Commonwealth REIT (NYSE:CWH) is the newest addition to Luxor Capital’s portfolio following a 13G filing with the SEC last week. Luxor has taken a new position in the office and industrial focused REIT that accounts for over 5% of Commonwealth’s outstanding shares. Managed by Christian Leone, Luxor was founded in 2002 and remains employee-owned. Luxor utilizes a public equity and fixed income hybrid strategy, while primarily investing in special situations and distressed companies. Luxor joins billionaire Ken Griffin – founder of Citadel Investment Group – as one of the top Commonwealth fund owners (check out Ken Griffin’s new stock picks).
Commonwealth pays a 6.4% dividend yield and focuses on office properties (317 locations) and industrial (199 locations). Office REITs are expected to continue to lag the overall economy, but should perform well assuming employment levels begin to see a boost. It appears overall office vacancy rates are showing some stabilization at 16.5%, thanks in part to the decline in new office space. Commonwealth’s 3Q earnings results showed funds from operations below the same quarter last year at $0.81, compared to $0.93 for 3Q 2011; the stock is down 10% over the last six months. Commonwealth presents investors with solid value after seeing weakness of late and it continues to reallocate capital to better-yielding properties. The REIT has sold off various suburban properties to raise capital for key office building acquisitions.
Luxor has a fascination with REITs and investment firms, and holds large positions in American Capital Ltd. (NASDAQ:ACAS) and American Realty Capital Trust Inc (NASDAQ:ARCT). American Capital is Luxor’s 5th largest holding, good for about 6.4% of the company, and American Realty was a new position taken during the third quarter, sitting at the 10 spot in Luxor’s 13F portfolio. American Capital is an equity firm and global asset manager investing in private equity and real estate. The investment company also trades very cheap when compared to other major peers, at 2.5x earnings. Other major firms all trade well north of that, such as KKR (7x), Apollo (19x), and BlackRock (15x). On a P/B basis, American Capital trades at only 0.7x and a book value of $17, compared to its current share price around $12. Billionaire John Paulson is one of American Capital’s fellow investors (see Paulson’s newest picks here).
American Realty is a commercial property REIT that pays a 6% dividend yield. Trading at a book value of $6.70, American Realty is a bit on the rich side given its $11+ share price. This monthly dividend payer is also looking to continue growing its portfolio, with a recent acquisition of five properties spread across four states. American Realty’s premium valuation is a result of its industry-best 100% occupancy rate. The REIT is also in the process of negotiating a merger with REIT Realty Income, which would give the two REITs a combined market cap of over $7 billion, while adding 500 properties to Realty Income’s portfolio.
Brandywine Realty Trust (NYSE:BDN) and Lexington Realty Trust (NYSE:LXP) are two close office and industrial REIT competitors for Commonwealth. Brandywine pays a dividend that yields 5%, with properties in promising areas such as Austin, Texas and Philadelphia. Occupancy rates are expected to see only a slight increase in 2013, to 89% from 88.5% in 2012. Funds from operations estimates predict Brandywine’s 2013 FFO growth rate will be flat, with FFO per share of $1.29, similar to 2012’s total. Billionaire investor Jim Simons – founder of Renaissance Technologies – is one of Brandywine’s biggest investors following a 500% stake increase last quarter (check out Jim Simons’ top picks).
Lexington Realty is another key office REIT that yields 6.2%. Lexington Realty reported 3Q results that showed EPS at $0.96, compared to a negative 24-cent EPS from the same quarter last year. Funds from operations also came in higher at $0.24 compared to $0.18 year over year. Despite being up almost 30% year to date, Lexington still only trades at 10x earnings, which is well below any of the other office/industrial REITs out there.
To recap: we believe that Commonwealth is a well-positioned REIT that is continually pressured by an uncertain economy, but it should perform well as it looks for strategic initiatives to provide value to shareholders. One such initiative might include the spinoff of its Australian assets. Even with a recent 50% dividend cut, this REIT still pays a relatively high yield and should be able to retain more cash for strategic acquisitions than it has in the past.
