Andrew T. Babin covers apartment REITs as well as student housing and manufactured housing REITs. Mr. Babin says that for apartment REITs, sentiment has been difficult for this year so far, and the main reason for that is new supply is overtaking demand, and the market needs time to absorb a lot of the new inventory. Mr. Babin is very positive on student housing. He says where the apartment REITs are having trouble deploying new capital, the student housing companies are still finding very good, accretive development opportunities relative to their cost of capital. He says manufactured housing is a very good business, primarily because capital expenditures are very low.
Full interview available here.
Real estate investment trusts have faced a difficult environment this year. New supply is now overtaking demand, and even though demand continues strong in apartment REITs, the deliveries of new supply nationwide are at very elevated levels, something that is especially difficult after also being elevated in 2014 and 2015.
Analysts expect supply to be strong in 2017 as well. Analysts think the market needs time to absorb the new inventory.
Same-property fundamentals in terms of rent growth are decelerating and REITs are beginning to maybe lose occupancy in some of their properties. Analysts say, however, that investors anticipated the slowdown, and this part of the REIT market has underperformed REITs as a whole.
Analysts also say the acquisition market is overpriced. They say it’s a good time to sell, but its hard to reinvest those proceeds, so the capital has had to be returned to shareholders.
Geographically, as location is always key in real estate, analysts say New York City and San Francisco have seen the most weakness. There has been a large amount of supply growth in San Francisco, which is expected to end in 2018.
In New York City, demand has decelerated as well. Job growth has decelerated, especially growth in high paying jobs, which correspond to the type of workers who are able to afford and have been preferring high-priced luxury apartments. Supply has continued to grow in Manhattan and in the surrounding areas, such as Hoboken and the outer boroughs.
Other regional markets have fared better. Analysts say Southern California’s supply growth has been modest, and demand growth was slower than Northern California. They say this has caused momentum to build up, especially as demand growth has how continued to be strong.
Seattle has seen positive trends as well. There is a large amount of new supply, but there has been increased migration of technology workers from the Bay Area to Seattle because the price points are much lower: it’s cheaper to do business, and it’s cheaper to live. Rent growth has been strong, but analysts expect more growth.
As for other types of REITs, analysts are positive on student housing. They say this segment has is less correlated with the economy and more with enrollment trends.
In the second quarter, analysts saw many of the apartment REITs moderate their guidance for the year, mostly owing to developments in in New York City and San Francisco. Investors probably expect the third quarter to be the same.
Full report available here.
Vincent Colicchio covers business services and software and companies within this area that are related to health care. On the hospital spending side, Mr. Colicchio says capital budgets have been tight for some time, and that the electronic and medical record business has largely matured. He says the education side is where he is seeing healthy spending, and talks about health care learning management systems and how companies implementing those are competitive leaders. Mr. Colicchio is also positive on companies that provide business-process outsourcing services.
Full interview available here.
Portfolio Manager Alex Ruehle of Denver Investments says Edison International (NYSE:EIX), a California-based public utility, will benefit from the state’s favorable regulatory environment. He also says the company’s strong fundamentals should drive 6% dividend growth.
Most utilities are struggling against the backdrop of efficiency improvements, environmental upgrade requirements and demand declines. However, a favorable regulatory environment in California aligns investors in Edison International with the state’s ambitious goals to modernize the electric distribution grid, integrate rooftop and utility-scale renewable generation, develop battery storage solutions, apply energy efficiency technologies and incorporate electric vehicles. California awards its utilities some of the best allowed returns on equity of any state in the nation and has created mechanisms to ensure timely payback of capital expenditures.
Edison International’s clean balance sheet, low payout, and strong and stable cash generation, which derived primarily through transmission assets and less predominantly from riskier generation sources, confer the flexibility to fund its capital program without diluting shareholders through share issuance. The company maintains a below industry-average payout ratio and will support dividend growth through investment in its productive asset base. Currently, Edison International has a 2.7% dividend yield. We believe that its attractive fundamentals will drive 6% dividend growth over the next five years.
Donald Hooker discusses health care IT. He says there is an increased focus on transitioning U.S. health care to value-based reimbursement, and this evolution is driving more demand for health care IT. He says there is a healthy market backdrop right now for health care IT vendors. When it comes to investing in health care, Mr. Hooker advises investors to stay away from volume-based propositions and to look for value propositions.
Full interview available here.
Raj Denhoy covers a large area of medical devices. Mr. Denhoy says devices have been a relatively good space for the last couple of years, but there was a period of time when they were out of favor. He says over the last decade or so there’s been a lot of changes in the industry, and in the last couple of years the stability of the markets has led investors to revisit the sector. Mr. Denhoy believes device companies will continue to manage through challenges, grow their top lines and deliver good cash flows and earnings. He expects to see continued innovation and appreciation of the stability of the industry.
Full interview available here.
Dr. Liana Moussatos covers emerging pharmaceuticals and looks at best-in-class clinical profiles in different disease areas. She says fundamentals in life sciences are good, but macro events could create an overhang. She is seeing a lot of M&A recently and says there is potential for more upside to come in the sector. Dr. Moussatos is concerned about the FDA, as there are areas of unmet need where the FDA could reduce their statistical requirements.
Full interview available here.
Portfolio Manager Alex Ruehle of Denver Investments says Apple Inc. (NASDAQ:AAPL) has both an attractive valuation and strong capital allocation behavior, and he expects the company to increase its dividend payments at a 10% annualized pace over the next five years.
There are two big-picture points I’d like to make. First of all, the stock has a very attractive valuation. When we began looking at it as it pulled back into the $90 range we concluded that the stock was simply too cheap given the power of its brand coupled with the upcoming iPhone 7 product cycle. At that point the stock was embedding very bearish expectations: 10% annual revenue declines through 2025, while margins were priced to deteriorate from 28% down to 18% — all while we were discounting the cash flows at a conservative 10% cost of capital. This seemed wholly unreasonable and gave us a large margin of safety going into a product launch for which many had low expectations.
Secondly, the company’s management team exhibits attractive capital allocation behavior. Apple has been reducing shares at a nice pace. Over the past three years they’ve actually reduced share count by 17%. Moreover, the company started their dividend policy in 2012 with a 6% payout. At the end of 2015, Apple was paying out just 21% of earnings in dividends.
Considering the low payout, we felt the dividend policy was ripe for a change. Indeed, we have seen 11% compounded annual growth in the dividend over the past four years. Apple currently pays a 2% dividend yield, and we anticipate that they will increase their payment at a 10% annualized pace over the next five years.
We believe that investors overlook Apple as a dividend growth vehicle. To put their dividend into perspective, the company has over $260 billion in cash. That’s $47.50 per share or nearly 25 years of dividend payments just sitting in cash. Given management’s past behavior, we think that future capital allocation decisions will continue to create value for shareholders.
Brien M. O’Brien discusses Port Capital LLC. While Mr. O’Brien has experience across all the major domestic asset classes, he focuses on small- and all-cap value equities as well as the MLP/energy sector. He uses a disciplined value investment strategy and research process to find companies that generate significant free cash flow. Mr. O’Brien studies a company’s fundamentals and competitive advantages. He also looks at management’s capital-allocation process and their success at compounding capital, as he believes the strength of a management team is extremely important. In addition, Mr. O’Brien places an emphasis on investments with repeatable, predictable and consistent revenues, strong margins and minimal capital intensity.
Full interview available here.
Derek Warren discusses Lincluden Investment Management. Mr. Warren’s philosophy is based on the belief that markets don’t always price value and risk appropriately. He aims to buy securities below fair value and to get paid for the risk he takes. Using fundamental research, Mr. Warren identifies undervalued REITs and real estate companies in North America to build portfolios that will generate superior risk-adjusted returns over the long term. One of the current trends that Mr. Warren sees in real estate is the development of workspaces that attract and retain young talent.
Full interview available here.
