by Will Ashworth | March 28, 2014 12:42 pm
Pure-play REITs are hot. A recent article in GlobeSt.com highlighted the reasons why so many REITs are spinning off portions of their holdings into separately run businesses. The opportunities to invest in pure-play REITs have never been better.
Which should you own? Here are five pure-play REITs worth considering.
Pure-Play REITs: Weingarten Realty (WRI)
Originally founded as a real estate offshoot to Weingarten grocery stores, the real estate business became the sole focus in 1980 when the stores were sold to Grand Union. After going public in 1985, WRI is in the final stages of a five-year transformation into a pure-play retail REIT. Focusing on shopping centers with supermarket and necessity-based retail anchors, the company has disposed of $2.3 billion in industrial and nonessential retail assets. The result: Its real estate portfolio is far more productive while less reliant on its biggest customers.
Over the past two years it’s achieved year-over-year increases in same-property net operating income of 4.2%, well above its growth in previous years. Approximately 43% of its annualized base rent (ABR) is from shopping centers with national grocers such as Kroger (KR) and Whole Foods Market (WFM). In total it generates 75% of its ABR from grocer-anchored shopping centers — a setup that provides investors with stable income from tenants generally resistant to the growth in e-commerce. New developments such as The Parks at Walter Reed are examples of where WRI is headed.
I expect the next two to three years to be very good to WRI investors. As pure-play REITs go, this is a story worth following.
AHP is a micro-cap REIT spun off from its larger parent — Ashford Hospitality Trust (AHT) — last November. AHT management came to the conclusion that its properties with higher revenue per available room (RevPAR) were better suited within a second REIT where investors could more easily value those assets. AHP is now 10 hotels (two acquired since spinoff) with an option for 12 of AHTs more expensive properties.
Regardless of whether it exercises those options, AHP’s focus on full-service hotels with RevPARs of at least twice the national average is a good one. I recently recommended AHP as a spinoff candidate that will likely outperform its parent over the next 12-18 months.
In my mind you can’t go wrong operating at the higher end of the customer food chain. Look for AHP to buy some interesting properties over the next year or two.
PSA is the world’s largest owner and operator of self-storage facilities with over 1 million customers. As America’s preoccupation with owning stuff has grown exponentially in recent years, PSA’s business has come along for the ride.
It’s possible that we’ll suddenly wake up one day and realize this fondness for hoarding things isn’t healthy … but until then PSA is going to continue to thrive in this niche industry.
Of all the pure-play REITs this is the one we should have invested in a decade ago. It’s up 15.1% on annualized basis over the past 10 years, almost 8 percentage points higher than the S&P 500.
PSA fills a need that’s not likely to disappear. In the latest fiscal year ended Dec. 31, 2013, PSA generated core funds from operations of $7.44 — 11.4% higher than in 2012. Same-store rental income increased 5.4% year-over-year due to higher rents and higher occupancies. It’s a winning combination that over time has proved successful. Although it’s only yielding 3.3% at the moment, it’s a very stable stock, having seen a negative return just once in the past decade. I like its odds.
This is the brand child of Public Storage founder Wayne Hughes, who started the company in 2011 to take advantage of falling prices in the single-family home market. Private equity firms such as Blackstone Group (BX), Hughes and others have been actively buying up houses on the cheap with plans to rent them out until prices rise to the point where they’re no longer worth holding on to. As a result of this intense competition, prices have risen faster than anticipated — slowing the number of home purchases made by institutional investors.
In the fourth quarter ended Dec. 31, AMH bought 2,001 homes, 32% fewer than in Q3. It now owns 23,268 single-family properties with an occupancy rate just under 80%. It might not sound great, but it’s an improvement of 12 percentage points over Q3. As a result its net operating income from leased properties in the quarter increased by 27% over Q3.
This is a business model that’s working, yet its stock price is barely up more than 5% from its July 31, 2013, IPO. As more capital flows into the business AMH will continue buying up more homes. Eventually, investors will realize that AMH isn’t going away and that Americans don’t have to feel bad about renting rather owning. Wayne Hughes has struck again.
Famed investor Leon Cooperman sold his position in Penn National Gaming (PENN) in the fourth quarter of 2013, replacing it with a 2.2 million shares of GLPI, the real estate spinoff the casino operator took public through a 1-for-1 share distribution last November. Its first acquisition came one month later when it paid $140 million for a casino in East St. Louis. Pure-play REITs come in all shapes and sizes, but never before has there been one in the casino business.
And that’s just crazy, because we all know the casino business generates huge piles of cash.
PENN separated its gaming operations from the real estate in order to operate an asset-light business model. While the hospitality side of the casino business is all about glitz and glamour, nothing happens without big-time real estate. Don’t be surprised if other large casino operators choose to split their businesses. Will Las Vegas Sands (LVS) or Wynn Resorts (WYNN) do it? I doubt it. They run different establishments than PENN. However, anyone running casino operations in places outside Las Vegas or Macau might want to consider it — it just makes too much sense.
As of this writing, Will Ashworth did not own a position in any of the aforementioned securities.
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