In this article I look at a my best ideas in the real estate REIT space because of their income and income growth potential rather their stock price growth potential. What most investors do not know is that a growing economy is good for real state REITs, and a flattening yield curve is bad for mortgage REITs. I will treat this issue within the body of this article. Investors should also know that REITs are required to pay at least 90% of their earnings as dividends to shareholders. Investors appear perplexed that most REITs pay well over 100% of earnings. Please note that many REITs report earnings as a secondary concern, with the free cash from operations (FCO) (earnings plus depreciation, amortization, and other non cash expenses) as the primary statistic. Unlike other authors on Seeking Alpha, I have dug into the earnings statements and will describe these trusts in terms of their FCO rather than their earnings.
Camden Property Trust (NYSE:CPT)
Camden is a Houston based REIT specializing in the acquisition, construction and management of multi family apartment communities. It is trading at a price to free cash flow ratio of 23, and has a market capitalization of $4.6 billion. It paid a quarterly dividend in 2011 of $0.49 per share, for an annual yield of 3.1%.
In 2011, Camden reported free cash from operations of $207.5 million, or $2.73 per share, which was fundamentally unchanged from 2010's reported FCO of $2.72 per share. Prior to recessionary years beginning in 2008, Camden had been reported FCO of over $3.00 per share, sometimes, way over. Camden is undertaking steps to restore itself. Specifically, it has new construction projects scattered around the country, primarily in California, Texas, and Florida. It is aggressively purging underperforming assets, and acquiring others, which is a key process for this industry, in my opinion. Occupancy levels at the close of 2011 averaged 94.5%, a 70 basis point improvement from the 93.8% reported at the close of 2010. Management has forecast FCO of $3.30 to $3.55 in 2012, plenty to allow dividend hikes. I like Camden. I would like it even more if it were priced toward the lower end of its 52 week range. But as it is, this issue still is paying a dividend yield over 110 basis points above the U.S. Treasury yield, and I believe that dividend is not only secure, but primed for increases the next few quarters. I urge you to take a look.
Simon Property Group (NYSE:SPG)
Simon is a REIT best known for its ownership and management of regional shopping malls. In sum, it has ownership or management interests in nearly 400 properties worldwide, with an aggregate 260 million square feet of leasable area. It has a price to FCO of 19.9, and a market capitalization of $40.4 billion. It raised its quarterly dividend recently to $1.10 per share, for an annual yield of 3.2%.
Simon reported FCO in full year 2011 of $2.44 billion, or $6.89 per share, a substantial, 38% jump from the $5.01 per share in 2010. Occupancy rates for Simon properties averaged 94.8% at the end of 2011, a marginal improvement from the 94.5% at year end 2010. But average rent increased to $39.42 per square foot in the fourth quarter of 2011, up 4.4% from the $37.77 in the same quarter of 2010.
Growth is continuing, as Simon opened in 2011 its first upscale mall in Southeast Asia (Malaysia), and has capital improvement projects ongoing or scheduled at 23 more of its malls in 2012. Simon stock has had a nice run of up by 38% since August, 2011. Gurus such as Ken Heebner and Imperial Capital see further upside. And with the dividend already 160% of the 10 year Treasury bond yield, I think the case for Simon is compelling. Further research is warranted.
UDR, formerly known as United Dominion Realty Trust, is a Colorado based REIT specializing in mid market apartment communities, particularly in California, Florida, and the mid Atlantic coast. Its stock was trading recently at between $25 and $26 per share, toward the high end of its 52 week range of from $27.26 to $20.04. It has a price to FCO ratio of 19.9, and a market capitalization of $5.6 billion. It recently raised its dividend for the second time in the past twelve months, to $0.22 per quarter, for a yield of 3.5%.
For 2011, UDR posted FCO earnings of $1.28 per share, up 17% from the $1.09 reported in 2010. UDR is basing its growth upon entering some of the country's most expensive markets such as Washington D.C., Boston, and San Francisco, and sold about $600 million in assets in areas not fitting with the new, higher end market strategy. UDR's properties averaged 95.5% occupancy at year end 2011.
UDR management is predicting 2012 FCO of $1.37 to $1.43 per share. Even so, there is limited growth in this equity. There is nothing wrong with taking dividends worth 175% of the 10 year Treasury yield, but I believe there are better choices.
About the author:
I practice Judaism and my faith is very important to me. I visit family in Israel once a year, but I am educated and work in the United States where I hold an MBA and a bachelor’s in English. I am a patient man, enjoy wine but am not a connoisseur, and I listen more than I speak.