It’s difficult to find sectors that are experiencing high secular growth right now. So much of the economy remains moribund. Thus, when a sector seems to be shining through the fog, investors should take note.
People tend to focus a lot on real estate, and for good reason. It tends to hold its value over the very long term. Infrastructure plays usually offer greater stability and long-term growth, and real estate is no exception. There are several public companies that offer what I would call “infrastructure and other investor services” for real estate investors.
These services are vast and deep. Capital market resources are offered to provide financing to buy commercial properties. There are construction oversight services, as well as project and development services to permit both new construction and improvements. Energy and sustainability services allow interested investors to see how to make buildings as energy efficient as possible.
Of course, this sector often involves the government, what with its regulations and all. So there are government navigation services. Agency leasing allows investors to find possible tenants for their commercial properties using local brokers and reps. Naturally, property management is also key, and that’s another important service.
So here’s a look at three of the best ways ways to play real estate.
Jones Lang LaSalle (JLL)
Jones Lang LaSalle (JLL) is a global provider of these services, and has been since 1997. The firm is so well-entrenched and expert in what it does that it has expanded throughout the Americas, Asia Pacific, Europe, the Middle East, and even Africa.
JLL offers just about every service one can think of, and does so across both commercial and residential properties. It handles offices, hotels, retail and industry properties, healthcare and labs, government facilities, military housing, sports and cultural facilities … the list goes on and on. It truly is a leader in the sector.
JLL stock has $500 million in cash and $430 million in long-term debt. It has a very reliable stream of free cash flow, rising from $120 million in FY11 to $183 million in FY13. Long-term growth projections are pegged at 15%, and amazingly, JLL stock only trades at 17 times earnings.
The bottom line: It’s an easy buy.
First Service Corporation (FSRV)
First Service Corporation (FSRV) is a Canadian-based firm now in its 42nd year of business. FSRV manages 6,500 properties with 1.5 million units, and its gigantic size allows it to take advantages of economies of scale.
FSRV has a particularly notable division called American Pool Enterprises, which is North America’s largest commercial pool and rec facility management operation, handling more than 7,000 residential pools.
For FSRV stock, $148 million in cash is offset by $327 million in debt and it, too, is growing its free cash flow — from $43 million in FY11 to $78 million in FY13. Also growing EPS at 15%, the stock trades at 19x estimates for FY14. Between FSRV and JLL stock, JLL is a better buy.
Reis (REIS) is a bit different, focusing less on the day-to-day management aspects of commercial real estate and instead offering a broad swath of analytical tools.
Its database is what it sells, along with ongoing asset and portfolio evaluations, reports and forecasts on real estate trends, and so on. Reis is a tiny company, but it is a subscription service with high renewal rates, so it also enjoys good margins.
REIS stock is growing EPS at 30% and it trades at 53x earnings. This is the kind of play that has very little debt, and if it establishes a greater foothold in this market, could become a multi-bagger. So consider waiting for a pullback and buying for the long term.
Lawrence Meyers does not own shares in any company mentioned.