Real Estate Investment Trusts, REITs, are a form of business that sells stocks in order to invest in real estate. REITs were essentially what made Collateralized Debt Obligations (CDOs) possible. Before the most recent financial crises, REITs set the stage for the real estate market to boom. A couple years ago, REITs went through a boom/bust cycle. That is, the stocks increased remarkably in value within a short amount of time, then crashed horrifically and suddenly, exactly what happened in the most recent housing crises. However, in the boom cycle, real estate development went wild, and construction soared, leaving many pieces of real estate without owners. The boom/bust cycle was fueled by speculators, not actual business activity. However, this boom and bust cycle has passed, the financial housing crises has basically subsided, and the world/US economy is slowly working its way back to normal. In this article, I aim to discuss specific REITs and why I would or would not advise investing in them while the US economy is trying to recover.
One of the most important things to remember about REITs is that they are required to distribute 90% of the company's taxable income through dividends. So of course, investors interested in gaining off of dividends may prefer REIT stock to other stocks.
Simon Property Group Inc. (SPG) is an REIT that focuses on prime retail real estate. In other words, places like shopping centers. It is the largest REIT in the United States, and currently commands an impressive ~$138 per share. The company has shown large, steady returns over the years, and shows no signs of slowing down.
One of the main things to consider about an REIT such as Simon is that right now there are currently a number of government programs that provide things like tax breaks, and "easy" loans at great rates that allow new businesses to open. This incentive has a large impact on a Simon's performance, as it results in more of their plots being filled with businesses sprouting up that are running under government funding. This is another thing to keep in mind when evaluating businesses closely tied in with a market that recently collapsed, and a job market that is slowly expanding.
Simon boasts a considerable 65.7% increase in net income per share from 2010 to 2011. In that same report, Simon breaks down how much each of the key metrics to their business increased over the year. We can see that occupancy of their buildings increased only 0.3%, which is still significant, seeing as how the company had occupancy of 94.5% to begin with. Something that stands out for me in these numbers is that the company posted an increase in average rent per square foot of 4.4%. Rent is increasing, which would likely mean one of two things: 1) businesses are doing better and Simon notices this, therefore knowing that they can increase rent without straining or losing their customers. Or 2) the company is putting excess strain on occupant businesses, which could possibly setting the stage for a future backlash. An Independent article attests to the former. It claims that as the economy is slowly but steadily increasing, it is enough to drive up rents across the board, as people are still prevented from buying, but have the income to be able to rent.
My outlook for Simon, in both the short and long term, is very positive. Net income, earnings per share, and all other positive metrics are on the rise, with no real sign of slowing down, and the company is still expanding locally as well as globally without over-extending itself.
Vornado Realty Trust (VNO) is a diversified REIT, owning many different types of commercial real estate in many different places.
Vornado does not have the most enticing outlook for the coming year. Projections for 2012 are practically equivalent to what was earned in 2011. Though the forward outlook for the company's expansion in 2012 is not the best, remember that REITs pay out rather dependably in dividends. This past year, the company paid out an attractive 3.3% interest per share in dividends.
Based on this, it is my opinion that Vornado is a worthwhile investment for those looking for profitable dividend yields as the company has a solid balance sheet, a flat outlook for the coming year, and a solid dividend yield for the past year. In terms of growth, Vornado does not appear to be the best choice at the moment. If some news were to be released on big property acquisitions, the company may build some momentum upwards, but until then, I would not rely on the stock rising very much.
Ventas Inc. (VTR) focuses on healthcare and housing for seniors. Needless to say, this industry as a whole has a very positive outlook as the baby-boomers in their old age continue to flow in. Ventas has proven itself to have substantial growth potential, after reporting an increase in net sales from 2010-2011 by an astonishing 74.3%. Hand in hand, net income increased by a resounding 48%.
Ventas has shown a strong eye for acquisitions in 2011, becoming the largest owner of medical office buildings on par with hospital systems across the U.S. It has acquired only office buildings with high occupancy rates (one acquisition was for 72 office buildings with 92% of the offices already occupied) showing that Ventas is assuming less risk. Instead of building more offices they are opting to acquire real estate that already has a reliable source of income.
While the company has shown remarkable performance in the past, some analysts choose to either hold off or to sell the stock. This is because the view the company's substantial short-term increases as being unstable, a proponent of future volatility. I acknowledge this to be a valid opinion many times, but it is my opinion that Ventas is in an industry and a place within that to reliably hold its ground and continue moving upwards.
While HCP Inc (HCP) may have been around for some time, and has a market share rivaling that of Ventas, it is my opinion that HCP is not the wisest place for an investor to entrust his money at this point in time.
The first reason for this is the CEO's previously demonstrated lack of judgment. This lawsuit may have been almost five years ago, but it is a significant piece of information relating to a core member of the company's management team, someone who still resides as CEO. In fact, 2011 saw $125 million paid to Ventas for the CEO's lack of judgment and regard for a written contract. I am not writing this with the intent of slandering HCP's CEO; it is merely on observed opinion based on the company's previous conduct. The industry is highly dependent on acquisitions and expansions at the moment. Something like this deeply scars a company's reputation, and others may opt to seek other companies to conduct business with.
HCP's financial statements have been somewhat erratic, at best. One can see large fluctuations in earnings per share between fourth quarters of 2011 and 2010 respectively of 35.7% and negative earnings per share in the fourth quarter of 2009.
In my opinion, while the industry is showing similar increases, HCP is not the contender that I would place my money with. The management team has not proven itself to be entirely trustworthy, and the company's finances seem to be unreliable as well.
Equity Residential (EQR) Is the largest public apartment owner in the United States. Currently however, the only thing to state about Equity Residential at this moment lay in a very recent development. With 11 people directly injured, and many more involved in an apartment fire, there will no doubt be very cumbersome lawsuits to follow.
Normally, a single lawsuit would not be enough to deter me from a stock at any given time, excluding extraordinary lawsuits of course. However, it is noticeable in the case of HCP how one lawsuit severely impacted the quarterly and in turn the yearly returns of the company. Since REITs are largely measured on how well they pay out in dividends, a single year of significantly lower returns could deter legions of investors, effectively creating an even more dire situation. On top of the lawsuits, a fire creates a lot of property damage, and while it is undoubtedly insured, this fire will cause the trust's expenses to increase both materially and permanently.
If it is determined that the fault of the fire lay in Equity Residential's faulty building, it could spell absolute disaster for the company. In short, stay away for now. I chose this stock to show the importance of taking into consideration all aspects of a company in both the short and long term, as opposed to simply analyzing the financial statements. Once more details of the fire are discovered, the stock price could theoretically suffer something like a 25% loss or more in a matter of hours, and the investor who went long without checking the news would take an immediate blow to the gut.
The company could certainly recover, and if taken to court, may not have to pay for many years as HCP did not have to, but the immediate effects are a risk that need not be taken until more information is released and the market reacts.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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