(Story updated to add that Health Care REIT raised $1.1 billion in a secondary share offering.)
) -- The U.S. real estate market is in two worlds, with residential housing in the dumps and not yet worthy of consideration for investing. But commercial real estate, in the form of real estate investment trusts (REITs), is prospering.
For example, demand for rental apartments is booming because an uptick in employment has people relocating to areas with job opportunities. While at the same time, home ownership is at 12-year lows and not seen growing significantly anytime soon, and that boosts the earnings outlook for apartment-owning REITs.
And demand for commercial real estate, which includes shopping malls, office buildings and storage facilities, is showing steady growth, aided by years of almost no new construction, limiting supply, while a strengthening economy increases demand.
"Help from the current, very modest recovery has been enough to lift occupancy and rental rates for an industry group that includes office buildings, shopping malls, warehouses, industrial spaces, apartments, and hotels, to name a few," Fidelity Investments said in a research note. "These positive fundamentals have, in turn, boosted net income for REITs."
That recovery has been little noticed by many individual investors, given their still-strong memories of the mortgage-backed securities crisis and the plunge in residential home values, which has poisoned their views on all things real estate.
But REIT securities have been climbing since March 2009. The benchmark FTSE NAREIT Equity REITs Index is up 5.8% this year versus the S&P 500's 9.3%, after gaining 8.3% last year compared to the S&P 500's 2.1% rise. And that was after two straight years of 28% annual increases in the FTSE NAREIT Equity REITs Index.
Industrial property REITs are doing the best this year, with a 15.6% return, while mixed use (office and industrial) REITs are up 13%. As for residential REITs, S&P Capital IQ recently raised its fundamental outlook for the sub-sector to "positive" from "neutral."
"In our view, many Americans may be reluctant to purchase a home until price stability returns," it said. "Moreover, we think the number of potential renters is expanding due to a large cohort of echo boomers entering the workforce. The net result has been low turnover among existing apartment dwellers and strong demand from prospective new renters."
Given the supply and demand forces, S&P said apartment rents should grow 5% to 6% or more on new leases this year, boosting REITs' revenues.
Here are summaries of
that focus on several different markets:
Home Properties, with a market value of $2.8 billion, specializes in garden-style apartments in suburban locations throughout the space-constrained Northeast and mid-Atlantic suburban markets.
Its shares have a total return of 2% this year and a three-year average annual return of 38%. S&P has them rated "strong buy," with a $72 price target, which is a 23% premium to the current price.
S&P says this company is its favorite in the apartment subsector due in part to the company's acquisition strategy of buying older properties to upgrade. It made eight acquisitions for $501 million last year, "all of which are expected to add positively to 2012 earnings. We expect average rent hikes of about 4% this year."
Essex Properties, with a market value of $4.8 billion, manages apartment buildings on the West Coast. It has an interest in about 134 apartment properties.
Its shares are down 0.16% % this year but have a three-year average annual return of 44%. S&P has its shares rated "strong buy" with a $172 price target, which is a 23% premium to the current price.
S&P expects the company will see 96% occupancy rates this year, virtually full occupancy, due to the improving employment picture. So it will be able to raise its rents by 6% and that will contribute to estimated earnings of $1.88 this year, which will grow by 24% next year.
UDR, with a market value of $5.5 billion, is the owner of multi-family residential properties with more than 40,000 apartments, many in major cities on the East Coast, including New York, Boston and Washington, D.C.
Its shares are up 1.4% this year and have a three-year average annual return of 56%. S&P analysts give them a "buy" rating and a $30 price target, a 10% premium. The ratings firm expects to see 13% revenue growth this year, aided by acquisitions and rent increases of 5% to 6%.
Simon Property Group
Simon Property, with a market value of $41 billion, is the largest retail REIT in the U.S., operating about 393 properties, including regional malls, premium outlet centers, and international properties.
Its shares are up 7.2% this year and have a three-year average annual return of 70%. Analysts give them eight "buy" ratings, seven "buy/holds," six "holds," and one "weak hold," per S&P. S&P says the company should benefit from low new construction trends, established relationships with many of the biggest retailers, excellent regional mall locations and an improving economy.
Simon Property Group said last week that it is in agreement to jointly develop a premium retail outlet center in Shanghai, China, adjacent to the Shanghai Disney Resort. Its partner is Bailian Group, the largest retail conglomerate in China. Simon Property has investments in 70 Premium Outlet Centers worldwide.
Public Storage, with a market value of $23 billion, is the largest player in the competitive self-storage sector.
Its shares are down 0.8 % this year but have a three-year average annual return of 41%. S&P has it rated "buy" with a $153 price target, a 16% premium.
The ratings firm said PSA's revenue grew 6.4% last year, and should rise by 8.2% this year, aided by its increasing occupancy rates and rents, and its 11 acquisitions last year and six so far this year. It's expected to generate funds from operations of $6.40 per share this year, growing to $6.85 next year.
ProLogis, with $16 billion in market value, owns and manages nearly 600 million square feet of industrial space internationally, which it leases to a wide range of corporate customers. About half of its properties are held in joint ventures, with institutional clients.
Its shares are up 18% this year and have a three-year average annual return of 52%. S&P has it rated "hold," on valuation concerns. Analysts give them four "buy" ratings, three "buy/holds," 11 "holds," and one "weak hold," according to a survey of analysts by S&P.
Health Care REIT
Health Care REIT, with a market value of $11 billion, has a geographically dispersed portfolio of properties, including senior housing, skilled nursing, medical office, and hospital facilities.
Its shares are up 1.6% this year and have a three-year average annual return of 30%. S&P has it rated "buy," with a $61 price target, an 11% premium.
Health Care REIT reported last week that it recently completed its secondary offering of 20.7 million common shares at $53.50 each, and raised approximately $1.1 billion which it will sue repay debt, and for other purposes.
Through a steady string of acquisitions, the company is seen as positioning itself to take advantage of the long-term prospect of increasing demand from an aging population. Analysts give its shares four "buy" ratings, four "buy/holds," 10 "holds," and one "weak hold," per S&P.
Boston Properties, with a market value of $15 billion, is the owner of more than 125 office buildings, 18 office and technical properties, one hotel, two residential properties, and three retail properties.
Its shares are up 2.9% this year and have a three-year average annual return of 48%. S&P has its shares rated "buy," with a $119 price target, a 16% premium.
S&P said it's well-positioned in the market, with a portfolio of urban office properties that are rebounding, as well as $1.8 billion in new projects in the pipeline.
Avalon Bay Communities
Avalon Bay, with a market value of $13 billion, is one of the nation's largest apartment landlords, owning around 47,000 apartments in urban areas such as New York, Boston, Washington, D.C., and San Francisco.
Its shares are up 1.2% this year and have a three-year average annual return of 53%. S&P has its shares rated "buy," with a price target of $150, a 14% premium.
S&P says its presence in coastal markets with some of the strongest job growth will let it raise rents by an average 6% this year. It also has a number of projects in the pipeline, hence Avalon has an "above-average long-term earnings growth profile," S&P said.
American Campus Communities
American Campus Communities, with a market value of $3 billion, owns and manages off- and on-campus college-student housing.
Its shares are down 1.1% this year but have a three-year average annual return of 41%. S&P has its shares "buy" rated, with a $47 price target, a 12.6% premium.
The ratings firm says "we think average rental rates will increase about 3.5% due to strong pre-leasing activity for the 2012-13 academic year. In addition, ACC has 11 wholly owned developments with 1,915 beds scheduled for August 2012 delivery."
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