More REIT Flavors to Choose FromFor REIT investors the menu options are getting bigger. The growing list includes 143 U.S. equity REITs, of which 133 are included in the FTSE NAREIT All Equity REIT Index. With an overall market capitalization of around $634 billion, the equity REIT sector is becoming more diverse as investors are experiencing many new flavors and even some unusual new specialty sectors.
I wrote about the recent wave of REITs listing in this article:
"More and more companies have been looking at the REIT structure as a way to unlock value in traditional shares. In what was previously more of a trickle of REIT conversions and spinoffs, the more recent activity has been viewed as more of a wave."Some have argued that non-REITs are hoping to utilize the REIT structure as a way to avoid taxation or perhaps create a "loophole" of sorts. However, my argument is centered on the notion that companies are exploiting the high demand for income, not trying to avoid taxes. As I wrote:
"It's clear that the increased demand is not driven by the corporate tax exemption -- because the IRS is going to get their money regardless -- either at the corporate-tax level or at the individual level (taxes paid by investors.) Instead, it seems that the strong demand is being driven by Mr. Market. REITs today are trading at very high multiples and that has created an environment fueled by low cost debt and equity."
"Remember, REITs offer the best of both worlds: the potential for long-term capital appreciation and a steady income stream. It's the attraction to dividend repeatability that makes REITs one of the most attractive investment alternatives today. That's why intelligent investors should consider REITs as a core asset class and one that will help them sleep well at night."
So Are REITs Overvalued Today?It seems that the demand for REIT dividends has sparked considerable debate as higher valuations have made certain REITs less attractive. It seems that many of the safer REITs -- especially the blue-chips -- have been trading at or above fair value. In the May 13 issue of Barron's, writer Andrew Bary asked Mike Kirby, director of research at Green Street Advisors, whether REITs were overvalued. Kirby's reply:
"Let me start with the least-favorable comparison -- stocks. REIT's trade for about 25 times 2013 earnings, and when I speak of earnings, I am using AFFO, or adjusted funds from operations, which is the industry's primary earnings benchmark. The S&P 500 trades at 15 times forward earnings. That suggests that REITs are awfully expensive. "But I'll throw you a couple of mitigating points. One is that REIT earnings growth is going to be very impressive. We project 9% growth in AFFO over the course of each of the next two years, and there is no reason that is slows down much after that because we are in the sweet spot in the real estate cycle. Over the past eight years, REIT multiples have been higher than the S&P 500. We have to ask ourselves if this is a new normal situation."He went to say that given the current environment, REITs are trading at fair valuation:
"Given the growth outlook, REITs look pretty attractive in a low-yield world. When we add it all up, we conclude that REITs are somewhere within a fair-value range, maybe at the pricey side of that fair-value range, but certainly not dramatically overpriced."
Check Out These New REIT FlavorsLast week I interviewed Jack Cuneo, CEO of Chambers Street (see the interview here). On May 21 this triple net (office and industrial) REIT plans to list a $125 million tender offer for shares that should settle between $10.10 and $10.60. There will be no lockup, and the modified "Dutch auction" tender offer should pay a dividend in the range of 4.75% to 5.0%. Another new REIT coming down the track is Cole Holdings (COLE). Like Chambers Street, Cole plans to list shares to take advantage of the liquidity opportunity for the nontraded REIT investors. The portfolio (CCPT3) consists of 1,014 properties (in 47 states), and the company intends to merge its advisory platform, Cole Holdings, to create a hybrid investment model. Another new REIT, Amanda Hoffler, plans to list shares in its diversified product platform. With a focus on Mid-Atlantic markets (Hampton Roads, Va.; Richmond, Va.; and Raleigh-Durham, N.C.), Amanda Hoffman intends to provide a balance of office (43.8% of ABR), retail (38.2% of ABR), and multifamily (18% of ABR). Across the border, Canadian Tire (CTC.A.T) announced last week that the company was spinning off its real estate assets into a standalone REIT. The Canadian retailer plans to list REIT shares to monetize a portfolio of around 250 freestanding stores. Stephen Wetmore, president and CEO of Canadian Tire has said the deal would increase the company's financial flexibility and give it funds at an attractive cost of capital.
My Favorite FlavorsI'm not sure about Canadian Tire. It seems that the company could be more aligned with shareholders by selling the stores to an existing REIT such as Realty Income ( O), Kimco ( KIM) or American Realty Capital Properties ( ARCP). All of these REITs have experience in managing REIT securities and more importantly, they have diversified operating platforms. It would appear that Canadian Tire's "circle of competence" is selling tires, not owning real estate. Oh well, great day! Much like selecting an ice cream flavor, picking REITs can be a very rewarding experience. It's important to stress that investors should pay special attention to the balance of current operations, expansion, leverage, and shareholder value. Remember that REITs benefit in the current low-rate environment as they are able to borrow at a low cost, reinvest, and achieve delicious operating results for investors. Of course the most rewarding thing about REITs is that the dividends should grow. Baskin-Robbins advertised its 31 original flavors. I now have a list of 11 original REIT flavors. I'd argue that these 11 REIT's sweetness is longer-lasting. They have not only maintained the consistency of paying annual dividends; they have also managed to increase dividends every year. Now that's a lasting treat.
"An investment operation is one which, upon thorough analysis, promises safety of principal and satisfactory return. Operations not meeting these requirements are speculative."Brad Thomas, a.k.a. The Intelligent REIT Investor, will be attending The Money Show in Las Vegas on May 14-17 and then the Annual ReCon ICSC conference from May 20-21 (also in Las Vegas). While there, Thomas will conduct interviews with 15 REIT CEOs and provided updated commentary and videos on The Street. At the time of publication, Thomas had no positions in securities mentioned. Follow @swan_investor This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.