Earnings season

Each quarter we listen to the conference calls of not only our companies, but those of major peers as these can often provide insight on industry fundamentals.  Below is our take on what we have heard so far.

In self-storage, Public Storage reported with a gloomy outlook.  They blamed weak operating metrics on oversupplied markets and one time hurricane costs.  As this company is by far the most visible in the sector, we believe its negative outlook may be holding back JCAP’s market price.

I do not see it as a sector problem but rather a Public Storage problem.  They have low quality properties that are getting too old.  This is evidenced by a very strong report from CUBE in which growth is still quite rapid.  CUBE is a third party manager for many of JCAP’s properties so we think their performance is more reflective of JCAP’s fundamentals.  Jernigan’s properties are top of the line quality and very new, so we suspect they will have far better luck maintaining pricing power than PSA.

Prologis, the industrial bell-weather, discussed the unshakable demand for logistics facilities.  Although supply is coming in, demand is still significantly outpacing supply which affords rental rate growth.  We think STAG and PLYM will both benefit from this tailwind.

Weyerhaeuser had good things to say about southeastern timberlands with a significant number of mills coming online in the region.  Presently, the mills are the bottleneck in the industry vertical which allows them to capture more of the value, but as more mills come online, the timberland will be the bottleneck allowing timber companies to realize better prices as the mills compete for timber.   CTT is a pureplay timber REIT and stands to benefit greatly from the shifting dynamics.

Retail has been more of a mixed bag with shopping centers looking remarkably strong and malls looking a bit weaker.  Kite Realty (KRG) had same store NOI growth in the high 3% range with leasing spreads around 17% on a GAAP basis which is truly outstanding for a company that owns nothing but “struggling retail”.  Thus far, grocery anchors have shown to be quite resistant to e-commerce, even as Amazon enters the grocery business through Whole Foods.

WPG had similarly strong shopping center performance, but their malls came in a bit weaker than I had anticipated.  Property dispositions took a bite out of FFO and since the proceeds are being funneled into redevelopments the reinvestment will take longer to positively impact cash flows.  Ultimately, I think WPG is heading in the right direction, it could just be a bit bumpy in the near term.

SPG had an excellent report which was met with a significant drop in market price.  I don’t think it is people selling SPG, but rather people selling retail ETFs.  J.C. Penney and other retail operators are reporting weak earnings so I suspect the market is selling retail ETFs to reduce exposure to the operators.  Given SPG’s size as the largest REIT, it is in just about every retail ETF, including those that are not REIT focused.  We took advantage of the dip to buy some SPG.  With a freshly raised dividend and exceptional FFO growth relative to its multiple, we think SPG could be a high return stock.

Commentary may contain forward looking statements which are by definition uncertain.  We retain no obligation to update or correct forward looking statements should the available information change.  Actual results may differ materially from our forecasts or estimations.

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