Intelligent REIT Investing: Rock, Paper, Scissors

NEW YORK (TheStreet) -- My kids love to play rock, paper, scissors. You know how it works: Rock beats scissors, and paper beats rock, and scissors beats paper. There are no tie-breakers, and there is always a winner.

That same principle applies to REIT investing. There are the primary asset sectors of housing, office, retail and industrial. All of these sectors provide needed space for their occupants, and some are considered better than the others at different moments.

As we all saw, during the great recession, necessity-driven sectors were in highest demand. Core survival-based categories of food, shelter and clothing became more relevant for investors, as their fixation on sustainable income and dividends became critically important.

Conversely, successful investors learned that the strongest sources of differentiation are found in those companies with the most sustainable business models, built on repeatable sources of income.

Investing in Food, Shelter and Clothing

They are also found in the form of food, shelter and clothing. These necessities are defined by their pure survival attributes, in which the sources of income are derived from routines, behaviors and activities that are relevant for sustainable investment differentiation.

In REIT-land there are some exceptional REITs that derive their competitive advantages from these necessities. These REITs provide value by providing space in a manner that lets them serve their core customers better and more profitably.

The Food REITs

I have five kids in my house, and we all love food. Of course, we eat a lot of food and, with a growing family, are all frequent customers at the neighborhood Target and Publix.

Several retail REITs have built repeatable income strategies on renting space to leading grocery chains, such as Regency Centers ( REG) and Weingarten Realty Investors ( WRI). Regency has a portfolio of 354 properties with a market capitalization of $4.44 billion. The Jacksonville-based REIT trades at $49.38 per share and has a current dividend yield of 3.75%. Weingarten, based in Houston, has around 316 properties, a market cap of $3.38 billion and dividend yield of 4.17%.

The Shelter REITs

As reported by Chilton Capital Management, "low supply, single-family home foreclos¬ures, and stringent mortgage requirements have driven high occupancy for apartment REITs, which has given landlords pricing power. The occupancy rate, which has averaged right above 95% over the past four years, has aided landlords in pushing rents."

So, is the demand for shelter peaking out? No. According to Chilton, "apartment REITs are trading at a discount to other REIT sectors on an NAV basis at a time of very robust funda¬mentals. We will watch closely for the point at which the fundamentals shift back in favor of the single-family housing product, but we feel confident the multifamily growth story isn't over. Accordingly, we remain overweight the sector in our REIT composite."

Several of the larger players that I like in the sector are Essex Property Trust ( ESS) and Camden Property Trust ( CPT). Essex has a market cap of around $5.59 billion with a current price of $153.49. The West Coast-focused REIT has paid consistent and increasing dividends for 19 years, and the current yield is 2.87%. Camden, with a market cap of $5.81 billon, has a current price of $69.45 and is paying a current dividend of 3.23%.

The Clothing REITs

Arguably, the retail recovery is well underway and U.S. consumers have found creative ways to fill up the parking lots.

One of my favorite retail REITs is Tanger Factory Outlets ( SKT). The Greensboro, N.C.-based REIT has around 39 properties and a market cap of around $3.14 billion. The company has maintained and increased its dividend for 18 years, and the current dividend yield is 2.51%.

Another favorite is Taubman Centers ( TCO). The Bloomfield Hills, Mich., regional mall REIT has 24 properties and boats a year-over-year total return of 48.9%. Taubman has the highest portfolio sales per square foot, at $641 per square foot, in the mall industry, and that repeatable metric is a fundamental driver for the consistency in dividends paid. (Taubman is the only mall sector REIT that did not cut its dividend during the recession.) Its market cap is around $4.97 billion and dividend yield is 2.3%.

Kimco Realty ( KIM) (KIM) is the largest U.S. shopping center owner. It has owned interests in 926 shopping centers comprising 136 million square feet of leasable space across 44 states, Puerto Rico, Canada, Mexico and South America. Publicly traded on the NYSE since 1991, and included in the S&P 500 Index, Kimco has a market cap of $8.289 billion and a dividend yield of 3.73%.

So Who Wins? Food, Shelter or Clothing?

The good news is there are no winner or losers. By owning a broad portfolio of REITs -- especially necessity-focused REITs -- investors are able to reduce volatility and gain exposure to a diverse income stream of dividends.

As Ben Graham once said: "For most investors, diversification is the simplest and cheapest way to widen your margin of safety."

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

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