May 1, 2017 - The dow jones business and Financial weekly. May 1 ... computer servers, which have managed ... DOes nOT C
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MAY 1, 2017
Streetwise
Hot Properties
By Kopin Tan As CEO and portfolio manager of a real estate fund, Burland East looks for stocks of companies whose tenants aren’t just thriving and able to pay more rent. He especially likes real estate where a tenant, for whatever reason—maybe it operates a nearby dam, or giant cellphone towers—can’t simply up and leave. If this sounds a bit like Hotel California, having a buffer from the economy’s cyclical swings can be useful. Last week, our aging bull market made another run that took the Standard & Poor’s 500 index just shy of its March 1 peak, and lifted the Nasdaq Composite Index above 6000 for the first time. If the stock market is supposed to look ahead and investors should buy low and sell high, then this moment—with peak consumer confidence and 4.5% unemployment—might be cause for caution, and not just celebration. Trillions in central-bank liquidity have eked out first-quarter growth of just 0.7%. Yet the market value of the Nasdaq 100 now exceeds one-third of the entire U.S. gross domestic product, and twice that of Germany’s. The stocks in Burland East’s Altegris/AACA Opportunistic Real Estate fund (ticker: RAANX) aren’t immune in a correction, of course. But over three years, the long-short fund delivered 14.4% annual returns with what Morningstar calls “upside capture” of 108% and “downside capture” of only 48%, which suggests it might keep pace in a rally and lose less in a correction. Among the fund’s holdings are real estate investment trusts like American Tower (AMT), Crown Castle International (CCI), and SBA Communications
(SBAC) that own and operate wireless infrastructure like cellphone towers, as well as QTS Realty Trust (QTS), which owns data centers. There’s also Cadiz (CDZI), which manages water resources in perpetually parched California, and owns 45,000 acres of land with water rights attached—including parts of a big aquifer under the Mojave Desert that could, with the necessary pipelines and approval, potentially pump water to the state’s farms and residents. East looks for situations where entry barriers and limited supply favor the landlord, or where it’s mission critical for a tenant to be in a specific location. “We also like growing businesses that make tenants more likely to ask landlords for more space,” he adds. Take data centers housing many big computer servers, which have managed to fuel demand for real estate with no windows and no views, but for which location is still key. Data centers need access to cheap electricity, and should ideally be near communication hubs and internet infrastructure centers, such as MAE East, or Metropolitan Area Exchange East, located near Ashburn, Va., and MAE West, near San Jose. QTS’ enterprise value is 22.8 times Ebitda (or earnings before interest, taxes, depreciation, and amortization)— below highs pushing 24 times in 2015, but hardly cheap. Cellphone towers have EV/Ebitda ratios of more than 20 times, which prices in a lot of good news. Data centers’ concentrated client base makes them risky, but if demand keeps climbing, spaces will often be leased by the
time they’re built. We live in an era of unlimited data plans and endless streaming, and our appetite for data grows at a staggering pace. A favorite recent cartoon shows a concerned parent asking her child at the dinner table: “Are you alright, dear? You haven’t touched your phone!” In contrast, East avoids what he calls more generic real estate where developers can quickly overbuild and where tenants think of price as a critical component of their decision. This rules out residential apartments where, say, a $300 monthly rent hike can send some searching for new digs. East also shuns industrial properties, where the country’s two biggest tenants—Amazon.com (AMZN) and Wal-Mart Stores (WMT)— wield extraordinary bargaining power, and whose margins require them to be stingy about real estate costs. If you’ve ever wandered into an Amazon facility, you’ll see everything is already in crates and on pallets—conveniently movable should a better bargain surface elsewhere. TO BE SURE, MANY AMERICANS feel that too much of their net worth is already tied up in real estate. But our home is just one type of property in one location, and real estate stocks can serve as an inflation hedge and as an income source, especially if weak economic growth keeps interest rates lower for longer. What about mall REITs, which have fallen 27% into a bear market? East remains wary and thinks anchor tenants like Sears Holdings (SHLD) and J.C. (over p lease)
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Penney (JCP) are eventually headed for bankruptcy, while Macy’s (M) will have to shutter more stores. Retailers are on pace to close more than 8,000 stores this year, more than in any recent year. “With stocks at record highs, you’d think soft-goods retailers should be doing really well,” East says. “But they’re not.” Record student debt and slowing
credit growth crimp consumer spending, and consumption growth was just 0.3% in the first quarter. But malls face an existential crisis that goes beyond economic cycles. E-commerce makes up just 8.3% of U.S. retail sales, but its share is doubling roughly every five years. Millennials also don’t prowl for acquisitions with quite the same zeal of baby boom-
ers. East has no data on that, just observations of his own millennial children. “They’re more interested in experiences, and if they need a pair of sneakers to do yoga, they’ll just buy them online,” he says. Technology is changing our lives— and also our land. n
The article: “Hot Properties” is provided for informational purposes only and should not be construed as investment, tax or legal advice of any kind, nor does it contain a recommendation to buy or sell any specific securities. Past performance is not indicative of future results and there is no guarantee that any investment will achieve its objective, generate profits, or avoid losses. Potential investors should carefully consider the investment objectives, risks, charges and expenses of the Altegris/AACA Opportunistic Real Estate Fund. This and other important information is contained in the Fund’s Prospectus and the Summary Prospectus, which can be obtained by calling (888) 524-‐9441. Read the prospectus carefully before investing. Funds are distributed by Northern Lights Distributors, LLC. Altegris Advisors and Northern Lights Distributors, LLC are not affiliated. MUTUAL FUNDS INVOLVE RISK INCLUDING POSSIBLE LOSS OF PRINCIPAL. Equity securities such as those held by the Fund are subject to market risk and loss due to industry and company news or general economic decline. Equity securities of smaller or medium-‐sized companies are subject to more volatility than larger, more established companies. The concentration in real estate securities entails sector risk and greater sensitivity to overall economic conditions as well as credit risk and interest rate risk. The Fund will engage in short selling and short position derivative activities, which are considered speculative and involve significant financial risk. Short positions profit from a decline in price so the Fund may incur a loss on a short position if the price increases. The potential for loss in shorting is unlimited. Shorting may also result in higher transaction costs which reduce return. The use of derivatives, such as futures and options involves additional risks such as leverage risk and tracking risk. Long options positions may expire worthless. The use of leverage will cause the Fund to incur additional expenses and can magnify the Fund’s gains or losses. Foreign investments are subject to additional risks including currency fluctuation, adverse social and economic conditions, political instability, and differing auditing and legal standards. These risks are magnified in emerging markets. Preferred stock and convertible debt securities are subject to credit risk and interest rate risk. As interest rates rise, the value of fixed income securities will typically fall. Credit risk, liquidity risk, and potential for default are heightened for below investment grade or lower quality debt securities, also known as “junk” bonds or “high-‐ yield” securities. Any ETFs held reflect the risks and additional expenses of owning the underlying securities. Higher portfolio turnover may result in higher costs. The manager or sub-‐adviser’s judgments about the value and potential appreciation or depreciation of a particular security in which the Fund invests or sells short may prove to be inaccurate and may not produce the desired results. The Fund is non-‐diversified and may invest more than 5% of total assets in the securities of one or more issuers, so performance may be more sensitive to any single economic, business or regulatory occurrence than a more diversified fund. 1196-NLD-5/19/2017
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