GGP vs. SGP - Here's a little more REIT help:
thestreet.com
So how should an investor play the REIT sector? Here are two simple strategies:
# Avoid stocks with problematic debt maturities.
Look at the capital position of the company and when debt maturities are coming due. This information can be found in the footnotes of 10-K filings.
In a difficult credit environment, refinancing mortgages is becoming harder. It's best to stay away from companies that have debt maturities they potentially can't cover.
General Growth Properties(GGP - Cramer's Take - Stockpickr), for instance, took on a lot of debt to finance its purchase of Rouse in 2005. While General Growth owns very nice malls, "it's a very bad time to have too much debt," says Moore, the RBC analyst.
General Growth has $2.6 billion of debt maturities coming due in 2008, and $3.2 billion due in 2009, according to the company's latest annual report. It has only $221 million available on its $650 million revolving credit facility.
Although the company has wiggle room today, "if credit markets worsened, GGP might find itself in a bit of a problem," says Moore, who rates the stock underperform.
In contrast, fellow mall giant Simon Property Group(SPG - Cramer's Take - Stockpickr) has $1.1 billion open on its $3.5 billion credit facility that can be used to fund long-term debt maturities as they come due.
Simon has $809.7 million of debt coming due in 2008, and $1.6 billion in 2009. This clean balance sheet is a major reason the stock is a top holding of real estate mutual funds.
# Remember that lower-quality retail or apartment owners may have problems with growth.
It's important to look at the quality of earnings streams, and lower-quality REITs may run into trouble on that front.
Think about it conceptually for a moment. Low-quality apartment and retail buildings in general also have worse-quality tenants. Landlords of such buildings, therefore, have lower pricing power, and existing tenants have higher risk of default.
Green Street's Kirby says there is some evidence this year that investors are mistakenly focusing more attention on "junk REITs" -- those that are high dividend-paying, have higher yields on funds from operations, higher leverage and/or lower quality portfolios.
"Many of these REITs have fared better than average over the last couple of months, as unsophisticated investors searching for bargains/yield often pile in to these names first," Kirby says.
But instead of chasing dividend yields, investors should look for a quality earnings steam.
For example, Federal Realty(FRT - Cramer's Take - Stockpickr) is considered to be the highest quality of the shopping center REITs. Federal also has a clean balance sheet and has had some of the highest spreads on new leases of any retail REIT in recent years.
Federal recorded 11.4% growth in funds from operations per share in 2007. Analysts expect another 7.8% FFO per share growth in 2008. There is a good reason why Federal enjoys one of the highest price-to-FFO multiples among REITs.
Growth, combined with safety, are the best way to play REITs today.
`BC |
