You may have heard the old saw that investing in real estate is all about location, location, location, but when it comes to investing in real estate investment trusts (REITs), I believe it's all about management, management, management. That's why I'm adding Excel Trust (NYSE: EXL ) , a relatively young REIT with a veteran management team, to the Total Realty Portfolio.
Why I'm buying
The retail REITs were the top performing REIT property sector through the end of August, rallying nearly 27% since the beginning of the year. That sort of move would usually cause me to look elsewhere for better deals, but in this case I noticed that my new pick, Excel Trust, got left behind in the rally. I think this divergence is likely because the company is still off the radar of income investors looking for larger companies with longer operating histories but that spells opportunity for those of us willing to turn over a few more stones.
Excel Trust owns and manages neighborhood retail centers that are anchored mostly by grocery or drug stores. The company's founder and CEO, Gary Sabin, has been running various public and private real estate companies since 1978 and has earned a reputation as a savvy operator in the retail real estate industry. Over the last real estate cycle, Sabin was smart enough to get out of the market when times were good, selling a previous venture to Kimco Realty (NYSE: KIM ) in 2004, and then savvy enough to get back in when the real estate market imploded.
Excel Trust raised capital in its 2010 initial public offering, just following the bottom of the Great Recession, with a strategy to buy distressed properties for below replacement cost and then improve the assets' operations. Today, Excel Trust's portfolio consists of 26 assets in 14 states spanning the Northeast, Northwest, and Sun Belt. These are properties that the company acquired mostly in private, off-market transactions from overleveraged or cash-hungry sellers.
Excel's shopping centers are mostly located in bedroom communities of larger metropolitan areas with above-average household income and good school systems. The company leases space primarily to grocery and pharmacy and value-oriented retailers with high credit ratings -- and less risk of being harmed by economic downturns. Excel's properties are 94% occupied with a weighted average lease term of seven years.
Although the company has been acquiring companies at a fast clip over the past two years, management has kept Excel's debt modest; its debt to total capitalization ratio is a mere 34%. At recent prices, Excel's stock is selling for a reasonable 14 times the midpoint of management's guidance for 2012 adjusted funds from operations (AFFO), and it's among a small number of REITs trading below the consensus estimate of its net asset value. Excel sports a 5.6% dividend yield, and thanks to the company's small size, and healthy $350-plus million acquisition pipeline, I believe that there's also plenty of room for the stock price to appreciate to deliver total returns of better than 10% annually.
Foolish bottom line
As a group, REITs have been a getting a lot of attention lately as yield-starved investors bid up prices to historically high multiples. Despite a bit more risk than you find with larger, established competitors like Kimco, Regency Centers (NYSE: REG ) , or Weingarten Realty Investors (NYSE: WRI ) , Excel Trust looks to be substantially cheaper, offering a reasonable risk-reward relationship. I'm starting a position because I think that the company's small size and modestly leveraged balance gives Excel Trust more room to grow and makes it a potential acquisition target as the REIT industry continues to consolidate -- and getting paid a 5.6% dividend while we wait isn't so bad either.