Appealing REITs

09/14/2015 9:00 am EST

Focus: REITS

Todd Rosenbluth

Senior Director of ETF & Mutual Fund Research, CFRA Research

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%.

S&P Capital IQ estimates rental rates will grow about 5% to 6% in SLG's core Manhattan market in 2015. SLG has a 2.1% dividend yield.

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.

AMT converted to a REIT in late 2011; former telecom services peer Crown Castle (CCI) also made the REIT conversion in 2014. CCI's 4% dividend yield is higher than AMT's 2%.

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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