Don't Mistake REITs for BondsReal estate investment trusts are basically companies that own space and charge rent. They aren't homebuilders or commercial developers. They are property owners that specialize in niches such as hospitals, downtown office buildings or shopping malls. Income-seeking investors like REITs because they are required to distribute at least 90% of their income in the form of dividends. But in recent years, investors seeking capital gains have flocked to them, too, as stable, rising rents have provided substantial capital gains. Chelsea Property, a mid-cap company that owns high-end outlet malls around the country, has advanced 21% per year in the past decade. That's much better than popular growth stocks like IBM ( IBM), Wal-Mart ( WMT) and Home Depot ( HD).
Gray's PicksRetail and health care REITs have been hit the hardest, possibly because they had been up the most. Now valuations aren't pound-the-table cheap, but a lot of fluff has certainly been removed by the panic selling. Here are a few names that are worth considering now, according to Gray:
- Macerich (MAC) owns interests in more than 70 major shopping centers that cover about 60 million square feet of leasable area. The stock plunged from $54 at the start of the month to around $41 a few days ago, but it has stabilized around $43. That kind of move is nothing for a tech stock, but Macerich has risen steadily since December 2000 with barely anything more than a 5% correction. Gray says the company has strong management, a predictable earnings outlook for this year and next year due to its long-term leases, and a tidy dividend of 5.1%.
- Boston Properties (BXP) owns high-quality assets in San Francisco, New York, Boston and Washington, D.C. Gray says it has a great management team, a stable portfolio of buildings in places where few new ones are being built and lots of operating leverage. The portfolio manager estimates the stock is now trading for a 10% discount to the value of Boston's properties.
- Koger Equity (KE), a small-cap, is a suburban office-building specialist in Florida that pays a 6.2% dividend. Gray says the company has strong management, good assets that could withstand a rise in rents, and a stock that is trading at a 5% discount to its properties' value.
- Chelsea Property Group, a developer and owner of trendy outlet malls, traded as high as $60, fell $11 in two weeks and stabilized at $52. "We told readers it was a screaming buy at $49," Vinocur said. Earnings are growing at a compound annual rate of 15%, dividend growth is in the low double digits and management is first-rate, he says. "We think you're hard-pressed to find a company with the track record that Chelsea has -- and it's still firing on all cylinders," he said.
- Ventas (VTR) owns senior housing and medical care properties in 37 states. Kindred Healthcare (KIND), from which it split, leases a majority of its facilities. Vinocur says CEO Debra Cafaro developed "a dynamite business plan" that has generated much more top-line growth than Wall Street believed possible. The stock was up 105% last year and 114% in 2001, and is still up 6% this year even after taking the hit.
- Vornado Realty Trust (VNO) owns office buildings, shopping centers and temperature-controlled warehouses throughout North America. Vinocur said he believes many of Vornado's properties in Manhattan and Washington, D.C. are renting below market and can easily be boosted if economic growth continues. Management is excellent, the valuation is good, the yield is 5.3% and there is plenty of room for further earnings and dividend growth. The stock has risen 19% compounded annually for the past 10 years, including a 57% move up last year. After the recent slide, though, shares are flat for 2004.