A Fast-Growing REIT Gets an Insider's Nod

 | Feb 20, 2013 | 1:00 PM EST
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Last week a BRE Properties (BRE) insider increased his BRE holdings significantly, according to an SEC filing, so let's take a closer look.

BRE board member Jeffrey Pero purchased a little over 2,000 shares at an average of price of $48.95, bringing his total to some 10,000 shares, including some 2,100 that are restricted. As a reminder, insider buys are generally considered to reflect particularly strong optimism on the company, since an insider would normally be moved to diversify away from a stock to which they are already heavily exposed -- or even to sell it.

About a week before the purchase, BRE -- a real estate investment trust that principally develops and manages apartment complexes --reported that 2012 funds from operations rose 9% from 2011 to about $170 million. Since the "net income" calculation requires depreciation of real estate, analysts often use the FFO metric for real estate-related names, which adds back some depreciation, among other adjustments. BRE's "core FFO," which includes still more add-backs, rose 16% from the previous year. Both measurements were not only above their 2011 levels, but also well higher than 2008 figures -- the four-year compound annual growth rate of FFO was 4%. At a market capitalization of $3.8 billion, the stock is valued at 23x trailing FFO and 21x trailing core FFO.

BRE also upped its annual dividend to $1.58 per year, which means the stock is now offering a yield of 3.2%. REITs such as BRE are required to return a large share of their taxable income to shareholders in order to maintain their preferential tax status. BRE did cut its dividend payments in 2009 as a result of the financial crisis and subsequent recession, so these yields should be treated as considerably more risky than those at providers of consumer staples or pharmaceuticals. Of course, it's also possible that BRE will continue to increase its payout over time. The stock price has risen only 2% in the last year, lagging the S&P 500.

For comparison, two other residential REITs are Equity Residential (EQR) and Essex Property Trust (ESS). The latter is slightly larger than BRE in terms of market cap, at $5.5 billion, and Equity Residential is significantly larger at almost $19 billion. Equity Residential also currently offers a somewhat higher dividend yield than BRE -- over 5% at current prices. Essex Property Trust's yield is just below 3%. Of course, income investors who are already familiar with REITs know that those in other businesses can pay yields of 10% or even higher -- though, of course those stocks carry considerable risk. This is particularly notable when it comes to investments in mortgage-backed securities.

BRE and its peers wouldn't be safe from a downturn in the real estate market, either. As we've already noted, the company had to reduce its dividend payments in 2009, so there is a significant possibility for either a rise or drop in the yield over the next few years. As it stands, however, the core business appears strong with growing FFO, even if we give less weight to the company's declared "core" figure.

Many income investors may decide the payout yield isn't high enough, as 3% is easily found in the consumer, healthcare and utility sectors. But, with REITs gaining in popularity, we think it's useful for anyone interested in dividend stocks to be familiar with the full spectrum of what's available -- even if it only makes you better aware of other REIT opportunities.

-- Written by Matt Doiron

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