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All Contents © 2019The Kiplinger Washington Editors
By Michael Brush, Contributing Writer
| January 25, 2018
Real estate investment trusts (REITs), like bonds, are high on the list of income investments the experts think will get hit as the Federal Reserve continues to hike interest rates. But these “experts” may have it all wrong. REITs actually look like great income investments, for several reasons.
When a broad swath of insiders challenge negative Wall Street sentiment, it’s time to side with those who have front-row seats to the business. That’s what we’re seeing in the REIT space, where insiders at more than 15 companies recently have poured tens of millions of dollars into their own stocks.
What do these insiders know that the “experts” don’t? Big picture: “It’s just not true that REITs underperform the S&P 500 during rate increases,” says Robert Stevenson, the head of real estate equity research at Janney Montgomery Scott. Why not? Because REITs aren’t bonds.
So if you’re shopping for income investments, follow the insiders. Here’s a guide to 10 REITs with some of the best insider buying.
Data is as of Jan. 23, 2018. Dividend yields are calculated by annualizing the most recent quarterly payout and dividing by the share price. Click on ticker-symbol links in each slide for current share prices and more.
Market value: $1.5 billion
Dividend yield: 4.1%
Retail REIT Agree Realty (ADC, $49.96) leases more than 400 properties to retailers – including the likes of Walgreens (WBA), McDonald’s (MCD), Lowe’s (LOW), and T.J. Maxx parent TJX Cos. (TJX) – in 43 states. It’s also on an acquisition campaign; purchases contributed to 23% rental income growth in the third quarter.
“They only need $300 million a year in acquisitions to move the needle in growth, and they can do that. They have a lot of growth potential,” says Stevenson at Janney Montgomery Scott.
Agree Realty is a “triple net lease” REIT, which means tenants pay property taxes, insurance and maintenance expenses. These kinds of REITs are less risky, says Jay Hatfield, president of Infrastructure Captital Advisors, an investment shop that manages the InfraCap REIT Preferred ETF (PFFR). Another plus here: Founder Richard Agree currently is executive chairman, and founder-run companies often outperform.
Insiders, including the CFO, recently bought roughly $214,000 worth of the stock up to $49.67 per share.
Market value: $44.5 billion
Dividend yield: 3.6%
Crown Castle International (CCI, $109.59) is an unusual REIT, but in a good way. Unlike normal REITs, which typically lease retail, office, industrial or apartment space, Crown Castle owns the towers that carry your smartphone signal. There are two big advantages in this.
First, it means Crown Castle is exposed to lots of growth, thanks to the voracious appetite for bandwidth because of the popularity of videos on Alphabet’s (GOOGL) YouTube, Netflix (NFLX) and Facebook (FB). Smartphone service providers must keep putting more equipment on towers. CCI’s revenue growth recently was in the 8%-10% range, and the company has been improving its guidance. “Leasing activity appears poised to pick up in 2018,” says Jefferies analyst Scott Goldman, who has a “Buy” rating on this REIT.
Next, CCI’s customers are solid businesses that typically have good credit ratings, points out Hatfield, at Infrastructure Capital Advisors. They include AT&T (T), Verizon (VZ) and T-Mobile (TMUS) – companies that likely aren’t going to stop paying the bills anytime soon. This makes CCI’s dividend more reliable.
A director bought a whopping $3 million worth of stock in the third quarter of 2017, at about $100 a share, which is a powerful insider signal.
Market value: $2.5 billion
Dividend yield: 4.6%
If you have kids in college, they might be living in housing provided by this Education Realty Trust (EDR, $33.66). Education Realty Trust operates student housing in 26 states near 54 universities, including Auburn, Oregon State, University of Kentucky and Texas Tech. The company also has a division that helps manage college housing owned by third parties.
Education Realty Trust shareholders had a tough 2017. Shares declined about 14% as an increase in overall college housing capacity weighed on rentals and growth. The company also saw delays in an Oklahoma State project.
But as the stock rattled around in a $35-$37 trading range toward the end of the year, insiders seemed to say enough is enough. CEO Randall Churchey and Edwin Brewer Jr. stepped up and bought $875,000 worth of stock at around $35, a sizeable amount.
They might be betting on a projected tightening of new supply in 2018 relative to expected enrollment growth. This suggests capacity usage might increase in 2018, compared to slippage in 2017. Education Realty Trust also has a pipeline of housing projects scheduled for Arizona State, Colorado State, Cornell and the University of Minnesota, among other campuses. While 2017 revenue trends were sluggish, cash flow growth was fairly robust in the 11%-plus range, suggesting the dividend is not at risk.
Market value: $493.5 million
Dividend yield: 5.1%
If you like following Warren Buffett, UMH Properties (UMH, $14.14) is for you. No, the Oracle of Omaha doesn’t own shares – but he has been a fan of manufactured housing for years, and does own Clayton Homes, which sells manufactured homes and offers related mortgages.
UMH Properties is a similar business. It owns “manufactured home communities,” aka mobile home parks, and leases the pads for people to put their homes on. It also rents and sells mobile homes, and it offers mortgages on them.
Business is going gangbusters. Rental and related income in the increased 11.9% year-over-year in the third quarter, and home sales were up 25.7%. UMH Properties is a play on the shale boom because it operates in and around the Marcellus Shale in western Pennsylvania and eastern Ohio. Lots of its customers work in the business. “We like this name a lot,” says Stevenson at Janney Montgomery Scott. “These parks have gotten a lot nicer and the homes look more like single-family homes.”
The insider buying here is light at about $150,000 worth in the third quarter, up to $15.38 per share. But it’s a cluster buy, meaning three insiders have purchased. Cluster buys are a bullish signal in the system I used for selecting stocks for my newsletter, Brush Up on Stocks. So even though the buying is light, it’s bullish.
Market value: $1.7 billion
Dividend yield: 2.9%
While many REITs specialize in one business, American Assets Trust (AAT, $36.24) offers a mix of retail, office, multifamily and mixed-use properties. It’s in attractive markets in San Diego; the San Francisco Bay Area; Portland, Oregon; Bellevue, Washington; and Oahu, Hawaii.
Top tenants include Sears (SHLD) division Kmart, Lowe’s (LOW), Sprouts Farmers Market (SFM), the Gap’s (GPS) Old Navy, Salesforce.com (CRM) and Autodesk (ADSK).
American Assets Trust posted weak results in 2017 in part because of delays at a San Diego office project. By the end of the year, AAT was off roughly 11% and trading near its 52-week lows.
Amid the weakness, however, CEO Ernest Rady bought around $7 million worth of stock in late 2017 at $38.40 to $39.50 – a bullish signal. Also bullish is that growth in funds from operations, a critical cash flow measure for REIT, was nice at about 7%. Plus, late last year, AAT upped its 2018 guidance and improved its dividend by 4% to 27 cents per share.
Market value: $1.1 billion
Dividend yield: 7.3%
Franklin Street Properties (FSP, $10.44) is a small-cap REIT that manages office properties in five core markets: Atlanta, Dallas, Denver, Houston and Minneapolis. This makes the company a play on robust growth in the Sun Belt, and continued strength in oil prices.
In Minneapolis, the company pins its hopes on the redevelopment of downtown office space at its 801 Marquette property, expected to begin generating revenue again in 2019. “The difference is night and day,” Stevenson says. “The asset will speak to creative types in the Minneapolis market.”
Like a lot of REITs, Franklin Street Properties disappointed shareholders in 2017 with a 17% decline. However, insiders – including CFO John Demeritt and several directors – signaled that there’s value to be found by purchasing more than $1.3 million worth of stock in the third quarter at around $10 a share.
The company expects properties in three of its five core markets to be 90% to 93% leased by February. “They are starting to see traction on leasing,” Stevenson says. “They are well-poised for growth. We like this name a lot.”
Franklin Street Properties has a huge amount of debt, or $1 billion on top of a market cap of around the same amount. But it might not be as scary is it looks. The weighted average maturity of the debt is 4.5 years, and 78% of the debt is at fixed interest rates. FSP also has been selling off assets to bring down debt, and more of this is in the works.
Market value: $7.0 billion
Dividend yield: 6.7%
Kimco Realty (KIM, $16.32) looks like ground zero for the rolling disaster in the sector, what with its huge exposure to the worst kind of retail properties: suburban shopping centers.
Brick-and-mortar retailers are getting slammed by online shopping, led by Amazon.com (AMZN). Millennials’ penchant for experiences like travel over buying stuff does not help. So it’s no wonder Kimco shares are off 35% since the start of 2016.
However, one insider believes the worst has been priced in. Kimco executive chair Milton Cooper bought $960,000 worth of stock at $19.20 in early December. Cooper is worth following. Now in his late 80s, Cooper co-founded this company in 1960 and he’s been in the business ever since. He also has a good record of correctly timing purchases.
Kimco has done a great job of getting out of low-quality retail properties since 2010, says Morningstar analyst Brad Schwer. Schwer still has his doubts about Kimco, but he concedes it has lots of quality properties and tenants. Top tenants include off-price retailers TJX Companies, Ross Stores (ROST) and Burlington Stores (BURL), as well as Home Depot (HD) – all of which are somewhat resistant to the online threat. Plus virtually no one is building new shopping centers, so there’s little risk of oversupply.
Market value: $1.3 billion
Dividend yield: 3.7%
On the surface, Monmouth Real Estate Investment (MNR, $17.44) might look like just another boring industrial property manager. But it’s really a stealth play on Amazon.com. That’s because 60% of its revenue comes from FedEx (FDX), which does lots of business with Amazon.
“They are the landlord of choice for FedEx,” says Janney Montgomery Scott’s Stevenson. “They have had 30-year partnership.” Moreover, FedEx is having trouble keeping up with demand, so it’s expanding its facilities, which is bullish for Monmouth.
Monmouth, which has 109 properties in 30 states, also is creating ties with Amazon directly. In late November, it announced the purchase of a large Amazon Fulfillment Services warehouse in Oklahoma City. “We have long positioned Monmouth as a company with strong linkages to the digital economy,” CEO Michael Landy said in a press release announcing the deal. He thinks continued growth in e-commerce will help his company boost profits in 2018.
Monmouth grew cash flow 9% in the trailing 12-month period ended September, and hiked its dividend by 6.3% in early October. Insiders including the CEO and CFO have been steady buyers for the past three and a half years, most recently at around $18.
Market value: $575.3 million
Dividend yield: 3.3%
Several apartment sector REITs are weighed down by an onslaught in supply. But not NexPoint Residential Trust (NXRT, $27.31). It’s in “Class B” apartments that command lower rents, about $932 a month on average “It has one of the lowest price points of any of the apartment complexes out there.” Stevenson says. In contrast, new supply is mainly hitting the market for pricier apartments. So NexPoint dodges that bullet.
This REIT has an investor-friendly business model in another way. Part of its strategy is to buy older apartment buildings, upgrade them and sell them. This acts as a source of funds that has helped keep NexPoint from diluting shareholders by issuing stock. “That has allowed them to fund their business for the past few years,” Stevenson says. “So it has done well, and we expect it to continue to do well.”
NexPoint posted healthy 12% revenue gains in the third quarter, and it announced a 13.6% dividend hike in October. Another potentially bullish twist: NexPoint is run by the hedge fund Highland Capital Management via NexPoint Real Estate Advisors, an affiliate of the hedge fund. “They are more than happy to let the company go at some point,” Stevenson says. Any takeover, of course, could add several points to this stock in an instant.
Chairman and president James David Dondero has bought almost $2.3 million worth of stock between $26.65 and $28.50 per share since mid-December.
Market value: $12.9 billion
Dividend yield: 10.8%
No roundup of REITs would be complete without a mortgage REIT. While traditional REITs own and sometimes manage physical properties, mREITs – as their name suggests – invest in debt. Annaly Capital Management (NLY, $11.12), for example, owns residential mortgages, commercial real estate loans, corporate debt, and credit instruments backed by pools of loans.
Mortgage REITs like Annaly may seem risky because the value of their debt instruments might sink in a rising rate environment. But Annaly maintains a diversified portfolio that hedges against this risk. Moreover, its loans constantly mature, which means capital can be redeployed.
Assurances like these don’t seem to calm investors, of course. For much of the 2017’s fourth quarter, NLY shares traded close to or below book value.
But insiders don’t seem concerned. CEO Kevin Keyes bought $3.3 million worth of stock in the weakness, at $11.12 in early November. CFO Glenn Votek, outgoing board chair Wellington Denahan and a director then followed with purchases of nearly $2 million worth of stock at prices up to $11.97.
If that doesn’t calm your nerves about owning Annaly for income and potential capital appreciation to boot, nothing will.
Michael Brush has suggested ADC, CCI, EDR, AAT, FSP, NLY, KIM, MNR, NXRT and UMH in his stock newsletter Brush Up on Stocks. Brush is a Manhattan-based financial writer who has covered business for the New York Times and The Economist group, and he attended Columbia Business School in the Knight-Bagehot program.
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