SP18 SIM Stock Presentation Real Estate April 10, 2018 Pooja Shah | Drake Tharp | Wesley Smith
Table of Contents Section Title 1. Sector Recap & Overview 2. Boston Properties, Inc. (NYSE: BXP) 3. Digital Realty Trust (NYSE: DLR) 4. Cubesmart L.P. (NYSE: CUBE) 6. Recommendation
Sector Recap & Overview 1. Sector Recap & Overview
Companies by Market Cap and Assets Overview: Companies Major Players SIM Holdings Companies by Market Cap and Assets S&P 500 Portfolio Real Estate 2.6% Source: Company Filings
Overview: Sector Performance Relative Performance YTD S&P 500 -0.2% Sector Performance TTM YTD -5.8% -9.1% Source: Bloomberg
Sector Recommendation Since we are currently underweight in real estate for the portfolio, we recommend that we stay underweight. Negatives: We believe that interest rates will continue to rise which will undercut companies that are used as bond proxies. Higher interest rates raise the cost of borrowing for commercial and homeowners Online shopping hurts retail space Positives: Growth in economy/corporate tax cut: office space demand Higher wages/lower unemployment: housing/apartment demand, retail demand, increased need for inventory space. Currently the negatives outweigh the positives as real estate demand tends to lag a growing economy.
Boston Properties, Inc. (NYSE: BXP) 2. Boston Properties, Inc. (NYSE: BXP)
Geographical Footprint BXP: Company Overview Summary Geographical Footprint Boston Properties, Inc. (NYSE: BXP), founded in 1997, is a self-managed real estate investment trust (“REIT”) and has grown to be one of the largest owners, managers and developers of office properties in the United States. The company has a significant presence in Boston, Washington, D.C., Midtown Manhattan, and San Francisco. Headquarters: Boston, MA Management: Owen D. Thomas, CEO Key Financials $mm, except per share values State Coverage Current Price $120.82 Revenue $2,602 52-wk High $137.35 EBITDA $1,526 52-wk Low $111.57 Net Income $458 Mkt. Cap. $18,648 Debt / EBITDA 10.83 P/FFO 19.40 ROA 2.42 Div. Yield 2.65% ROE 3.13 Source: Company Filings; Market Data as of 4/9/2018
Segment Analysis Office Residential Retail 97% of revenues come from its office properties, accounting for 159 properties Significant Class-A portfolio Eight properties under development for organic revenue growth BXP operates six properties, four of which are currently being developed Properties in MA, CA, VA, NY Urbanization is driving the segment BXP operates five properties Strong presence in MA Omnichannel is fueling growth in the space
Property Analysis CAGR 5.0% NOI by Property Type NOI by Location % Leased as of December 31, 2017 Office: 91% Residential: 93% Hotel: 80% Wtd. Avg.: 91% Industry: 84%
Property Analysis (cont’d) % Leased Trend Diversification of Assets Sector % of Portfolio Media & Tech. 26% Legal Services 20% Financial Services 14% 91% Media & technology sector’s growth is expected to propel BXP’s top-line The industry has been experiencing rapid employment growth of 5% annualized over the past five years Improving Margins Tenant Sq. Ft. % of Portfolio U.S. Government 1,706,503 3.87% Arnold & Porter Kaye Scholer 890,578 2.02% Biogen 772,212 1.75% Kirkland & Ellis 767,749 1.74% Bank of America 665,193 1.51% $64
BXP Performance Relative Performance Industry Operational Performance BXP YTD Industry Operational Performance Historical Operational Performance Source: Bloomberg
Related Market Growth Opportunities Economic Growth Pro-business spending tax reform may result in increased CAPEX spending Largely seen in media and technology space, with employment growing at a rate of 5% YoY U.S. market and employment growth presents expansion opportunities in office properties E-commerce Demand Promotion of omnichannel retailing, which BXP is increasing its market share in Pop-up stores are expected to increase in numbers BXP investment in mixed-use developments will position itself to capture this growth without struggling from closings of brick and mortar stores Rise of Urbanization Millennials and empty-nesters are driving urbanization to never-before-seen numbers Luxurious taste in multifamily units is more common, leading to investment in micro-apartments BXP’s heavy exposure to popular cities in states like MA, CA, and NY will allow it to gain from this trend
Company Growth Opportunities Internal Strategy CEO Owen D. Thomas highlighted the company’s goal to grow NOI 25% by 2020 2/3 of the growth is coming from new developments, mostly the Salesforce Tower in San Francisco 1/3 of the growth is coming from increased occupancy level from 90% to 93% Growth of Media & Tech Space The industry has been experiencing rapid employment growth of 5% annualized over the past five years to more than $7.3 million people Media & tech growth is prominent in CA and MA, both areas BXP has significant investments in Premiums on residential properties due to higher demand and stronger affordability Healthy Economy Economic growth in the United States with projected GDP growth of 3% for 2018 Job creation remains favorable with 313,000 jobs created in February and unemployment at a historical low of 4.1% BXP dominates the office space and is in the process of completing and developing four residential properties, both areas that benefit strongly from economic growth
Relative Valuation Cover Cover
Intrinsic Valuation
Recommendation BUY Valuation Range Recommendation Intrinsic Relative Potential Upside: 27.8% Prior Weight: 0.00% Target Weight: 1.25% Relative
Digital Realty Trust, Inc. (NYSE: DLR) 3. Digital Realty Trust, Inc. (NYSE: DLR)
Geographical Footprint DLR: Company Overview Summary Business Segment Digital Realty Trust, Inc. (NYSE: DLR), founded in 2004 is a REIT which owns, acquires, develops and manages technology related real-estate. The company is focused on providing data center, colocation and interconnection solutions for domestic and international tenants across a variety of industry verticals ranging from cloud and information technology to healthcare. Headquarters: San Francisco, CA Management: A. William Stein , CEO Key Financials Geographical Footprint $mm, except per share values Current Price $104.38 Revenue $2,450 52-wk High $127.23 EBITDA $1,330 52-wk Low $96.56 Net Income $248 Mkt. Cap. $22354 Debt / Equity 79.23 P/FFO 18.38 ROA 2.04% Div. Yield 3.57% ROE 3.16%
Digital Realty Trust Inc. (NYSE: DLR) 52 Week Stock Price Graph 5 year Stock Price Graph
Digital Realty Trust Inc. (NYSE: DLR) Key Value Drivers Demand for data centers and ability to provide flexible solutions Acquisition synergies Solid demand from cloud service providers Improving lease spreads Flexibility of balance sheet Key Risk Factors Interest rate risk Technological innovation causing redundancy Changes in financial condition of top customers Oversupply of data centers Foreign Exchange Risk
Ratio Analysis of DLR and Peers Market Value Ratios Ticker P/E TTM P/S TTM P/B P/CF TTM EV/ EBITDA TTM Average 46.60 7.17 3.09 17.38 20.23 Digital Realty Trust 105.22 7.39 2.31 17.80 31.15 Peers Coresite Realty Corporation 55.73 21.10 16.51 19.48 CyrusOne 159.27 6.62 2.80 15.46 22.29 Equinix 137.15 4.70 21.84 23.68 QTS Realty Trust 2978.33 4.62 2.07 N/A 17.95 Global Switch Holdings 93.25 10.05 18.16 7.96
Profitability Ratios Company Profit Margin Operating Margin ROA ROE Digital Realty Trust 10% 22.10% 2.04% 3.16% Coresite Realty Corporation 15.54% 25.90% 5.23% 19.79% CyrusOne -12.43% 14.42% 1.69% -5.81% Equinix 5.33% 19.40% 3.38% 4.15% QTS Realty Trust 0.29% 11.70% 1.45% 0.15% Global Switch Holdings 8.87% 25.76% N/A
Dividend Yield
Debt-Capitalization Ratio Solvency Ratios Debt-Capitalization Ratio
Total Debt to EBITDA Ratio
Digital Realty Trust Inc. (NYSE: DLR) DCF Model
Digital Realty Trust Inc. (NYSE: DLR) Recommendation: HOLD Potential Upside: 8.7% Prior Weight: 1.03% Target Weight: 1.03%
Cubesmart, L.P. (NYSE: CUBE) 4. Cubesmart, L.P. (NYSE: CUBE)
CUBE: Company Overview Summary Geographical Footprint Cubesmart L.P. owns, operates, acquires, and develops self- storage facilities in the United States. Third largest self-storage REIT in the S&P 500 behind Public Storage and Extra Space Storage. Cubesmart owns 484 self-storage properties with 33.8m rentable sq. feet across 23 US states, the company generated $558 million in revenue during 2017. Headquarters: Malvern, PA Management: Christopher P. Marr, CEO Key Financials $mm, except per share values Recent Performance Current Price $28.26 Revenue $548m 52-wk High $29.7 EBITDA $195m 52-wk Low $22.83 Net Income $135m Mkt. Cap. $5.15B Debt / EBITDA 4.75 P/FFO 18.42 ROA 4.67% Div. Yield 4.32% ROE 8.24% Source: Company Filings; Market Data as of 4/9/2018
FFO and Dividend Growth Property Analysis Property Growth Debt Coverage FFO and Dividend Growth
Occupancy
Occupancy
Performance
Related Market Growth Opportunities Economic Growth Pro-consumer spending tax reform may result in increased durable goods purchases Low Unemployment of 4.1% Record High consumer spending on durable goods Rising disposable income allows same store rent growth and demand for storage Rise of Urbanization Millennials and empty-nesters are driving urbanization to never-before-seen numbers Rise of micro-apartments Cube’s heavy exposure to popular cities in states like NY, TX, and NJ will allow it to gain from this trend 70% of Cube’s revenue comes from densely populated urban areas.
Company Growth Opportunities Internal Strategy Grow Same store revenue (raise rents.) Short term leases are renegotiated often Lower expenses and raise NOI margin Maintain/increase occupancy levels. Added many properties in 2016, takes a few years to get to full occupancy (57 properties 2015-2016) External Strategy Acquisitions: 80 million in 2017 down from ~500m in 2016 Open new developments: opened $168m of properties in 2017 Third party operations: used as acquisition targets and are good for the brand. 160 contracts in 2017 Healthy Economy Economic growth in the United States with projected GDP growth of 3% for 2018 Job creation remains favorable with 313,000 jobs created in February and unemployment at a historical low of 4.1% Cube is the third largest self storage company and benefits from this expansion
Intrinsic Valuation
Recommendation BUY Recommendation Valuation Range Intrinsic Potential Upside: 11% Prior Weight: 0.00% Target Weight: 1% Valuation Range Intrinsic
Recommendation Company REIT Industry Recommendation Basis Points Current Price Target Price Upside/ Downside (260 Available) Boston Properties REIT BUY 0.82 120.82 156.20 27.8% Digital Realty Trust Specialized-Data Center HOLD 1.03% 104.38 113 8.70% Cubesmart Self Storage 0.75% 28.44 30.33 11%