Some remarks on recent earnings (or non-earnings in the case of REITs) and other items of interest in the news follow.
First, I’m definitely working on a Tesla post. Here is a little Bloomberg digital video talking about the $6,500 per hour cash burn and the fact that Tesla (“TSLA”) may have to raise money in 2018. Earnings come out, tomorrow (05/02/18) after the market. I am not long TSLA at this price, but I could be tempted if the price was right. I also am going to toy around with some other reasons to give Musk cash in my upcoming post.
I Bonds
One more thing before we get into some earnings stuff. I Bonds are now offering a .30% fixed yield (this doesn’t change for the duration of the bond) and a 2.22% floating yield (based on the CPI-U). So the total yield, until the next change of the floating rate (11/1), is 2.52%.
That seems like a pretty compelling option for fixed income and/or emergency fund savings. The interest income is deferred and exempt from state income tax (double check with your personal tax jock).
I talked about I Bonds before: Year End Moves: I Bonds. I would strongly consider buying my $10K annual allotment and then you can see what the rate is after 11/1 to buy your 2018 allotment.
REIT Reports
Turning to another item of interest, many retail REITs have reported financials for the first quarter over the last week. You will recall that we looked at retail real estate and REITs before: Retail REITs: Apocalypse or Opportunity?, Retail REITs: Brookfield’s Acquisition of General Growth Properties, and Bed, Bath & an Abomination?.
KIMCO
As I type, KIM really popped last week. It is up like 12% since earnings dropped last Friday. Here’s a handy link to the IR section of the KIM site.
Some of the highlights from the earnings release were:
- Achieved 5.4% YoY growth in FFO to $0.39 per share, compared to $0.37 per share.
- Grew same-property net operating income 2.6% over the same period in 2017.
- Generated new leasing spreads of 15.6%.
- Disposed of 21 shopping centers totaling 2.3 million square feet.
The company repurchased 1.6 million shares of common stock for $24.3 million during the first quarter. So, an average price of $15.19.
KIM also reaffirmed guidance of $1.42 – $1.46 per share for 2018 FFO. Finally, I noted they are basing guidance on dispositions of $700 – $900 million at a blended cap rate of 7.5% – 8%.
So, they are selling what they would probably call “non-core” (i.e., some of the lower quality properties) for ~8% cap rates and buying back stock in the remaining “high-graded” portfolio at like a 7.5% dividend yield and probably a 12%+ FFO yield. Sounds like a catalyst. Funny how cash can make that happen.
Kite Realty (“KRG”)
KRG also reported. KRG did not pop, but was up last week about 3%, in line with VNQ.
Here are the KRG highlights:
- Net loss attributable to common shareholders of $17.9 million, or $0.21 per common share, which included a $24.1 million non-cash charge due to the impairment of an operating property.
- FFO of $43.5 million, or $0.51 per share.
- Increased Same-Property Net Operating Income + 1.5% YoY.
- Generated aggregate rent spreads on 58 comparable new and renewal leases of 2.3% (or 8.2% excluding one new anchor tenant that did not require the Company to spend any capital and one strategic anchor renewal (i.e., they got “pencil whipped” on a few big boxes)).
Hey, I can cut and paste from earnings reports and presentations pretty well! Maybe I can become a big time blogger on a site that I shall not name (it has something to do with alpha).
So, KRG took a pretty big write down on a property, that’s not so good. It would have wiped out almost half the FFO for the quarter (if FFO accounted for it like that). They are still guiding for ~$2.00 a share in FFO for the year.
They sold two “non-core” properties for $63MM. I think, on the call, they said they sold at “low 8’s” blended cap rate. The obvious comparison is that you can buy the equity interest in the whole portfolio with a dividend of ~9% (and a higher FFO/earnings yield) while they are selling the crappier properties at around 8%.
So what KIM is selling properties and buying back stock. KRG, however, is more highly levered. Apparently too highly levered, as they deployed 100% of the $63MM in sales proceeds to pay down debt. They also touted that they refinanced and extended an unsecured line of credit.
I think KRG management said they want to get leverage down to below 6x EBITDA. It’s at about 6.8x now, so they want to pay down around another $185MM, based on my quick and dirty math. So, basically, you’re not getting a floor/catalyst from buybacks for a while.
It’s also less attractive to have to sell properties at a 8+% cap rate to buy back debt at ~4% (that was the coupon I found on one of their outstanding bonds. What do you want? I have no Bloomberg). KRG’s CFO also retired, so that’s probably usually not great, but it sounded like he was legitimately retiring on the conference call.
BRX also reported, but this is getting kind of long. Just quickly, they didn’t pop and they already started doing buybacks back when we first looked at them. I still like BRX more than KRG and probably KRG more than KIM (post-pop).
Cheap, highly levered, and paying down debt isn’t so bad. Check out Dan Rasmussen’s work on this if interested. He was just interviewed by Barron’s online too.
One final REIT world note, Prologis agreed to acquire DCT for $8 billion (EV; including debt assumed). That worked out to like a 22 P/FFO. My GPT is at more like 12x. Granted, its not exclusively industrial, but is trending that way. GPT moved up on the news (and/or earnings…sheesh). I’m back to break even(ish), but I’m still a seller of GPT @ ~ $29. I probably wouldn’t get involved now for a ~20% potential upside versus the risks of a potential stagflation, VNQ yields 9%, REIT-sector steam roller scenario.
CPG Easy as $1, $2, $3
Ok, we will just put a pin in this to circle back but some of these package goods/food companies are getting cheap-ish. Jorge Lemann from 3G capital reportedly appeared at the Milliken Institute and talked about 3G not foreseeing the disruption that their businesses now face.
By the way, the Milliken Institute puts some good videos on their YouTube channel. It looks like the ones from this year’s confab out in Cali aren’t up yet, but I’ve head some interesting stuff from reporting on a few appearances. So, check it out.
Anyways, I think I saw the disruption in beer coming for a while. If I had to guess, I would wager it will only grow (and that spirits are going to get hit next). I noticed last time in Europe that a bunch of the pubs/drinking establishments have like anti-competition licensing agreements with big beer brands. That, along with regulations, might slow the craft/local/micro brews for a while there, but seems like it hasn’t peaked yet.
I don’t have an opinion about their QSR business. I do watch DNKN and SBUX in that space, but that’s pretty much it for me in that space. I don’t do restaurants or retail (excepting their landlords).
KHC is getting hurt too, but I think food companies have some different dynamics. Some of their brand power has been probably been diminished by the food safety and quality of the food supply in the U.S. This allows people to move on to fresh and local, versus just making sure they get the brand name so they know it won’t get sick/ingest adulterated food. Still seems like big food companies can pick up brands and slap them on their supply network/platform and create some value (if they don’t pay nosebleed prices). I mean Annie’s has worked out pretty well for GIS, when you consider it.
In any case, I don’t purport to be a CPG expert, but if KHC gets to a 10x EV/EBIT, I’m a buyer (doesn’t have all that much farther to go). I’m also watching MDLZ, NOMD, and CPB.
Operating Earnings Yield Hurdle
Why 10x EV/EBIT? Good question. Here’s a video of Alice Schroeder, author of The Snowball. In it (at some point), she discusses Buffett’s absolute 10% pretax earnings yield hurdle (seems like a quantitative/”quantamental” screen…after the fashion of Ben Graham, in my opinion). This hurdle has been mentioned elsewhere (and appears to have been dialed down a bit now, given the capital to deploy and low bond yields), but I always keep it in mind:
The BRK annual meeting is coming up this weekend. Maybe the guys will have something interesting to say about CPG disruption, but probably they will keep their cards very close to the vest. If you are headed to Omaha, have a safe trip!