As a consultant for hedge funds, trust me when I tell you that hedge fund managers don’t always know everything there is to know about the market. The best hedge fund managers have an area of expertise and leverage it by making purchases in specific sectors.
Hedge funds that invest in REITs and dividend stocks are worth following if you’re an income investor. By taking note some of the REITs the big funds are buying, you can identify good investment opportunities.
You may find a growth or value play or a good dividend play. Generally, however, when a hedge fund buys a REIT, it isn’t just for the dividend yield. Their investors are expecting market-beating returns, so if a hedge fund holds a REIT, the manager is likely expecting significant capital gains as well.
REITs to Watch
A very popular move by some hedge funds has been to buy shares of SL Green Realty Corp (SLG). The 44-year-old firm handles financing, development, construction, leasing, acquisitions and property management for commercial properties. At the end of June, hedge funds only owned about 775,000 shares. By the end of September, however, Aberdeen Asset Management (ABDNY), a hedge fund based in the United Kingdom, had bought 8.3 million shares or just over 9% of the company.
Now you get a chance to buy in along with Aberdeen. SLG is at about $115 currently after fluctuating between $101 and $110 since June 30. It pays a 1.8% dividend yield.
It’s difficult to say why Aberdeen made the move into SLG. As a U.K.-based firm, it may have wanted more U.S. exposure — especially exposure to Manhattan, where real estate is going crazy. The REIT does a lot of business in New York City.
That’s not all the only REIT that hedge fund Aberdeen has gobbled up. It also purchased 3.6 million shares of Home Properties Inc. (HME) in the quarter. This REIT acquires, operates and renovates 112 apartment communities with 42,000 units along the east coast, half of which are in Baltimore and Washington, D.C. It focuses on upgrading units from what are considered “C” level properties to “B” or “B+” properties. On average, those upgrades yield rents that are 90% higher.
The company has turned its cash flow situation around, going from huge negative free cash flow in fiscal year 2011 to being $135 million in the black over the past year. HME pays a 4.6% dividend yield.
The chart for this REIT looks a lot like that of SLG, in that both stocks sold off about 10% in September and that’s when Aberdeen may have bought in. That Aberdeen has purchased both of these REITs — one a commercial REIT and the other focused on residential — shows the hedge fund is after U.S. real estate exposure.
Aberdeen also plunked down a wad of cash to purchase 2.68 million shares of Brixmor Property Group (BRX). Also buying this REIT was Duff & Phelps Investment Management, which purchased 939,000 shares in the quarter.
What does Brixmor do that these other REITs don’t? It operates 532 neighborhood shopping malls that are anchored by grocery stores. It’s also a subsidiary of Blackstone Real Estate Advisors, so you sort of have one hedge fund buying a piece of another hedge fund.
Brixmor’s grocery stores have a big thing going for them. They require very little capital expenditure. BRX isn’t upgrading lousy apartments or homes. Consequently, cash flow is on the increase as the company acquires more and more properties. The REIT is also pushing out dividend yield big time. It paid $12.8 million in Q4 of last year and it paid $61 million in the last quarter. At the moment, that’s a 3.3% yield.
Lawrence Meyers does not own shares of any company mentioned.