An Analysis of Publicly Traded REITs

TAUBMAN

Founded in 1950 by A. Alfred Taubman, Taubman is a publicly traded REIT headquartered in Bloomfield Hills, Michigan known for its focus on dominant retail malls. They own 28 properties ranging from 300,000 to 1.6 million square feet and 60 to 200+ stores. The basic mission of Taubman is to own, manage, develop, and adquire retail properties that deliver exceptional performance to shareholders. They strive to do this by creating superior retail environments for shoppers, retailers, and investors.

Taubman owned regional and super regional malls are located in major markets across the United States and is extending the company to international markets through its Taubman Asia subsidiary based in Hong Kong.They manage an extremely productive portfolio with sales averaging $641 per square foot in 2011, a record for the publicly held U.S. regional mall industry. Compounded annual growth of tenant sales per square foot has been 3.8% over the past ten year period, compared to the Consumer Price Index compounded over the same period. Because tenant sales per square foot are an important measure of the quality of regional mall assets, Taubman seems like an attractive investment to those looking into healthy, growing companies.

Taubman began trading on the New York Stock Exchange in 1992 under the ticker TCO and has had one of the highest ten-year total returns within the Mall REIT sector. A solid balance sheet and strong performance made it possible for Taubman to steadily increase the dividend over the past several years, as show in the graph below.

 

In addition, Taubman was able to reward shareholders with a 27% total return on their investment in 2011, compared to the S&P 500 Index's return of 2.1% and the MSCI US REIT Index's return of 8.7%. An area to be watching is the company's debt position. The debt-to-asset ratio is 84%, somewhat high compared to competitors. Taubman also has significant amounts of debt coming due in the next few years, particularly in 2015 and 2016. However, the company does estimate strong FFO projections in the near future and stock price is contuing to rise. Since becoming public, the company has almost quadrupled its total enterprise value along with equity market capitalization. All in all, Taubman is an attractive investment opportunity for investors wanting a stable income stream and consistenly good returns.

PUBLIC STORAGE

 

Public Storage, headquartered in Glendale, California, is one of the largest self-storage companies in the United States. The company opened its first self-storage facility in 1972 and today operates over 2,200 locations in the United States and Europe.

Having achieved higher occupancies and better pricing in the past year, net operating income growth dramatically improved to 6.6% from 0.2% in the previous year. Unfortunately, the outlook for the European self-storage market is not great as demand is deteriorating. In addition, Public Storage's commercial property investments continue to be challenged by high unemployment and slow business activity. Overall, revenues increased 7% in 2011, and net operating income improved by over $100 million due to improved same store results as well as acquisitions and expansions. This is a great sign considering same store properties are fundamental strength of the company's business.

Dividends have been stable and increasing in the past 20 years. Although the dividend is relatively conservative as observed by the payout ratio, profits would have to decrease more than 30% for the dividend to fall. It is expected to continue to grow.

As seen in the graph below, stock price performance has been superior compared to Public Storage's direct competitors.

Since the recent recession, there have been virtually no new self-storage facilities built and financing for them has nearly evaporated. Due to this lack of new supply and possibilty of inflation,  Public Storage is expecting above average growth going forward.

SL GREEN REALTY CORP.

SL Green Realty Corp., is NYC's largest commercial office landlord and is the only fully integrated, self-managed and administered Real Estate Investment Trust primarily focused on owning and operating office buildings in Manhattan. The investment focus of SL Green is to create value through strategically acquiring, redeveloping and repositioning office properties primarily located in Manhattan, and re-leasing and managing these properties for maximum cash flow.

As of December 31, 2011, SL Green owned interests in 65 Manhattan properties totaling more than 38.7 million square feet. This included ownership interests in 27.0 million square feet of commercial properties and debt and preferred equity investments secured by 11.7 million square feet of properties. In addition to its Manhattan investments, SL Green holds ownership interests and debt and preferred equity interests in 32 suburban assets totaling 7.3 million square feet in Brooklyn, Queens, Long Island, Westchester County, Connecticut and New Jersey.

The company manages a strong and durable asset portfolio, as observed by an extremely healthy average occupancy rate of 96% since 1993 and investment in Class A tenants. SL Green also holds 10% of REIT market share by revenues. In 2012, the NYC portfolio incurred minimal damage as a result of Hurricane Sandy.

SL Green's debt is structured so that rent payments to the company cover amortized loan payments. Unfortunately, in 2008 the company did take a hard hit compared to the S&P REIT Index. However, since then stock price increases and revenu growth indicates that the company will remain successful in years to come.

 

AMERICAN CAMPUS COMMUNITIES

 

American Campus Communities is the nation's largest developer, owner and manager of high-quality student housing. In 2004, ACC became the first publicly traded student housing REIT. Since 1996, the company has developed more than $3.8 billion in properties and acquired more than $3.7 billion in student housing assets. ACC has also become a national leader in third-party development and management of on-campus student housing.

The company tends to develop on-campus communities as well as off-campus communities in close proximity to the university or college. They are focused on markets with high barriers to entry in order to maintain a stronger grip on the market. The goal is to develop quality, differentiated products that are unmatched by competitors. The total owned, joint-venture, and third-party managed portfolio includes 148 high quality properties, all in A plus locations.

ACC has been fortunate to have mainted strong performance through the recent economic recession. In the recent year, rental rates saw over 4% growth, and same store revenue is up more than 3%.

 

In 2011, American Campus Communities was the top performing residential REIT in the Morgan Stanley REIT Index and the second best performing REIT in this index as a whole, delivering a total shareholder return of 37.3%, very favorable compared to competitors. On average, the company exhibits a conservative payout ratio as compared to other publicly traded REITs. As seen in the graph below, dividends have remained stable since fiscal year 2004, when they were increased substantially. The dividend is not currently expected to increase, but for those investors looking for a steady income stream from a strong, healthy company, American Campus Communities is a great choice.

 

Operating Statement and Forecasting

09/16/2012

Investing in real estate is similar to investing in stocks. In order to profit from the investments, investors must determine the value of the property and predict how much profit they will generate. Accurately valuing real estate investment opportunities is crucial. There are several models and tools to use, but it is important to examine the investment from all possible angles. The market is often very uncertain, and any type of investment involves some degree of risk. Because of these things, valuing real estate investment opportunities is difficult.

One valuation used to estimate the attractiveness of a real estate investment opportunity is the discounted cash flow method (DCF). Future free cash flow projections are discounted using a cost of capital figure to arrive at the present value of the investment. If the calculated present value is higher than the current cost of the investment, it may be a profitable opportunity. Essentially, the DCF method is used to estimate the amount of money that would be received from an investment adjusted for the time value of money. The discounted cash flow method can be used to value just about any investment opportunity, and therefore is widely used. The article below discusses some advantages and disadvantages of this method.

http://www.investopedia.com/university/dcf/dcf5.asp#axzz279OwVfCK

According to the article, the main reason to like the DCF method is because it produces the closest thing to the intrinsic stock value. In general, DCF is a reliable tool that avoids the approximations and subjectivity associated with reported earnings. Discounted cash flow analysis helps investors identity where the company's value is stemming from and if the current stock price is rationalized.

DCF analysis does have its drawbacks. For one, the model is only as reliable as its inputs. For this reason, DCF prognosis can fluctuate wildly, depending on predictions and beliefs about how the market will unfold and the company will operate. In other words, if the free cash flow forecasts, discount rate, and growth rate are inaccurate, the fair value generated from the model will also be inaccurate and the investment could be over or undervalued. There must be a high level of confidence about future cash flows and other inputs. The model is also extremely sensitive to changes in assumptions and inputs. Any time these things change, the model must be reexamined because the fair value will also change. In addition, DCF is focused on long-term value, not short-term investing. The value derived from the model does not necessarily mean that the investment will sell for that value anytime soon. It could cause investors to miss short-lived price run ups that could be profitable. On the other hand, it could help investors from buying in to a bubble. The DCF model can also be fairly time consuming.

While the DCF model can help reduced uncertainty, it does not make it disappear. It is important to think through all the factors that will affect the performance of the investment.

The capitalization rate is also a good starting point to compare real estate investment opportunities and estimate the value of an income-producing property. It is essentially the rate of return on a real estate investment property based on the expected income that the property will generate, calculated as net operating income divided by total value as stated in the article below. The cap rate should not be the sole factor in any investment decision. 

http://www.creonline.com/cap-rate-formula.html

For more ways to value real estate, visit http://www.investopedia.com/articles/mortgages-real-estate/11/how-to-value-real-estate-rental.asp#axzz279OwVfCK

Supply and Demand in Real Estate

09/16/2012

Real estate economics is cyclical. There are booms and busts, rises and falls. Every year the housing supply is reduced by natural events, demolitions, and abandonment, while at the same time new housing goes up with construction and redevelopment. As mentioned in the article below, because land cannot be moved, it is a local commodity influenced by local conditions. Making more units take time, and there may not be room to develop more in a given area. When there is an over supply, lower prices are usually expected. On the other hand, a shortage in supply usually means higher prices. Although more real estate may  be in construction, the time delay is often too great to fulfill the demand and prices will rise.

http://www.thetruthaboutrealty.com/real-estate-supply-and-demand/

See the article and video posted directly below. To keep supply at a good pace, new construction should account for about three percent of the current housing supply. Anything about three percent could result in a bust, while anything below could cause a boom. The cost of construction often runs closely with the cost of real estate. For this reason, it is a good way to measure the condition of the real estate economy. As construction costs rise, the price of homes typically rises accordingly. Furthermore, as the cost of construction declines, further development is stunted.

Without buyers, the supply of housing is meaningless. Demand also affects the price of real estate, causing it to change as it fluctuates. Population affects demand in that as the population grows, supply is diminished and prices rise. Demand is dependent upon the purchasing power of potential buyers. There must be qualified buyers to have strong demand and meet supply. Typically, if disposable income rises faster than inflation, demand for housing should be strong.

http://www.thetruthaboutrealty.com/real-estate-supply-and-demand/

The video below discusses how foreclosures affect supply and demand. In general, and increasing number of foreclosures causes prices to drop. This is consistent with the law of supply and demand in that as supply goes up, demand goes down and prices fall. When foreclosures are decreasing as banks sell of inventory, prices will rise.

Real Estate as an Investment

09/16/2012

For many investors, real estate is more authentic than stocks and other types of investments due to the fact that it is tangible-- you can physically touch it. However, real estate investing is not black and white. As stated in the articles below, there are several ways to earn returns on a real estate investment, such as flipping a house or renting out an income property. Typically, a down payment is made and the rest is financed, creating leverage. With leverage it is possible to invest in more properties with less money down and capitalize on your investment. Similar to with returns on other securities, it is also possible to incur a loss if leverage is used incorrectly. 

http://beginnersinvest.about.com/od/realestate/a/real-estate-vs-stocks.htm

http://www.investopedia.com/articles/basics/09/real-estate-versus-stock-investments.asp#axzz26hBs9X1l 

Unlike stocks and bonds, real estate is relatively illiquid, meaning it is difficult to quickly convert to cash. See the graph below. In the long run, real estate values generally  increase at a steady pace. Stocks tend to be more volatile than real estate, but over the long run seem to have delivered much better returns. When investing in real estate, stocks, bonds, and other types of securities, there is an initial outlay of funds with hopes that their values will increase over time. Stocks are also more flexible and can be reallocated into different accounts. In many ways, stocks seem to be the better investment. It is often difficult to be diversified if investing in real estate. Investing in stocks allows you to own a piece of many different industries economy-wide. However, real estate does seem to be advantageous when it comes to stability and tax advantages. Real estate investment trusts can be used to combine some of the benefits of stocks with some of the benefits of real estate and assist in diversifying your portfolio.