This week, the REITs float to the top of the barrel.
Because many of you are inquiring about the real estate investment trusts in my small-cap basket, this week's Bottom of the Barrel reviews the sector's three names highlighted over the past year. As noted in a
recent column on value REITs, public real estate markets face many challenges. So it's no surprise that the Barrel's small-cap REITs are encountering similar hurdles. But for two names in the portfolio, investors have some reasons for optimism.
Alexandria: Health Can Be Expensive
Alexandria Real Estate
focuses on laboratory offices primarily for the biotech industry. When I
first mentioned this company in February, its stock was trading at $40.25. Today's price of $42.60 has provided investors a nice return and, combined with 4.7% yield, has made a good investment.
As the office market struggles, can Alexandria continue to outperform? The answer is a qualified yes.
One area of the office market that hasn't felt as much of the occupancy and rent-rate pinch is the medical technology space. Although Alexandria's occupancy rate fell to 95.2% from 96.7% in the third quarter, the company fared much better than many mainstream office landlords. It also posted an increase in net operating income of 3.3% for the third quarter, while many mainstream office companies struggled to find any growth at all.
More important, management is confident that growth will continue. They currently see 2002 funds from operations, or FFO, a REIT's measure of operating success, at $3.92 a share, translating into a current multiple of about 10.9 times FFO. In 2003 the company thinks it can post FFO of about $4.30, putting the forward multiple below 10, about equal to the growth rate.
That multiple seems about right, given economic uncertainties. But the dividend appears safe, and this could be one of the few REITs to see a modest boost in the coming year. On the basis of a $2 dividend, Alexandria only pays out 55% of its funds available for distribution, estimated at about $3.60 for 2003.
That doesn't mean the stock is cheap. Calculating the value of any REIT's properties is subjective, but Alexandria's assets appear to be worth about $37 per share, when viewed conservatively. That suggests the shares are trading at a 15% premium to asset value, near the top of the range that investors are traditionally willing to pay for a public real estate company, especially in an uncertain economy.
A combination of Alexandria's strong property niche, solid growth rate and dividend indicates that the stock will be a stalwart in tough times for mainstream real estate. However, it seems fairly priced, given both its multiple to FFO and premium to net asset value. If you're looking for a nice dividend with longer-term appreciation potential, consider Alexandria, but keep your short-term expectations in check.
Acadia Still Solid
isn't on any analyst's radar screen anymore since CIBC dropped coverage about a month ago.
That's too bad, because this small shopping-center REIT knows how to do things right: It runs its portfolio to benefit shareholders. The company owns more than 30 community shopping centers, largely in urban centers in the Northeast.
profiled the stock in June, it's up about 6.5%. Combined with a dividend yield of nearly 7%, Acadia has offered shelter from a stormy market.
But shopping-center landlords aren't without problems, either. There's a glut of suburban space, problems with major tenants like
( KM) and the ever-present challenges from
. However, Acadia's centers are in in-fill locations -- meaning there's little surrounding land on which to build competing projects -- and that protects them from ravenous competition. In fact, Wal-Mart is an Acadia tenant, contributing just over 3% of the company's total rents.
Acadia's portfolio performed well in the third quarter as the company posted an 8% increase in FFO and a 2.3% increase in net operating income. In addition, it was able to sell two shopping centers during the quarter, including one with a 112,000-square-foot anchor.
The company expects to post FFO of 85 to 90 cents a share in 2003, placing the forward multiple at about 8 times, below the shopping-center average of 9.7 times 2003 estimates. Although Acadia's small size is the reason for part of the discount, the stock seems reasonably priced. With a 7% yield and a management team that seems to be on the right track, this small REIT still looks cheap.
The JDN Marriage
( JDN), the Atlanta-based big-box retail REIT, I said there was a good chance of a merger, which should provide a modest benefit to shareholders. That proved correct.
In October the company agreed to be purchased by
Developers Diversified Realty
in a stock deal that is now worth about $11.22 per share for JDN shareholders. That's not great, but given the dividend, holders have fared alright. Once the deal is complete, JDN shareholders would become shareholders of Developers Diversified, a decent retail REIT. However, there's little to say about JDN except to congratulate CEO Craig Macnab for keeping the company afloat after a troubling chapter in JDN's history. Because of the merger, I'll remove JDN from the portfolio.
Next week, there'll be another Barrel pick and the return of Barrelology, my historical look at the portfolio.
Christopher S. Edmonds is vice president and director of research at Pritchard Capital Partners, a New Orleans energy investment firm. He is based in Atlanta. At time of publication, neither Edmonds nor his firm held positions in any securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. While Edmonds cannot provide investment advice or recommendations, he welcomes your feedback and invites you to send it to