RTL - The Necessity Retail REIT
Summary
Estimated target price: $10.20.
Factors supporting price growth:
The calculated gross asset value is higher than the value implied value based on market capitalization.
Net Asset Value per share exceeds the current price per share. Although the market dynamics impact the prices in the short term, in the long term we expect that stock prices (adjusted for certain items) to be close to NAV per share.
Attractive dividend yield, supported by strong cash flow
Experienced management
Growth strategy that is in line with market dynamics: the Company is increasing the weight of the grocery-anchored shopping centers in its portfolio
Risk factors:
The combined debt and preferred shares as a percentage of total asset is close to 60%, which is significantly higher industry norm.
The mitigating factors are 1) the majority of the mortgages are fixed rate and the REIT has entered into hedging agreements to fix the floating rate debt, and 2) the REIT is selling low-performing properties and using cash to repay the debt.Risk of severe recession caused by tight monetary policy or geopolitical tensions
The recent change in strategy and the acquisition of a large portfolio might cause inefficiencies in operations as the onboarding of such a large portfolio takes time. This might result in missing out on opportunities or the inability to properly execute the strategic plans.
See in the two files below the assumptions, detailed cash flow, valuation reports, and other important exports:
(modeling is done in Argus Enterprise software)
Methodology:
Calculated the implied cap rate and implied gross asset value based on the current share price (market cap).
Built a model in Argus to estimate the fair value of properties. This means building a cash flow model which includes entering information on tenants, inflation, cap rate, loans, etc. Assumptions used in the model come from 10Q, 10K, Nareit, NCREIT, CBRE research, NYU Public Database, and other public sources. We estimate two fair values for the properties: 1) using the direct capitalization method by taking the market cap rate as of today and year-1 NOI, and 2) using discounted cash flow for 10 years, using the market discount rate and exit cap rate appropriate for year 10.
Considered risk factors as well as other favorable/unfavorable conditions that might cause the price-per-share to deviate from the NAV-per-share. For example, we identified that larger REITs (measured by market cap) have a higher Price-to-Book ratio compared with smaller REITs (i.e. positive correlation between Market Cap and Price-to-Book.) We did not put too might weight on this factor because there are multiple factors, some of which are unknown, and it’s quite possible that they offset each other.
Compared the following items and judged the appropriateness of price-per-share: 1) implied cap rate vs. market cap rate, 2) calculated fair market value of properties vs. the implied value of properties, and 3) compared the calculated NAV-per-share with price-per-share.
Assessed the viability of dividend distributions by comparing the expected annual dividend distribution with the annual ‘free cash available for distribution’ (or FAD: Funds Available for Distribution) in the cash flow model.
We built a portfolio of properties in Argus by categorizing leases into statistically comparable groups based on the information provided in 10Q as well as public sources. The REIT operates in two segments with the weighted average lease expiry provided (for each segment). We created five ‘tenant groups’ per segment (a total of 10), with a dispersed lease expiry constructed such that the calculated weighted average based on square footage ties to the figure provided by management in 10Q.
Rental amount per square foot, operating expenses, and non-operating expenses are consistent with the information provided in 10Q, corroborated by market research (Other REITs and LoopNet).
Inflation rates, expected occupancy, and rent growth is consistent with market data (US Census Bureau, CBRE, JLL, Nareit, and NCREIF sources were used).
Cap rate and discount rates are consistent with current market information, incorporating recent expectation for rate hikes. However, the full impact of the rate hikes remains unknown.
Debt has been classified based on the structure (senior debt, credit facility, and mortgages). The mortgages were grouped into four categories based on the maturity date, and entered in Argus separately (with their respective rates).
Below are a summary of the assumptions. Based on this information, we calculated the estimated price per share for RTL.
The REIT:
Externally managed REIT, with properties categorized by management into the following two categories: 1) single-tenant and 2) multi-tenant.
Single-tenant properties are primarily stand-alone properties located in prime locations adjacent to a shopping center with a good access. The property is occupied by only one tenant leased through a net lease (also called NNN lease, meaning that the landlord only collects base rent and the expenses and capital expenditures are the responsibility of the tenants). These leases are usually long-term, between 10 to 20 years. RTL disclosed all of their leases in their 10Q form. The remaining years of the lease for single-tenant properties ranged from 1 to 19 years.
Multi-tenant properties of RTL are primarily open-air, grocery-anchored, high-quality shopping centers located in the suburban market.
Overall, the REIT owns 1056 properties as of June 30, 2022 (date of the analysis).
In 2021, the REIT changed its strategy from focusing on single-tenant properties to mix of single-tenant and multi-tenant. Subsequently, it acquired a large portfolio of multi-tenant assets for $1.3 billion which primarily closed in two tranches during the first half of 2022. The consideration for the purchase of this portfolio was paid by: cash, assumption of debt, use of credit facility, and issuing shares to the seller (approx $50 million).
The REIT plans to use its leasing platform to improve the occupancy rate of the acquired portfolio.