Director Christopher Nolan of MLV & Co says Main Street Capital Corporation (MAIN) has one of the strongest management teams in the sector, and is trading at roughly 1.6 times NAV while offering an 8% dividend yield.
“They tend to focus on smaller, lower-middle market companies which are often family-owned, and they are going through some sort of transition. Either the entrepreneur who founded the company is looking to retire or getting a divorce or something. They are looking to sell or pass it on to the next team,” Nolan said.
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Nolan says generally these companies have stable management teams, occupy a stable defensible industry niche and have good cash flow generation. Main Street‘s stock, he adds, benefits from the capital gains, which drives growth in NAV per share.
“Main Street Capital offers to invest both debt and equity and becomes a significant shareholder, which enables them to help grow the company,” Nolan said. “[Main Street has] grown NAV per share, which is equivalent to book value per share, well above the industry average for the last several years, so it’s a name which offers an attractive dividend and NAV per share growth. I have a price target of $37, which is achievable in the next year or so.”
Managing Director Christopher Nolan of MLV & Co is impressed by Prospect Capital Corporation’s (PSEC) superior yield as well as how the company approaches risk.
“For example, liquidity risk — Prospect has 24 banks in its bank credit facility. As for interest rate risk, almost all of Prospect’s loans are adjustable rate, almost all of its funding is fixed rate. So if interest rates were to go up, earnings yields would generally benefit,” Nolan said.
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Nolan adds that Prospect Capital has roughly $6 billion in assets, and approximately $4.5 billion of those assets are completely unencumbered. Additionally, the company benefits from using a 100% external valuation process for valuing its investment portfolio.
“Every quarter they can deliver all the records from the investment portfolio and they turn it over to an outside firm,” Nolan said. “Furthermore the same Prospect team that finds a deal and persuades the company to invest in also has to manage the investment afterward, and live with it through good and bad. All these things, you start adding them up and it’s an attractive name.”
Nolan also reports that Prospect Capital is now offering a 13% dividend yield, which is paid monthly.
Portfolio Manager Margaret Vitrano of ClearBridge Investments says that Visa Inc (V) is a company that has many characteristics she looks for in a core portfolio holding.
“Visa operates an electronic payment network, so it is a beneficiary of the trend away from using cash as payment and toward using credit cards or debit cards to pay for things. Higher adoption of electronic payments is a secular trend that has been underway for some time, but one that we believe should continue for the foreseeable future,” Vitrano said.
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Although Visa is profitable, Vitrano says the company is not sitting back while the electronic payments industry continues to move forward.
“Visa generates high returns, but the management team is not resting on its laurels. The company has been re-investing in its business to ensure that it stays relevant as the payments industry continues to innovate,” Vitrano said.
Thomas Eidelman, Portfolio Manager at Eidelman Virant Capital, says his firm looks for companies with great management and strong market positions trading at low price to book, low price to earnings ratios, or low industry-specific multiples. The firm finds such characteristics in small banks like Pacific Premier Bancorp, Inc. (PPBI).
“One of our largest holdings and favorite banks is Pacific Premier Bank based in California. Steve Gardner took over this bank a few years ago. He is an aggressive marketer and fantastic manager; he is an outstanding operator that is trying to outwork his competitors,” Eidelman said.
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Eidelman says that as one of the few publicly traded banks in California, Pacific Premier is creating scarcity value.
“Anybody who wants to get into California market is going to look at potentially buying Pacific Premier,” Eidelman said. “We think PPBI could earn $1.40 next year and should trade at 15 times those earnings based on their markets, management quality and competitor valuations resulting in a price target of $21 per share, a 50% premium to the current price of $14.”
