09/14/2015 9:00 am EST
The appeal of REITs for many investors is the relatively high dividend yields they offer against a backdrop of bond alternatives, observes Todd Rosenbluth, editor of S&P Marketscope.
S&P Capital IQ has a positive fundamental view of the retail REIT group, which is comprised of shopping mall operators.
Cathy Seifert, an equity analyst for S&P Capital IQ, thinks increasing absorption of retail space should present retail landlords with more pricing power.
Most of the retail REITs have long-term leases with their customers, with embedded rent adjustments that should help insulate them from economic fluctuations.
Simon Property Group (SPG) is the largest retail REIT, with a $57 billion market capitalization.
While occupancy in Simon’s US regional mall and premium outlet portfolio was 96.1% at June 30, 2015, down slightly from 96.5% a year earlier, it remained above most peers.
Re-leasing spreads in the 12 months ended June 30, 2015, rose a healthy 18.4% over the prior year.
Meanwhile, mall tenant sales advanced 2.0% to $620 per square foot. SPG has a 3.3% dividend yield.
S&P Capital IQ also thinks the fundamentals for the residential and office REITs sub-industries are favorable; thanks to an uptick in demand coupled with a muted increase in supply.
For example, Equity Residential (EQR) reported 4.1% second quarter revenue growth and margin expansion. S&P Capital IQ forecasts 5% revenue growth with an occupancy rate an above-peers 96%. EQR has a 3.0% dividend yield.
Meanwhile, New York City-focused office REIT, SL Green Realty's (SLG) occupancy rate for Manhattan at June 30, 2015 was 97.0%; while—on the same basis—occupancy for SLG's suburban portfolio was 84.2%.
The other major industry for REIT investors to understand is specialized REITs, which is a myriad of companies driven by fundamentals ranging from cell phone towers to pulp and timber, all of which have opted to operate under a REIT structure.
With a market cap of $40 billion, American Tower (AMT) is the second-largest REIT in the S&P 500 index.
S&P Capital IQ estimates revenue increases of 13% in 2015 and 14% in 2016, reflecting higher lease activity and more new towers.
Seifert thinks AMT will benefit from the demands of wireless carriers to improve their network quality and coverage.
The specialty REIT industry also includes companies such as Weyerhauser (WY), a former paper & forest products company that is largely dependent on conditions in the home construction business; sales declined 8% in the second quarter of 2015. WY has a 3.8% dividend yield.
For those investors seeking income-oriented equities with strong fundamentals, these securities are worthy of attention.
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