Any investment that has “real estate” as part of its title is a risky proposition right now. However, among Real Estate Investment trusts (or REITs), there are still some nice opportunities right now if you know where to look. These companies tend to yield very high dividends, and some have very good upside potential even amid a tough housing market.
Equity Residential (EQR), Simon Property (SPG), Boston Properties (BXP), Senior Housing Properties Trust (SNH) and Annaly Capital Management (NLY) are some of the biggest players in the REIT industry and provide a variety of different real estate flavors. AREIT can focus on condos, commercial real estate and mortgage-related debt, among other things. According to Wall Street rules, a REIT is a corporation that invests in real estate in some form and gets a special tax designation as a “trust” that reduces or altogether eliminates income taxes. In return, Real Estate Investment Trusts must return 90% of their income to investors. This provides for some great dividends for income-oriented investors.
Equity Residential (EQR) is one of the largest developers and managers of multifamily properties in the United States. EQR owns part or all of about 600 properties in 24 states and the District of Columbia consisting of over 150,000 total apartments and condos. With a plentiful yield of 3.7%, Equity is a favorite among income investors. Though EQR saw a 60% jump in Q4 results at the end of February, the company fell short of Wall Street forecasts. Though several analysts have been impressed by this REIT in the wake of its earnings, their targets of around $35 to $40 a share reflect a very low ceiling for the stock. EQR is currently trading at around $36 a share. Credit Suisse, which upgraded Equity to “neutral” from “underperform” showed its caution by saying, “We suggest ‘dipping a toe’ into REIT sectors such as apartments that are less likely to have earnings quality deterioration from higher leasing costs or non-cash operating income adjustments.”
Boston Properties (BXP) is one of the leading office companies in America, owning about 150 pieces of prime real estate in major urban centers like Boston, midtown Manhattan and San Francisco. BXP boasts about 50 million square feet of office space — equal to two square miles of desks, filing cabinets and computers! The company also operates about 11.2 million square feet of parking garages for all those employees. BXP yields a 2.9% dividend and continues to perform well. In January, the company posted a quarter-over-quarter sales decline of -3% but still beat expectations since it continues to outperform other commercial real estate companies. Shares are trading around $68 with most analysts forecasting a price of around $72 — about 6% above current levels. Boston Properties was upgraded to “neutral” from “sell” at UBS on Feb. 1 from “hold” to “buy” at Stifel Nicolaus on Feb. 2.
Simon Property Group (SPG) is another commercial REIT, though it focuses more on stores than offices. The firm invests in regional malls, premium outlets and community centers around the world, and offers a rich 3.1% dividend. However, Simon recently dipped into its cash reserves big-time in February with a move to snatch failed commercial real estate company General Growth Properties out of bankruptcy. The alliance would team up the two largest mall owners in the U.S. with a price tag of about $1.9 billion. Some analysts have been improving their grade for SPG in the wake of the move, raising price targets as high as $89 a share — more than 10% above current pricing.
A more specialized REIT play is Senior Housing Properties Trust (SNH), based out of Massachusetts. The company primarily invests in senior housing properties in the United States, including both full-service hospitals and nursing homes as well as senior-only apartments for independent adults. With about 200 total properties, including two hospitals, SNH has a wide reach and a very substantial dividend yield of about 6.9% right now. Unfortunately, that dividend is probably the best thing going for the company since threats to reduce Medicare payouts are weighing heavily on all health care providers — but particularly those that special in geriatric care. Jefferies & Co recently initiated coverage of SNH in January with a “hold” rating and a target of around $22. That’s just a hair above where shares are trading today.
Perhaps the hardest REIT to pin down right now is Annaly Capital Management (NLY). The company focuses more on paper than properties, making its money from investments such as mortgage pass-through certificates, collateralized mortgage obligations, and other mortgage-backed securities. Since even now it’s hard to tell how many “toxic mortgages” remain on the market or whether the real estate market has truly hit bottom, it makes it hard to forecast NLY’s future performance. Perhaps that’s why analysts have a wide price range from a low of under $16 to a high of $23. Shares are currently trading right in the middle of those estimates at around $19. Some investors are taken by the fact that NLY pays an impressive annual payout of $3 a share — a yield of over 16% above its current price! But with a spread like that, either the share price will jump or the dividend will fall in the months ahead. And from the wide analyst range on Annaly’s price, it’s tough to tell which scenario will play out.