Connecting Dots - Sears, Real Estate, Amazon, and more

Asset Management Staff on

Posted in  Amazon, Starbucks, Sears, REITs, Office Depot, Ocala Star Banner, Shopping Malls, Co-Working, Share Space

A Deep Dive

Real Estate Investment Trusts, Commercial, Retail, Trends, Working & Life Changes

Thank you to Carlos Medina of the Ocala Star Banner for the opportunity to share a few ides (Sale-leaseback sought for Sears at Paddock Mall in Ocala) and the professionalism you display with each article.

  • Commercial construction trends are better today than a few years ago but with a difference.
  • 2017 REITs underperformed the broad stock indexes; however, 9% overall return is nothing to sneeze about and that percentage is close to the long-term average for REITs generally, based on the All U.S. REIT Index which has been around since 1972.
  • REITs are a way for those who are land rich to become cash flush and are best suited for long-term individual investors seeking a steady cash flow and dividend.
  • Retirees have been sold REITs as an alternative income source due to low interest rates; however, very few investors should ever consider or buy a non-traded REIT.
  • REITs are sold to retail and institutional investors as an alternative to bonds.
  • There are 189 REITs traded on the New York Stock Exchange and 226 make up the FTSE Nareit All REITs Index
  • FTSE: Financial Times Stock Exchange - Think of FTSE as a news organization that creates indexes and tracking services akin to Dow Jones.
  • Current REIT activity could be due in part to the anticipation that interest rates will rise.
  • Rising interest rates can be a significant headwind; however, REIT leverage is at the lowest level since REITs have been tracked.
  • There are two additional keys in terms of current leverage. One, 81% of outstanding debt is held at a fixed rate (not variable). And two, the weighted average term to maturity is 6.3 years 2024, which is a presidential election year.
  • Tax law changes recently enacted were advantageous to investors of real estate.
  • Several changes directly impact REITs. The 20% deduction on pass-through entity income is substantial and means that the top income tax bracket on REIT dividends goes from 39.6% to 29.6%.
  • Coupled with the removal of REIT dividends on wage restriction calculations means there is no cap on what one can deduct; this is a rather complex item for retail investors but significant to institutional investors.
  • The 1031 tax-free exchange for like kind holdings remains intact for REITs.
  • Ocala Metro is an attractive location for industrial/manufacturing/warehouse REITs.
  • Ocala has long been overlooked by national players for a variety of reasons; however, time has a way of bringing new players, views, and opportunities.
  • The transportation system is relatively strong for trucking and the demographics of the active working and flexible labor force bodes well for an increase in warehouse development.
  • From a pure fundamental perspective, increase trade disruptions between China and the EU means only one thing for Ocala, increased opportunities for South American trade.
  • Central American assembly, logistical costs, and reasonable lead time to the U.S. east coast makes Ocala a smart drop point for reconfiguration of land transport.
  • If the Ocala airport authority could cobble together a few long-term thinkers with solid financing, the boom heard would not be only from planes breaking the sound barrier.
  • The “Amazonification” of consumables is also in play.
  • The reduction of spokes in a hub-and-spoke distribution network (distribution center to retail outlet) has resulted in the transference, increase, and concentration in distribution square footage demands.
  • Sears is merely in the long and slow process of dying.
  • I see nothing on the horizon that will stem the tide of store closings.
  • The one item that is not discussed enough is the impact of the under-funding of the defined benefit pension plan for Sears employees.
  • While some discount the $4.5 billion paid into the pension in the last 13 years, a couple hundred million here and there adds up to a lot of people who would have not gone through significant employment upheaval.
  • $5 billion in stock buybacks, $4.5 billion in pension contributions, a 100 times drop in stock price ($140ish to $14), online technological advancements, changes in consumer engagement, and a “stuck-in-yesterday” mentality, well, what else is there left to do other than sell the land before the doors close?

Connecting dots is for client (and occasional non-client) educational use only. Investment Performance Is Not Guaranteed. Past performance is not indicative of future results. This material does not take into account your particular investment objectives, financial situation or needs. Nothing should be construed as an individual recommendation. Always read and all applicable information carefully before making an investment decision. Investments are not bank guaranteed, not FDIC insured. and may lose value. Due to our extensive holdings and that of our clients, you should assume that we have a position in all companies discussed and thus a conflict of interest should be assumed.


Episode Links

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Sears Stock Price image description

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  • What exactly are you paying for?
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