Bottom of the Barrel: REITs Lend Some Support

Small-caps haven't been spared from the market's big funk. Yet, in the Bottom of the Barrel portfolio, a few real estate names have provided decent stability and continued to reap dividends. Many stocks have suffered, but these REITs remain in the black.

However, investors are always looking to the future. As such, many of you have asked about the strategy for three REIT names today: Acadia Realty (AKR Quote), Alexandria Real Estate Equities (ARE Quote) and Capital Automotive (CARS Quote). Here's a look.

Acadia: Stable Retail

When I first profiled Acadia last June, I noted the company's niche markets, its independence and a lack of sponsorship on the Street. All of those tenets are still true, although interest does seem to be increasing among smart real estate investors.

Acadia It has potential upside

Just below $8, the stock trades at about 8.8 times 2003 estimates of funds from operations, or FFO, a REIT's measure of ongoing cash flow. That's a slight discount to the shopping center average, and Acadia has a more focused portfolio of assets than a national shopping center REIT like Kimco (KIM Quote). Acadia's assets are in the Northeast and are largely infill, meaning that competitors have less of a chance of building another center nearby.

In addition, Acadia now yields nearly 7.25%; the dividend appears safe at about 64% of FFO.

It does carry risks, though. Kmart is Acadia's largest tenant, making up 4.7% of base rents in six stores. Although Kmart stores in Acadia centers are among Kmart's top-yielding outlets, the retailer's future is shaky. If Kmart shuts its doors, Acadia would probably find new tenants quickly, possibly even at higher rents. However, the transition time would mean potential downtime for the locations.

Acadia seems fairly valued, with potential upside from two catalysts: better visibility for 2003 FFO and an increase in the dividend. If the company continues to perform well, both are possible. Until then, investors get 7.25% to wait. Given the stability of the portfolio, Acadia pays to be patient.