While many investors view REITs as boring, bond-proxy, dividend stocks, – do not be fooled – there are many instances when the returns generated by REITs tell a different story. There is nothing boring about stock prices that are up 62%, 58%, and 54% over the course of less than a year. Contrary to popular belief, there is consistent opportunity in the REIT market to pick big winners. Below we discuss the trends driving big moves in three REITs that have crushed the market since January.
Equinix (EQIX) – +58.53% from Jan. 1 – Nov. 15th, 2019
Equinix is one of the worlds premier data center companies, and one of the largest REITs that exists. Born in the early days of the internet, Equinix has been providing power and connectivity to internet providers, enterprises, and large tech companies for over 20 years. Chances are, if you use the internet, your traffic has at some point flowed through an Equinix data center.
With more than 200 data centers across 25 countries, Equinix has consistently benefitted from the expansion of our modern digital economy. As mobile devices, artificial intelligence, and self-driving cars generate more and more data, landlords like Equinix capture this demand by providing power and space to those companies needing huge amounts of computing and network power.
While Equinix has been a stellar investment over the last 5 and 10 years, going into 2019 the company was struggling with some of its worst stock price performance in years.
Early 2019 Expectations: At the outset of 2019, conventional wisdom held that Equinix was set to see revenue and EBITDA growth slow meaningfully from 2018. That’s not an unreasonable assumption after a year in which the company grew it’s EBITDA by 17%. Large cloud players Microsoft, Amazon, and Google had all announced slowing growth in their data center segments, and analysts both on the buy and sell-side were extremely concerned about slower growth in the “hyper-scale” demand segment.
These concerns caused analysts to lower their price targets, and the stock traded to multi-year lows in December of 2018.
Actual outcome: Expectations, as it turned out, were far too bearish. Analyst price targets had fallen 10% between January 2017 and January 2018 but have since rebounded 27% higher. The chart below shows year over year (YoY) change in analyst price target expectations. The bearish trough in December/January and subsequent acceleration is clear. Bearishness was pervasive going into 2019, the company announced better than expected revenue and EBITDA guidance early in the year, and the stock has subsequently powered higher.
Take-away: Not even the best of breed REITs are immune to bad news and swings in sentiment. EQIX has had consistent growth over a long period of time, but that did not stop the investing mob from getting overly bearish in the face of perceived bad news late in 2018. Investors that saw a buying opportunity, however, in a high-quality data center portfolio were richly rewarded.
Brixmor (BRX) – +62.08% Jan.1 – Nov. 15, 2019
Brixmor is a retail REIT specializing in open-air shopping centers. The company began as a collection of retail assets that was aggregated and then taken public by Blackstone (BX) in 2013. Brixmor’s portfolio consists of 409 shopping center properties totaling 72 million square feet and is 91.9% leased as of the end of 3Q 2019.
Along with many of its peers in the retail real-estate space, Brixmor had seen its stock price cut in half between July of 2016 and late 2018, falling from over $28 to $14. This was a direct result of the “retail apocalypse” which has garnered headlines in US over the past few years. As Amazon continues to make goods more and more available online, bricks and mortar retail locations have had a more and more difficult time keeping tenants in their buildings.
Conventional Wisdom: As can be seen in the chart below, going into the year Brixmor had experienced steadily declining same-store net operating income “NOI” since 2015. As same-store NOI continually moved lower, so did the companies forward earnings multiple, falling from about 17x in 2015 to below 10x in late 2018. At a forward multiple of under 10x, investors clearly had low expectations for Brixmor at the start of this year.
Actual outcome: While consensus expected lack-luster same-store growth to continue, Brixmor produced positive results in 2019. Same-store NOI has increased from 0% to over 4% in the most recent quarter as bankruptcies have had less of an impact and comps have become easier. The company’s multiple has since re-rated to near historical mean levels, increasing from 10x to closer to 15x, taking the stock price from $14 to near $22 over the same period.
Take-away: While bricks and mortar retailers have had to adapt to the increasing reach of Amazon and other e-commerce players, those owning high-quality real estate and strong management teams have seen much less degradation in the cash flow generating potential of their portfolios. Despite the “retail apocalypse” Brixmor remains over 90% leased and continues to sign new leases with rents 30% higher than expiring rates. Investors that could see past the sensationalist headlines got a bargain buying Brixmor at sub 10x forward earnings in late 2018.
Prologis (PLD) +54.84% Jan.1 – Nov. 15, 2019
The king of the logistics industry, Prologis has the largest portfolio of warehouses in the world. The company owns 797 million square feet of warehouse space over four continents, with an A- credit rating and a market cap of over $57 billion. Prologis is no misunderstood small-cap stock, they are a behemoth in the warehouse space and the company is run like a well-oiled machine.
Conventional wisdom: The strength in Prologis’ portfolio going into 2019 was no secret. The warehouse industry since 2015 has benefitted where many retail portfolios have struggled. As Amazon and the e-commerce industry have taken share from bricks and mortar retail real estate, they have been massively additive in the warehouse segment. The chart below shows the steady growth in analyst price targets, Net Asset Value (NAV), and the stock price of PLD since 2015.
Actual outcome: Expectations were not low for PLD going into 2019, but as fundamentals in the warehouse space have remained incredibly strong, the company was able to exceed already lofty estimates for 2019 growth. As the year has gone on, analysts have steadily increased their price targets and NAV estimates, pushing PLD’s stock price meaningfully higher.
Take-away: Expectations can be flawed in either direction, and while analysts are traditionally overly bullish, in this instance they under-estimated the fundamental strength of PLD’s real estate portfolio. Those that could see the long-term direction of trends in the warehouse space got an incredible buying opportunity towards the end of 2018 in a best in class REIT.
Don’t miss big opportunities in REITs
The REIT market offers fantastic returns for patient and insightful investors. Through the course of every year, there are sell-offs in booming property types, opportunities to step into distressed situations, and the ever-present ability to simply buy and hold high quality real estate portfolios run by best in class management teams.
With the right tools, investors can systematically take advantage of these opportunities. A model that emphasizes value, momentum, and quality has been invested in all three of these excellent performers at different times during 2019, simply by consistently re-balancing using a rules-based process. As investors look to harness the power of REITs within their portfolios, a model with a proven track-record can be an invaluable tool.
For those interested in the opportunity to add exposure to the highest quality commercial real estate that exists, Serenity Alternatives is here to help. Our tools allow investors to consistently mine the REIT universe for compelling ideas. With a powerful back-tested model and deep expertise in the REIT market, our mission is to help investors make better decisions in REITs.
For information on the current opportunity set or to explore Serenity’s suite of REIT products, contact Martin Kollmorgen at Mdkollmorgen@SerenityAlts.com.
Martin Kollmorgen, CFA
CEO and Chief Investment Officer
Serenity Alternative Investments
Cell: (630) 730-5745
**All charts generated using data from Bloomberg, LP, S&P Global, and Serenity Alternative Investments
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