Land and Buildings, the activist hedge fund run by former top Citigroup analyst Jonathan Litt, made headlines on Tuesday by arguing casino giant MGM Resorts MGM -0.49% should convert to a REIT and divest some of its retail and Asian operations, causing shares to spike. But, the fund also has a list of five other “must own” real estate stocks for 2015, which it published in the first quarter.
In addition to MGM Resorts, Litt and his team at Land and Buildings have identified five stocks ranging from cell-tower REITs to regional malls, offices and hotel operators that the firm expects will achieve 25% returns over the course the next twelve months. Since publishing quarterly “must own” lists beginning in the first quarter of 2013, picks from Land and Buildings have achieved a compound 56% return, significantly outperforming the 38% return posted by the Vanguard REIT Index.
Real estate brokerage CBRE Group CBG +0.03% kicks off Land and Buildings 2015 “must own” list because of its exposure to accelerating activity in the global real estate upturn, in addition to the company’s exposure to property management outsourcing.
Land and Buildings believes global real estate transaction volumes will rise from 2014 levels as investors continue to hunt for yield and credit terms on transactions ease, benefiting CBRE. Meanwhile, the firm is most positive on real estate markets in the America’s, where CBRE has the bulk of its operations. Finally, Land and Buildings expects CBRE’s property management outsourcing business, which accounts for over 40% of the company’s revenue, will grow sales 15%-to-20% annually, bolstering the company’s valuation.
“CBRE is gaining market share through aggressive hiring and accretive acquisitions utilizing free cash flow. Outsized growth in the high margin leasing and sales business segments and secular growth in outsourcing should lead to earnings growth of 20%+ in 2015, above street estimates,” says Land and Buildings, which notes the company’s valuation of 17-times estimated 2015 earnings is “undemanding.”
In the hospitality space, Land and Buildings is positive on DiamondRock Hospitality Company, an owner of 27 hotels, including five hotels in New York City, the Hotel Rex in San Francisco, the Conrad in Chicago, and the Westin Boston Waterfront. According to Land and Buildings, DiamondRock benefits from its small scale, which allow renovations and changes in local demand to have a meaningful impact on earnings.
As DiamondRock’s five in-process renovations come on line, Land and Buildings expects they will create years of double digit revenue-per-available-room growth and margin expansion. At a valuation of 14-times forecast 2015 EBITDA, Land and Buildings believes the market is undervaluing DiamondRock’s expected earnings growth of between 15%-to-20%.
Kilroy Realty KRC -0.01% is Land and Buildings’ top pick among office property REITs. The company’s portfolio, which is concentrated in the Northern California real estate market, totals roughly 13.5 million square feet. However, the company holds a commanding 9.8 million square feet of office property in San Francisco, a market that posted its strongest office leasing results since the height of the dot-com bubble.
As Kilroy develops $1 billion worth of fully leased office properties, Land and Buildings expects that the company will exceed forecasts on cap rates it can achieve. “Development continues to be a compelling investment for Kilroy, with yields routinely in the 7-9% range and market cap rates in the 4% range across the west coast for Class A product,” states Land and Buildings.
Mall operator Pennsylvania R.E.I.T, a owner and operator of 33 regional malls in the mid-Atlantic, is a top 2015 mall pick, according to Land and Buildings. The hedge fund believes that Pennsylvania R.E.I.T’s real estate holdings are currently undervalued by the market and can be unlocked through the sale of poorly-performing assets, an issue Land and Buildings says it is engaging management on.
While Land and Buildings believes Pennsylvania R.E.I.T can sell under-performing malls and focus on high end properties to unlock shareholder value, the hedge fund also believes that the company could eventually consider an outright sale if management can’t bridge an apparent valuation gap.
Finally, when it comes to cell-tower REITS, Land and Buildings sees the most value in SBA Communications SBAC -0.46%, the lessor of 17,500 towers across North and South America. SBA, like competitors American Tower AMT +0.38% and Crown Castle International CCI -0.26%, is benefiting from rising wireless usage and carriers’ continued investment in their network builds. Some $45 billion was spent by telecom giants such as AT&T T +0.41%, Verizon, Sprint and Dish Network at the Federal Communications AWS-3 spectrum auction, which Land and Buildings expects is a “material positive” for tower companies.