BALTIMORE (Stockpickr) -- As we get deeper into 2014, real estate investment trusts -- better known as REITs -- continue to be a pocket of stellar performance for stock market investors. Year-to-date, the average large REIT is up more than 11.6%, double the performance of the S&P 500 over the same stretch.
You'd better believe that hedge fund managers are paying attention to the trend too. In the last quarter, funds' five biggest REIT bets grew by a whopping $19.1 billion, an indication that the smart money is buying REITs with both hands right now.
And with the broad market's flight to yield holding up as the S&P presses up against new highs, the only question is why aren't you buying them too?
Today, we'll take a closer look at hedge funds' five favorite REITs for 2014. To figure those out, we've got to take a closer look at 13F filings.
Institutional investors with more than $100 million in assets are required to file a 13F -- a form that breaks down their stock positions for public consumption. From hedge funds to mutual funds to insurance companies, any professional investors who manage more than that $100 million watermark are required to file a 13F.
In total, approximately 3,700 firms file 13F forms each quarter, and by comparing one quarter's filing to another, we can see how any single fund manager is moving their portfolio around. While the data is generally delayed by about a quarter, that's not necessarily a bad thing research shows that applying a lag to institutional holdings can generate positive alpha in some cases. That's all the more reason to crack open the moves being made with pro investors' $19.6 trillion under management.
Without further ado, here are hedge funds' 5 favorite REITs.
Simon Property Group
First up is Simon Property Group (SPG), a $51 billion name that tips the scales as the largest U.S. real estate investment trust. SPG owns a wide collection of retail real estate assets, with U.S. regional malls and outlet centers making up approximately 90% of net lease income. Simon also owns a 29% stake in Klepierre, which gives the firm exposure to European retail properties as well. Funds picked up 2.27 million shares of SPG last quarter.
Simon's scale is one of its biggest benefits. The firm is better able to secure access to cheap capital than its smaller peers, and it's able to participate in larger projects that a smaller firm would require a partner for. The decision to spin off its smaller strip mall properties into Washington Prime Group (WPG) is a positive for the SPG shareholders. It retains the highest-quality assets under the SPG banner while unlocking shareholder value at a time when REITs are looking comparatively attractive in the marketplace.
In many cases, SPG also gets added exposure to retail sales. Because the firm's main properties are malls, lease agreements typically include a cut of store revenue. That's an attractive sweetener in an environment where consumer spending continues to be on the upswing.
Right now, SPG pays out a 3.16% dividend yield. While this stock isn't the beefiest payout, it's a staid bet for investors looking for their first taste of REIT exposure.
American Realty Capital Properties
2014 has been a challenging year for shares of American Realty Capital Properties (ARCP). Since the calendar flipped to January, this commercial real estate name has dropped by 6% and change, underperforming the rest of the REIT space in dramatic fashion. But with event risk largely shaken out of ARCP, this landlord is starting to look like an interesting, if speculative, bet. Last quarter, funds picked up a whopping 383.99 million shares of ARCP, a buy operation that amounts to 42% of this firm's outstanding shares. That's a conviction bet if ever there was one.
ARCP invests in single-tenant commercial properties, with a portfolio that includes everything from retail restaurant space to office buildings. The firm recently made news when it announced that it was planning on selling essentially all of its shopping center assets to Blackstone Group (BX) for $1.975 billion, rather than unloading those shopping centers through a spinoff. Simultaneously, the firm plans to use the proceeds of the Blackstone deal to fund a major sale-leaseback transaction in Red Lobster restaurants for $1.5 billion. Shares dropped hard on news of the change in course, but now that they've settled, this stock could be a particularly solid name for income-seekers who aren't exceptionally risk-averse.
Right now, ARCP pays out an 8.33-cent monthly dividend, a payout that adds up to a massive 8.3% yield at current levels. That big payout should continue to hold significant appeal as interest rates stay constrained near zero.
$29 billion self-storage REIT Public Storage (PSA) stands apart from most of the other names on this list because of its structure. As a self-storage stock, the firm receives far more revenue directly from consumers than the typical retail landlord ever would. Likewise, it generally leases storage units on a month-to-month basis rather than through a long-term arrangement. Despite the glaring differences, PSA is still a REIT worth taking a closer look at in 2014.
Hedge funds agree. They picked up 2.37 million shares of PSA last quarter.
Public Storage owns approximately 140 million square feet of leasable storage units spread across 38 states here in the U.S. as well as parts of Western Europe. Unlike a conventional landlord, where location is typically the deciding tenant factor, brand matters to PSA. Because the items stored at PSA's facilities are inherently valuable (they must be worth something for customers to bother storing them), customers are more likely to weigh a brand's reputation before securing space. Public Storage's huge scale gives it advertising and reputational advantages that smaller rivals can't match. Demand remains high for storage facilities in 2014, and that tailwind should help to propel growth.
Financing is another space where PSA stands out from its peers. Unlike most REITs, Public Storage has historically opted to finance most of its growth through equity rather than debt, leaving just $360 million in net borrowings on its balance sheet at last count. Right now, PSA pays out a 3.3% dividend yield.
Commercial landlord Boston Properties (BXP) is enjoying a solid run in 2014. Since the start of the year, shares of the $17.6 billion REIT have rallied more than 14.5%. And with the commercial real estate market looking strong this year, there's reason to expect a lot more upside in this high-quality trust. Funds picked up 804,650 shares of BXP in the most recent quarter, a $92 million buying spree at current share prices.
Boston Properties owns interests in more than 160 properties spread across the country, with a focus on office buildings in large metropolitan areas. In addition, the firm owns a hotel, three residential properties and another four retail spaces. BXP's properties are mostly concentrated in just five markets: Boston, New York, Princeton, San Francisco and Washington, D.C. Location is everything, and that's the approach BXP has used to pursue high-quality properties in prime locations that continue to enjoy strong demand for leases.
BXP has historically been more tactical than most of its peers, selling off buildings when markets get frothy and buying again when prices drop. That approach is a bit more hazardous than the typical "own it forever" approach to real estate that most REITs follow, but Boston Properties has frankly been able to walk the line very effectively. Today, BXP's 65-cent quarterly dividend adds up to a 2.26% yield.
Essex Property Trust
Last up is Essex Property Trust (ESS), an $11.2 billion apartment REIT that owns interests in 234 residential communities with a total of 33,468 units among them, as well as five commercial buildings. Essex's properties are focused on the West Coast.
As a residential REIT, there are some major differences between Essex and a conventional commercial landlord. For starters, while commericals are able to lease space triple-net and very long-term (that is, tenants pay for insurance, maintenance, and taxes directly), housing trusts don't. That exposes ESS to some short-term pricing risk if the firm gets caught with surprise bills it also exposes the firm to risks from housing laws in jurisdictions that are tenant friendly. Similarly, residential leases typically span just a year, rather than the 20-year average seen in commercial property leases. Combating all of those factors, Essex is able to charge retail and has the big tailwinds of a hot rental market in the regions where it operates.
In April, Essex purchased BRE Properties in a $6.2 billion deal that dramatically grew Essex's scale, making it the largest multifamily REIT on the West Coast. While the ink is basically still wet on the purchase, the combined firm should be able to provide big economies of scale for ESS shareholders in 2014.
Hedge funds seem to think so. They picked up 5 million shares of the firm last quarter, adding to their previous holdings by approximately 15%.
To see these stocks in action, check out the Institutional Buys portfolio on Stockpickr.
-- Written by Jonas Elmerraji in Baltimore.