Category: Property

Business Strategy & Outlook

Public Storage acquires, develops, owns, and operates self-storage facilities, which offer storage spaces—of varying sizes and features—on a monthly lease for personal and business use. The company also has a lucrative insurance business that offers products to cover losses for the goods in self-storage facilities. The company’s strategy is to own and operate self-storage facilities within a 3-5-mile radius of densely populated urban centers and invest aggressively in enhancing its coverage, scale, brand, operating efficiency, and technology platform. Self-Storage is a highly fragmented industry with the five largest players owning 19% (including 9% by Public Storage) of US inventory, with the remaining 81% being owned by regional operators. Self-Storage outperformed all other real estate asset classes during the global financial crisis and is considered a recession-resilient sector as the demand for it is partially driven by transitions and difficult life events. 

The industry has experienced tremendous growth in the last several years, and the further societal shifts fueling that growth for years to come, albeit at a more modest pace. The traditional self-storage uses like downsizing, moving, adding space, change in household, etc. are being supplemented by additional demand drivers like growing adoption rate, urbanization, decluttering trend, increasing business demand, migration, population growth, and lower home affordability. Pandemic-related disruptions, the work-from-home dynamic, strong economic recovery, and a vibrant housing market have resulted in historically high occupancy rates and strong rental growth for the sector. The fundamentals like rental growth and occupancy levels to normalize in the medium term from the current elevated levels as additional supply hits the markets and pandemic-related demand fizzles. In the long run, the larger players in the industry keep gaining market share on the back of scale benefits and access to low-cost capital.

Financial Strengths

Public Storage’s balance sheet has long been the gold standard among real estate investment trusts—light on debt and heavy on progressively cheaper preferred stock, with a good portion of acquisitions and facility developments fueled directly with cash flow from operations. The company had $7.5 billion of debt, $4.3 billion in preferred equity and $0.9 billion of cash resulting in $10.9 billion in net debt and preferred equity as of the end of first quarter of 2022. The company had a trailing twelve-month EBITDA of $2.7 billion resulting in a Net Debt & Preferred Equity/EBITDA ratio of 4.0 times. Management has set the long-term target for Net Debt & Preferred Equity/EBITDA ratio at 4-5 times. Management has been prudent in utilizing the low interest rate environment to achieve savings through refinancing both debt and preferred shares over the years. The weighted average interest rate on the company’s debt was 1.70% and the weighted average rate for preferred equity was 4.5% resulting in the overall cost of debt and preferred equity of 2.7%. The maturity schedule of the company’s debt shows that the maturities are adequately spread. The fixed charge coverage ratio which is a ratio of EBITDA divided by all fixed expenses (including interest expenses & preferred dividends) was 9.1 times as of the end of Q1 2022. As a real estate investment trust, Public Storage is required to pay out at least 90% of its income as dividends to shareholders. The FFO payout ratio which is a ratio of dividends to funds from operations was reported at 62.0% for the year 2021. This gives the firm enough flexibility to fund its operations, pay dividends, pursue inorganic growth, and invest in organic development opportunities. The company can probably use slightly higher leverage to fund its capital structure given its relatively low leverage, high cash flow generation capacity, and the recession resilient characteristics of the industry

Bulls Say

• Public Storage’s commanding lead in supply-restricted West Coast markets leads to consistent revenue growth. 
• Public Storage’s industry-leading balance sheet leaves room for low-cost consolidation opportunities in a fragmented market. 
• Pandemic-fueled changes like work from home, decluttering, migration, etc. have persisted and have created more demand for self-storage facilities leading to historically high occupancy rates and strong rental growth.

Company Description

Public Storage is the largest owner of self-storage facilities in the US with more than 2,800 self-storage facilities in 39 states and approximately 200 million square feet of rentable space. Through equity interests, it also has exposure to the European self-storage market through Shurgard Self Storage and to an additional 28 million net rentable square feet of industrial space in the United States through PS Business Parks.

(Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Business Strategy & Outlook

Extra Space Storage acquires, owns, and operates self-storage facilities, which offer storage spaces of varying sizes and features on a monthly lease, for personal and business use. The company also has a lucrative insurance business and a strategically important third-party management business. The company’s strategy is to invest in enhancing the coverage, scale, brand, and operating efficiency of its self-storage facilities that are located within a 3-5-mile radius of densely populated, high-income urban centers. Extra Space’s owned portfolio is the second biggest in the U.S., and its third-party management business is the largest in the country which has enabled it to expand its geographic footprint, data sophistication, and scale with little capital investment.

Self-storage is a highly fragmented industry with the five largest players owning 19% (including 5% by Extra Space Storage) of U.S. inventory, with the remaining 81% being owned by regional operators. Self-Storage outperformed all other real estate asset classes during the global financial crisis and is considered a recession-resilient sector as the demand for it is partially driven by transitions and difficult life events. The industry has experienced tremendous growth in the past several years, and the further societal shifts fueling that growth for years to come, albeit at a more modest pace. The traditional self-storage uses like downsizing, moving, adding space, and so on are being supplemented by additional demand drivers like growing adoption rates, urbanization, decluttering trends, increasing business demand, migration, population growth, and lower home affordability. Pandemic-related disruptions, strong economic recovery, and a vibrant housing market have resulted in historically high occupancy rates and strong rental growth. The self-storage fundamentals normalize in the medium term from the current elevated levels as additional supply hits the markets and pandemic-related demand fizzles. In the long run, the larger players in the industry keep gaining market share on the back of scale benefits and access to low-cost capital.

Financial Strengths

After decreasing the fair value estimate for Extra Space Storage to $167 from $185 after taking a fresh look at the company. The updated fair value estimate implies a forward 2022 fund from operations multiple of 21 times. The estimate of Extra Space Storage’s long-term weighted average cost of capital is 7.3%, and an enterprise value/EBITDA multiple of 22.4. In base case, the company’s portfolio will continue to thrive off strong fundamentals in the short term as customer demand drives excellent occupancy statistics and strong rental rate growth. The tenant insurance and third-party management business continues to grow at a healthy rate. One cannot think that management can increase prices indefinitely at the current rate as the low cost of building and the largely undifferentiated nature of self-storage facilities allows supply to enter the market. The national delivery volume for self-storage facilities peaked in 2019, but the existing supply pipeline remains strong at an estimated 8.9% of existing inventory. In the long run, the self-storage market cools down, resulting in occupancy rates and rental growth normalizing.

Bulls Say

• Extra Space’s third-party management business serves not only as a capital-light revenue stream, but also as an acquisition pipeline, ensuring future growth. 
• Extra Space Storage’s strong balance sheet leaves room for low-cost consolidation opportunities in a fragmented market. 
• Pandemic-fueled changes like work from home, decluttering, migration, and so on have persisted and have created more demand for self-storage facilities, leading to historically high occupancy rates and strong rental growth.

Company Description

Extra Space Storage is a fully integrated real estate investment trust that owns, operates, and manages almost 2,100 self-storage properties in 41 states, with over 160 million net rentable square feet of storage space. Of these properties, approximately one half is wholly owned, while some facilities are owned through joint ventures and others are owned by third parties and managed by Extra Space Storage in exchange for a management fee.

(Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Business Strategy and Outlook

 Park Hotels & Resorts is the second largest U.S. lodging REIT, focusing on the upper-upscale hotel segment. The company was spun out of narrow-moat Hilton Worldwide Holdings at the start of 2017. Since the spinoff, the company has sold all the international hotels and 15 lower-quality U.S. hotels to focus on high-quality assets in domestic, gateway markets. Park completed the acquisition of Chesapeake Lodging Trust in September 2019, a complimentary portfolio of 18 high-quality, upper upscale hotels that should help to diversify Park’s hotel brands to include Marriott, Hyatt, and IHG hotels. In the short term, the coronavirus significantly impacted the operating results for Park’s hotels with high-double-digit rev PAR declines and negative hotel EBITDA in 2020. However, the rapid rollout of vaccinations across the country allowed leisure travel to quickly recover, leading to significant growth in 2021. The company should continue to see strong growth in 2022 and beyond as business and group travel also recover to pre-pandemic levels with Park eventually returning to 2019 levels by 2024.

 However, the hotel industry will continue to face several long-term headwinds. Supply has been elevated in many of the biggest markets, and that is likely to continue for a few more years. Online travel agencies and online hotel reviews create immediate price discovery for consumers, preventing Park from pushing rate increases. Finally, while the shadow supply created by Airbnb doesn’t directly compete with Park on most nights, it does limit Park’s ability to push rates on nights where it would have typically generated its highest profits. Still, Park does have some opportunities to create value. Management has only had control of the portfolio for three years, and think there is some additional growth that can be squeezed out of current renovation projects. The Chesapeake acquisition should provide an additional source of growth as the company drives higher operating efficiencies across this new portfolio. The pandemic could create additional opportunistic ways for Park to grow the portfolio.

Financial Strength

Park is in solid financial shape from a liquidity and a solvency perspective. The company seeks to maintain a solid but flexible balance sheet, which will serve stakeholders well. Park does not currently have an unsecured debt rating. Instead, Park utilizes secured debt on its high-quality portfolio. Currently, the majority of Park’s debt is secured by five of its largest hotels, leaving Park with 39 consolidated hotels that are free of debt encumbrance. Even if Park is unable to pay its debt obligations, the company can return the collateral secured by its debt to the lenders and proceed with its unencumbered business essentially debt free. That said, debt maturities in the near term should be manageable through a combination of refinancing, the company’s free cash flow, and the large cash position Park currently has on their balance sheet. Additionally, the company should be able to access the capital markets when acquisition opportunities arise. In 2024, which is the year hotel operations should return to normal, net debt/EBITDA and EBITDA/interest will be roughly 5.7 and 3.1 times, respectively, both of which suggest that the company should weather any future economic downturn and that it would be able to selectively acquire assets as the market recovers. As a REIT, Park is required to pay out 90% of its income as dividends to shareholders, which limits its ability to retain its cash flow. However, the company’s current run-rate dividend is easily covered by the company’s cashflow from operating activities, providing Park plenty of flexibility to make capital allocation and investment decisions. Park will continue to be able to access the capital markets given its current solid balance sheet and its large, higher-quality, unencumbered asset base.

Bulls Say’s

•  Potentially accelerating economic growth may prolong a robust hotel cycle and benefit Park’s portfolio and performance. 
• Low leverage gives Park greater financial flexibility to be opportunistic with new investments or return more capital to shareholders through dividend growth or share buybacks. 
• Park’s management identified several enhancement initiatives that it can execute to drive EBITDA higher on the newly acquired Chesapeake portfolio.

Company Profile 

Park Hotels & Resorts owns upper-upscale and luxury hotels with 27,889 rooms across 48 hotels in the United States. Park also has interests through joint ventures in another 4,297 rooms in seven U.S. hotels. Park was spun out of narrow-moat Hilton Worldwide Holdings at the start of 2017, so most of the company’s hotels are still under Hilton brands. The company has sold all its international hotels and 15 lower-quality U.S. hotels to focus on high-quality assets in domestic, gateway markets.

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do, business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and is not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Business Strategy and Outlook:

Prologis leases distribution space to some of the nation’s top retailers, and its tenant list is the strongest in the business. The continued growth in e-commerce should provide a long growth runway for distribution and logistics facilities, especially given the large amount of space necessary to support online sales compared with brick-and-mortar retail. It is difficult for industrial REITs to earn moats since supply can quickly and easily enter key cities to negate supply and demand imbalances. The aggressive construction after the financial crisis brought significant new facilities on line, and it is expected that supply will continue to grow. Although demand outpaced newly added supply for several years, supply additions have increased sharply, and company is cautious that a slowdown in consumer spending could expose the asset class, increasing vacancies, as seen in the recent downturn.

With vacancy rates hovering around historic lows in the United States and Europe and average market rent rebounding significantly since 2012, the Prologis is in the best position to benefit from incremental demand. The company’s vast portfolio surpasses all other logistics REITs in size, predominantly along coastal markets, where it more than doubles its competition. There is an undeniable shift toward tech-savvy millennial consumers, who are more likely to skip the brick-and-mortar locations and spend more time on retail websites and utilize mobile purchasing. They are also more likely to return items, which adds to the space needed to fuel the growing e-commerce distribution industry. As retailers seek additional distribution facilities closer to population centers to accommodate this trend, Prologis will tap into its deep land bank to complete lucrative developments and drive value for shareholders.

Financial Strength:

Prologis’ balance sheet has improved over the past several years, and the firm’s financial position is considered to be more in line with industry-leading REITs. It is forecasted that 2022 debt/EBITDA to be 6.0 times. This level is reasonably maintainable, with the company having completed the Industrial Property Trust acquisition with cash. Additionally, improving operating performance should help Prologis maintain this metric going forward. 

As a REIT, Prologis is required to pay out at least 90% of its income as dividends to shareholders. The current dividend of $3.16 per share is more than comfortable for Prologis. In fact, it’s likely that the company will continue to tap into the debt markets as its main source of financing, given its healthy appetite for expensive developments and cheap access to capital. Management continually evaluates the portfolio and sells facilities as well as land, which allows the company to subsidize developments and not become overburdened with debt financing. It is estimated that dispositions will begin to

slow in the short term as supply continues to increase.

Bulls Says:

• Prologis has the largest portfolio of quality facilities in place and is in the best position to capitalize on e- commerce demand.
• Industrial property is the real estate subsector best positioned to weather the coronavirus outbreak- related storm.
• Prologis has an enviable tenant list, which gives investors hope for expansion and a sense security in a downturn.

Company Profile:

Prologis was formed by the June 2011 merger of AMB Property and ProLogis Trust. The company develops, acquires, and operates over 900 million square feet of high-quality industrial and logistics facilities across the globe. The company is organized into four global divisions (Americas, Europe, Asia, and other Americas) and operates as a real estate investment trust.

(Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Business Stratgy and Outlook

 Toll Brothers prides itself on controlling an ample supply of some of the best land in the industry. Premier land inventory, combined with luxurious, customizable designs, allows the company to charge industry-leading average selling prices (among public peers).

The U.S. housing market remained robust in 2020-21 despite the pandemic, and expect continued strength this decade, with homebuilders and multifamily developers starting about 1.6 million homes annually over much of that time frame, above the 1.4 million historical average for annual new-home production.

 The three tailwinds driving increased demand for Toll Brothers’ traditional offerings: Strong demand for entry-level homes should encourage established homeowners to sell their first homes in favor of new move-up homes; the popularity of empty-nester homes and active-adult communities is increasing among baby boomers; and growing household wealth should put the company’s “affordable luxury” products in reach of younger households.

Toll also invests in for-sale urban high-rise infill and for-rent projects to diversify revenue and leverage existing assets. Although it is thought as these projects are riskier, and believe the firm mitigates some of this added risk by careful underwriting and joint venture partnerships. It is believed that these projects have generally met Toll Brothers’ expectations, and think the company has a robust project pipeline that will continue to contribute profitable growth in a healthy market.

Overall, Toll Brothers will continue to capitalize on what is seen as strong long-term housing demand dynamics. That said, given its luxury build-to-order focus and higher average selling price, and don’t think the firm is as well positioned to capture demand from first-time millennial buyers as lower-priced homebuilders like D.R. Horton.

While Toll Brothers can achieve positive economic profits with increased sales volume, but it is expected that competition and the company’s more capital-intensive land acquisition strategy (compared with peers) to restrain the amplitude of those profits. However, management is focused on moving to a lighter land strategy and has made substantial progress.

Financial Strength

As of Oct. 31, 2021, Toll Brothers had approximately $3.4 billion in total liquidity, including $1.6 billion in unrestricted cash and $1.8 billion capacity on a revolving credit facility. It is believed that this capital structure is appropriate for a large-scale production homebuilder. Toll’s $3.6 billion of outstanding debt consists of unsecured, fixed-rate notes payable ($2.4 billion), term loans and credit facilities (approximately $1 billion), and mortgage loan facilities (about $150 million). The outstanding senior notes have maturities staggered through fiscal 2030, with no more than $650 million due in any one year over the next 10 fiscal years. Between 2017 and 2021, Toll generated $4.4 billion of cumulative operating cash flow. Toll Brothers has formed joint ventures to participate in attractive opportunities and mitigate risk on certain land development, home construction, and other adjacent projects. As of fiscal 2020, the company was doing business with 46 joint venture partners and had approximately $431 million invested in joint venture projects, with a commitment to invest an additional $75 million. All of the company’s for-rent projects have been or will be developed in joint ventures. This is a prudent strategy, given the increased riskiness of these projects and Toll Brothers’ relative inexperience with this market. The company has guaranteed debt of certain unconsolidated, joint venture entities that is not recorded on the balance sheet–approximately $240 million as of fiscal 2020. And this is believed that the underlying collateral should be sufficient to repay a large portion of the obligation, should a triggering event occur.

Bulls Say’s

•  New-home demand has strengthened, and inventory of existing homes remains tight. Job and wage growth should support growth in household formations and increased demand for new homes. 
• The aging baby boomer population could spur demand for Toll Brothers’ empty-nester and active-adult products. 
• Toll Brothers’ targeted customers are wealthier, have stronger credit profiles, and are more likely to make all-cash payments than the typical homebuyer.

Company Profile 

Toll Brothers is the leading luxury homebuilder in the United States with an average sale price well above public competitors. The company operates in 60 markets across 24 states and caters to move-up, active-adult, and second-home buyers. Traditional homebuilding operations represent most of company’s revenue. Toll Brothers also builds luxury for-sale and for-rent properties in urban centers across the U.S. It has it headquarters in Horsham, Pennsylvania.

(Source: MorningStar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Business Strategy and Outlook

Duke Realty has enjoyed an impressive run, shifting its portfolio from suburban office properties to become the leading domestic-only industrial REIT in the United States. Over the past few years, the company capitalized on depressed supply and an explosion of growth driven by a steady economy and the rise of e-commerce. However, with industrial vacancy hovering at historically low levels, investors may be late to the party. Supply has increased to levels not seen since 2007, posing a significant threat to the buoyant rent growth Duke Realty’s portfolio had been experiencing. 

As experts have noted in their no-moat argument for the company, Duke Realty’s properties are largely commoditized, with locations that are often along highways, miles away from metropolitan city centres. While prices for this type of land have risen over the years, the structures are easily replicable, causing other real estate companies to throw their hats in the ring, diversifying to meet the demand for industrial property. 

Major retailers continue to shift their strategies as brick-and-mortar shopping loses ground to its online counterpart. Fortunately for Duke Realty, warehouses that support e-commerce sales require more space, up to three times as much as traditional retail warehouses. While e-commerce currently accounts for only about 13% of total retail sales, its piece of the pie is growing at a double-digit pace annually. It is eventually viewed additional supply bringing Duke Realty’s returns to the cost of capital, since little prohibits new entrants to this market. Despite the competitive nature of this industry, Duke Realty has an established presence and first-mover advantage in many high-quality markets. The company’s tenants typically sign multiyear leases, so it may take some time before the effects of new construction on returns are seen.

Financial Strength

Duke Realty’s balance sheet has improved over the years and is in good financial shape. The company’s debt/EBITDA was 4.6 by the end of 2022. It is alleged as a maintainable level, given the company’s plan to finance most of its developments by disposing noncore assets. Its focus on Tier 1 markets will keep its facilities in high demand as e-commerce grows and retailers shift to an online strategy. Current leases have around 2.25% contractual rent bumps, so cash flows should rise with inflation in the short term. As a REIT, Duke Realty is required to pay out at least 90% of its income as dividends to shareholders. It’s likely that the company will continue to tap into the debt markets as its main source of financing given its healthy appetite for developments and cheap access to capital. Management continually evaluates the portfolio and sells facilities as well as land, which allows the company to subsidize developments and not become overburdened with debt financing. It is forecasted that dispositions will be steady as the company trims noncore assets.

Bulls Say’s

• E-commerce should continue to drive demand for logistics space, and Duke Realty was an early mover with an established tenant list. 
• The coronavirus outbreak will accelerate the growth of e-commerce relative to brick and mortar retail 
• Historically low vacancy rates for industrial facilities should continue to warrant double-digit leasing spreads in the short term.

Company Profile 

Duke Realty is an Indianapolis-based publicly traded REIT that owns and operates a portfolio of primarily industrial properties and provides real estate services to third-party owners. It has interest in over 150 million square feet across the largest logistics markets in the U.S. 

(Source: MorningStar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.