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Attractive REITs



January 08, 2014 – Comments (0) | RELATED TICKERS: AVB , SPG , ARE

Board: Real Estate Investment Trusts

Author: Reitnut

Here are a few REIT stocks that look particularly attractive to me at the present time, from a quality and valuation perspective, and which I am adding fresh capital to:

Call me very stubborn, but I continue to add to AvalonBay Communities (AVB) at $118-119. One would think, from its performance over the past couple of years, that it is one sorry company. But it's still doing what it's always done, creating a lot of value by managing its quality apartment properties efficiently and developing new communities at very attractive stabilized yields. AFFO growth will be 10% this year, and perhaps 8% in 2015. The dividend is modest, given its low property cap rates, but it is well covered and will rise annually. AVB's balance sheet is among the strongest in the entire REIT industry.

Apartment REITs have been beaten down badly - due to concerns over losing tenants to single-family homes (overblown, in my opinion) and rising new supply in some markets - a valid concern, but new supply will be tapering off beginning later this year. AVB stock sells at a double-digit NAV discount; this is too good a company for that to continue. I don't believe it will be a poor performer for much longer.

I also love Simon Property Group (SPG), especially at the current price. NAV estimates have risen all year, as have AFFO projections. It owns highly-productive malls, which is where retailers want to locate (despite the inroads of e-commerce), and its outlet centers continue to perform well. SS NOI growth continues to rise at above-average rates, as does projected FFO/AFFO (perhaps in the double digits this year and next). I think the pending spin-off of its less productive mall properties and virtually all its strip centers is a great idea, and the new REIT may be able to create value by acting as a "consolidator" of less productive properties and providing better management.

And yet the stock was flat for the past year, up just 0.05%. Due to rising FFO/AFFO and a stagnant stock price, the multiple has shrunk - for no good reason. And the stock trades at an NAV

The last one I will mention is Alexandria (ARE), a lab space REIT. They own quality properties in the best medical research markets, and have been creating value via new developments. Tenant quality is very good, despite a recent slip when one of its tenants unexpectedly took a new and favorable drug off the market. Internal growth is reasonable, and external growth via filling new developments will add to the FFO/AFFO growth rate - which will be a modest 5% this year but increasing to almost 10% next year. This property type is more recession-resistant than most office properties, given the continual spend on new product development by Big Pharma and biotechs.

Like AVB, the stock has been a poor performer over the past two years. See I am guessing that this will not continue. The dividend is reasonable, at 4.2%, and the balance sheet is at just over 40% levered. Like the others noted above, the stock trades at an NAV discount, even larger than AVB's.

Finally, I still love the self-storage sector, especially EXR, but I already have an overweight position here and, while internal growth is still excellent, it is probably beginning to slow; what happened to the apartment guys when that happened may happen to the self-storage stocks, and they may be underperformers this year after several years of outperformance. They are, however, strong "holds" IMO, and lightning might not strike twice in the streets of REITville.


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