SIR - Select Income REIT

[thepupil]

Scattered thoughts...

 

Portnoy/RMR managed (or should we say mismanaged) triple net lease REIT trades 8% cap rate, 13.8% FFO Yield, and a sustainable 9.9% dividend yield, has WAL of 10.5 yrs and minimal expirations before 2022, 40% IG tenants, 15% awesome hawaii asset, 35% non IG non Hawaii, well termed out freshly issued low cost fixed rate debt.

 

I am nibbling with the idea that I will receive 0% growth in value per share over time and will just receive the dividend. At a 10% yield I start to nibble in the IRA and will add should shareholders become more fatigued and the stock bombed out. This is effectively a portfolio of corportate bonds since they own lots of corporate headquarters with long leases with residual risk once leases expire. With such high carry, the capital return is very high and mitigates the residual risk substantially.

 

Hawaii assets are very valuable and worth well more than book and the implied price (possibly as low as a 5% cap rate).

 

Portnoy's will not build value and are perennial underperformers. They are sufficiently entrenched after a failed activist campaign and after SIR signed a 20 yr management agreement with them.

 

SIR will spin a 10% interest in RMR to shareholders for which they look to have actually underpaid. This amounts to a decent fee cut since they are giving economics of the management company to shareholders, but we don't know RMR details yet.

 

Shares Out:  90MM

Market Cap: $1.8B

Debt          : $2.2B

$4B enterprise value

 

Most recent quarterly NOI was $80MM and FFO $60MM ($0.7 / share).

 

 

 

Background

2012 VIC Writup @ $22.70 http://www.valueinvestorsclub.com/idea/SELECT_INCOME_REIT/70269

4/2014 VIC Writeup @ $30.00  http://www.valueinvestorsclub.com/idea/SELECT_INCOME_REIT/117366

 

Lakewood's failed activism and ensuing greenmail, sold around $27

http://www.sec.gov/Archives/edgar/data/1424381/000092189515000074/ex1todfan14a10242002_011315.pdf

http://finance.standardspeaker.com/news/ipo-news/portnoys-pay-greenmail-to-make-activist-go-away-seeking-alpha-registration/portnoys-pay-greenmail-to-make-activist-go-away-seeking-alpha-registration-13844216.htm

 

 

Commonwealth's sale to GOV at $31.50

http://www.prnewswire.com/news-releases/commonwealth-reit-sells-its-interest-in-select-income-reit-sir-266480791.html

 

 

[thepupil]

adding a little, 10.3% dividend yield, 14.5% FFO yield and the spinoff will be an additional $0.50 to $1.00 coming in the next quarter or two.

 

Is there no price at which a Portnoy REIT is ownable? In my opinion there is, and we are getting there.

 

Less than 7X FFO for a NNN REIT with no giant red flags in the assets (they overpaid for a few things, but I don't see any doomsday scenario here with the assets.

[JAllen]

Why do you like this one more than GOV?

[thepupil]

- Humu-humu-nuku-nuku-apua-a  (I like their Hawaiian assets, I introduce myself in social gatherings as a Hawaiian industrial land owner)

- cheaper on FFO basis

- more bombed out with two waves of failed activists and followers thereof

- cleaner BS without minority stake in another stock (GOV owns a big piece of SIR, as I'm sure you know)

- SIR came to market very recently w/ debt so cost of debt very low and nicely termed out

- I prefer corporate headquarters (where SIR seems to be deploying capital) to government as tenants, maybe that's off

- I had already looked at SIR when the portnoys got kicked out of CWH since CWH owned a chunk of SIR, so I was already familiar with it when it started really falling, i haven't looked at GOV as closely

 

[thepupil]

I've added a poll to test the yield piggish-ness of the board.

 

SIR trades at what I believe to be a very sustainable 11% yield, providing an equity return in cold hard cash, assuming no capital appreciation or growth, and providing a very nice return assuming even just a tiddily bit  / infinitesimal amount / a smidgeon / a hair / a pinch / a drop of growth.

 

Look up the self-interested and poor track record of the Portnoy's. Look at SIR's assets, liabilities, cash flows, tenant roster, etc. Look at the RMR spin (well actually you can't do that yet, but know that you're going to own a nice percentage of RMR (the parasitic management company that feeds upon this REIT and others). And make a decision as to what yield you require.

 

If you think the yield is unsustainable, I'd like to hear why. I rate shocked their debt up by 300 bps and it still works. I don't see any crazy red flags in the tenant list.

 

For those who participate, thanks in advance.

[Zorrofan]

food for thought......

 

http://seekingalpha.com/article/3241446-investing-in-one-sucker-yield-reit-can-sink-the-fleet

 

and a Munger quote on quality:

 

We've really made the money out of high quality businesses. In some cases, we bought the whole business. And in some cases, we just bought a big block of stock. But when you analyze what happened, the big money's been made in the high quality businesses. And most of the other people who've made a lot of money have done so in high quality businesses.

 

cheers

Zorro

[thepupil]

dash to trash...eventually valuation outweigh portnoy management...maybe.

 

High quality, high valuation (SL Green) got rocked and the shit of the shit (where I am tentatively playing) starting to see a little more love. <--though this isn't a good comparison and more speaks to net lease vs. office. SIR is still at a massive massive massive discount to the Brad Thomas, super dependable triple nets (O and NNN)

 

7X FFO and 9.5% yield with a little re-rate optionality looks good to me.

 

 

 

Select Income, Government Properties Best February Office REITs

Analysts Jeffrey Langbaum (REITs) & Colin Winrow

12:27

 

Office REIT 2016 Year-to-Date Returns

 

Exhibit

(Bloomberg Intelligence) -- Select Income REIT shares gained 9.1% and Government Properties Income Trust's rose 8.1% to be the top-performing office REITs in February. Both easily beat the peer group's average 2.4% decline. They were followed by Corporate Office Properties Trust, which rose 4.9% in February and is the leading office REIT year-to-date. These three REITs, which each trade at 2016 FFO multiples below the peer group average, were the three worst-performing office REITs of 2015.

Peer Comparison: Select Income REIT, Government Properties Income Trust, Corporate Office Properties, Highwoods Properties and Hudson Pacific Properties were the only office REITs to post share price gains in February. First Potomac Realty, down 13.6%, was the peer group's worst performer.

[BPCAP]

 

Already mentioned by many, but I repeat what's before us:  Some great properties but a classic principal/agent conflict.  Management is incentivized to grow sq. footage, not to necessarily increase per-share net worth.

 

Good to follow heuristics here and avoid.  You may miss opportunities from time to time, but in the long run, you'll be better off for it by avoiding the big crash; and you'll be freed up to catch other, better opportunities. 

[thepupil]

up 40% ish since start of thread (33% price + dividends) excluding the RMR spin which added a little depending on how long one held, great relative to S&P and IYR, but actually quite shitty relative to O and NNN as it still trades 400 bps wide of those.

 

probably time to trim as the absolute yield (7.5%) is starting to get to where I'd no longer be satisfied with the 0% growth 0% return from re-rating price and the portnoy discount / absolute yield feels a little more realistic than when this was yielding 11%.

 

price probably needs to only go a little higher before they issue equity to increase the size of the empire.

[thepupil]

Portnoys doing what they do best, diluting value per share and growing their empire in GOV (not SIR, though SIR is selling off in sympathy as shareholders realize they haven't changed a bit).

 

GOV off 15% or so and at a 9.3% yield and may offer opportunity for the sequel to the SIR trade, but probably need a bit more sell off to get interesting.

 

think the assets are a little worse than SIR, tenant quality is better with 70%+ government and IG rated corps but think the lease term and supply/demand dynamics are probably worse. FPO has some great stuff in DC proper (like their building right on Dupont Circle), but also some  crap in the exurbs appears oversupplied, I looked at it a couple times but couldn't get there on the mix between high and low quality.

 

 

 

 

https://seekingalpha.com/article/4084577-first-potomac-found-patsy

 

Government Properties Income Trust Prices 25M Common Shares

Government Properties Income Trust (NYSE:GOV) priced public offering of 25M common shares at $18.50/share, settlement expected on July 5, 2017.

Net proceeds from this offering to fund, in part its acquisition of First Potomac Realty Trust and repay outstanding unsecured revolving credit facility or invest the net proceeds from this offering in short term investments consistent with its intention to maintain its qualification for taxation as a REIT.

Underwriters have a 30-day option to buy up to an additional 3.75M shares.

Joint bookrunning managers: Citigroup, BofA Merrill Lynch, Morgan Stanley and UBS Investment Bank.

 

Government Properties buying First Potomac for $1.4B

First Potomac (NYSE:FPO) will receive $11.15 per share in cash - that's lower than last night's close of $11.35, but a premium to FPO's price of three months back when speculation of a sale was first reported.

Government Properties (NYSE:GOV) expects to realize about $11M of annual G&A expense savings.

The estimated acquisition cap rate is about 7%, and GOV expects the deal to accretive to normalized FFO per share after 2018.

The deal, of course, is subject to approval of shareholders.

GOV has launched a 25M share secondary offering to help fund the purchase.

A conference call is set for 10 ET.

FPO -2.2% premarket to $11.10.

 

 

[thepupil]

https://s2.q4cdn.com/076011897/files/doc_presentations/2018/11/OPI_Nareit-Presentation_Nov-2018_FINAL_TAB-edits_FINAL.PDF

 

So the Portnoys have done what they do best and destroyed equity value in GOV/SIR, to the point where it may be once again time to sleep with these flea ridden dogs.

 

GOV and SIR are merging. SIR owns a slug of ILPT that they are spinning off. So GOV and SIR (henceforth called CrapCo since it owns a bunch of marginal real estate leased to decent tenants). CrapCo's ticker will be OPI (Office Properties Income Trust is the real name)

 

GOV shareholders will own 52% of CrapCo and SIR 48%. SIR still owns the majority of ILPT (it won't soon), so let's use GOV to calculate the implied valuation of OPI. Here's a short thesis on GOV at $11.30 (stock at $6.60 now) for some background https://www.valueinvestorsclub.com/idea/Government_Properties_Income_Trust/2818335034#messages

 

GOV trades for $660 million. Divide that by 0.52 to get the pro-forma OPI / CrapCo equity value of $1.269 billion.

 

What do we get for $1.269 billion? You get the equity in the real estate owned by GOV and SIR ex ILPT.

 

SIR has $1.4 billion of ex ILPT debt. GOV has $1.5b billion so $2.9 billion of debt + $1.2B equity market cap =$4.1 billion EV.

 

For $4.1 billion, you get in the company's words:

 

OPI will own, on an adjusted basis, 213 buildings containing 30.2 million square feet in 38 states and the

District of Columbia, with undepreciated gross assets of $5.7 billion, occupancy of 92% and a weighted

average remaining lease term by revenue of 5.8 years. In addition, approximately 66% of OPI’s annualized

rent will be paid by tenants that are investment grade rated 3.

 

Not included in that $5.7 billion of gross is $0.4 billion of properties already sold to delever

As of September 30, 2018, excluding ILPT, adjusted for the sale of SIR common shares owned by GOV and for 50 buildings containing 3.4 million

square feet that are expected to be sold prior to year‐end 2018 for total gross proceeds of approximately $438.5 million. See Appendix for property

disposition detail. Amounts have not been adjusted for the up to $750 million of property sales to occur post merger to achieve OPI’s leverage

targets.

 

So about $6 billion of properties / properties which have agreed to be sold for $4.1 billion, an asset level discount of 30 or so percent.

 

The equity of $2.8 billion or so is selling for $1.2 billion or a 60% discount to gross book. 

 

The equity will have a divvy of $0.5 - $0.6 (7.5-9.0%). I assume after the massive cut and the deleveraging this is sustainable, but this is all napkin math to see if I want to get in bed with these dogs again, not a rigorous valuation.

 

GOV and SIR also own 2.7 million (26% of float, less of the company) shares of RMR, the publicly traded parasite which gets the fees from the external REITs. This is worth $150 million. I assume they'll have the REITs blow out of that. So OPI (CrapCo) has $440 million of buildings that it has agreed to sell, owns $150 million of stock in the external manager and also intends to sell $750 million of buildings after the merger to de-lever. LEt's say they take a big discount on the $750 million and only get $500 million and only get $100 million from the stock. So if that happened, then Gross buildings would go down to $5 billion ($5.7-$0.75) and debt would go down to $2 billion ($2.9-$0.1 from stock sale, $0.4 from agreed to sale, and another $0.5 from the target $0.75). this would reduce leverage to something like 40% of gross asset value, likely reducing the loss of capital from excess leverage (the portnoys dilute and delever before credit becomes an issue).

 

So there you have it, I think OPI is trading at something like 0.3-0.4x gross book and will not be overly levered. The portnoys suck and continue to prove that out. But that doesnt' mean there is absolutely no price at which their stocks are a buy (for me at least). Not sure if that's now or with additional moves down. Would have to do some more work and it may not be worth it if higher quality stuff keeps falling.

 

Disclaimer: I may have well missed some things and miscalculated debt, gross book, really anything, just an initial 5 minute driveby after GOV/SIR collapsed.

 

Also Gross book is obviously a terrible metric to value a portfolio of real estate purchased by crappy capital allocators. Will follow up with NOI, implied cap rate, blah blah blah.

 

EDIT: I think it's at like a 11-12% cap rate, levered with a bunch of 3-4% debt. The pro-forma FFO yield is probably something insane. There's massive lease roll at GOV's properties and their debt is below market, so it's not like all that stuff is sustainable.

 

[Deepdive]

Why bother sleeping with sleaze bags in this market where there are plenty of bargains? 

[thepupil]

Why bother sleeping with sleaze bags in this market where there are plenty of bargains?

 

I decided to focus on other higher quality stuff.

 

It's up 25% in the 10 trading days since my posting which is about what I'd probably have been playing for on the re-rate from "absolute crap" to "crap". It's probably still cheap, but I think the temporary dislocation is gone and I'm not really interested in doing the work on it.

[aws]

Have you looked at since the Q4 report?  Gave back most of its post merger gain and is getting back to the absolute crap price, while the rest of the market is obviously quite a bit higher since.  I haven't done any work on it, but it's on my list to look into for sure.

[aws]

Current distribution is .55/quarter and management says that's about 75% of the cash available for distribution.  Obviously I'm quite skeptical with the Portnoy entities but I think there's a reasonable opportunity for a quick return, especially if this continues down at the current rate.  We're back to almost exactly where it was when you posted back in December.

 

We are at an 8.3% yield right now, and I don't really see this trading much below a 10% yield given the extra cash available on top of what is paid out. I'm thinking about buying some shares and writing September 22.50 call options for a net cost of around 21.50.  It's only about a dollar of premium which sounds low, but with a distribution this high I'm thinking the most likely option is I get a pop and the shares are called away early, probably even before the first distribution which would hopefully be within two months.  That would be about a 4.6% return if that happened.  If I had to hold until the option expired I would collect 1.10 to bring my average cost down to 20.40.  It's hard to imagine things getting that bad, but I've been wrong with these guys before.