Friday, March 17, 2006

Steady Flow of Capital Makes REITs Attractive

In 1960, President Eisenhower gave birth to the real estate investment trust (REIT) industry when he signed the Real Estate Investment Trust Act. That legislation made it easier for individuals to invest collectively in income-generating commercial real estate. And just like that, history was born.

By giving the public access to professional real-estate management and a high yield, REITs remain one of the more popular investment vehicles extant. The S&P Real Estate Investment Trusts Composite index returned 11.31% in 2005, outperforming the market -- again.

Since there are so many different types of REITs (close to 200 with a total market cap of $336B), it behooves readers to study the nuances of each, and realize how they're affected by the sectors they belong to. In the meantime, here are 5 REITs we think represent compelling investments should one find them trading below fair value.

SL Green (SLG) -- Currently capitalizing off the Manhattan office space boom. REIT differentiates itself by shopping for "old school" styled buildings (they got a mean penchant for stone) and then leasing them out to small businesses, typically at a hefty profit. Properties are located in attractive areas (next to buses, subways, etc) and small businesses appreciate the luxury without having to pay through the nose for it. As we expect growth to slow down over the next 5 years, SL Green is one of our more conservative plays. Readers should know that since the REIT is heavily concentrated in NYC landmarks, a terrorist attack could easily leave this REIT crying over a bottle of Jack Daniels.

Simon Property (SGP) -- Perhaps our favorite in the bunch. Think malls filled with upscale stores -- that's Simon Property. They have a portfolio (close to 300 malls, centers, & outlets) that makes rivals lose sleep and the firm runs a tight ship, hardly ever leaving spaces unoccupied. SPG throws off a ton of cash and insiders are enamoured with the stock -- they own 15% of the company. A robust pipeline and a plan to expand internationally make Simon attractive, in our opinion. Don't forget that this is the REIT that just hooked up with apparel/accessories titan Coach (COH).

Boston Properties (BXP) -- Boston has an A+ client list that includes Citigroup (C), among other blue chip stalwarts. It's real advantage, though, is its longer than average lease duration. With occupancy rates a bit down, BXP seems to be struggling. But since BXP owns high end properities in high barrier to entry locations, we're not too worried by this development. Insiders are all over the stock; they own 20% of the common. Financial health is strong, but we'd warn investors to wait for a deep pullback before pouncing on the stock.

Kimco (KIM) -- "Killer Kim," to some. As the nation's #1 shopping center owner (135M square feet), we believe Kimco's a juggernaut. The firm pukes cash and keeps debt low. With a lot of grocers under its belt, KIM is vulnerable to the shakeout we're currently seeing in that contested space. However, when you have a REIT run by a real estate avatar like Milton Cooper (who hasn't sold a share since the common was floated), you have to view KIM as a top name selling at a decent price. Did we mention operating margins are at 74% and EBIT (operating income) covers interest expenses by 4x? And in case you haven't seen the chart, wear safety goggles: this one's on fire.

Vornado Realty (VNO) -- Vornado's list of properties is diverse and includes assets bought on the cheap then flipped for lucrative rental rates. This REIT focuses on three core markets (DC, NYC, and Chi-town), which at first might intimidate one, but Vornado has ironically exploited it by locking out new entrants and keeping occupancy rates at 95%. Insiders, again, are saddled up alongside shareholders -- they own 24% of the company. We're closely watching to see what Vornado will do with that recently acquired Toys R Us (co-acquired in 05 for $6B) property. Like the others mentioned above, Vornado is in top financial health: the REIT yields a manageable 44% debt/total cap ratio.

Over the next month, we'll be profiling roughly 15-20 more REITs we think deserve your attention.

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