Sifting Through the Rubble

 | Aug 21, 2013 | 1:00 PM EDT  | Comments
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Stock quotes in this article:

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epr

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skt

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hta

Now that real estate investment trusts (REITs) have spent almost three months of dropping, I believe it's a good time to start dipping into these names. While the latest pullback has been mild by historical comparisons, only some 5%, REITs have truly taken it on the chin. Many have dropped well into the double digits. In the months preceding this drop, these names had run up spectacularly. But the fall back down to earth, in some cases, has been even steeper.

In the rubble we can now find some reasonable valuations among the REITs. Income investors can especially appreciate the higher dividends and steady growth of some of these beaten-down names.

Home Properties (HME) is down 12.5% from its high and has a dividend yield of 4.8%. This East Coast apartment REIT specializes in "upgrading" communities needing deferred maintenance. Home upgrades apartment communities in areas with potential and reaps the rewards of higher rent and capital gains when the apartments are sold. They tend to grow dividends by between 4% and 7% each year.

EPR Properties (EPR) is down 16% from its high and has a dividend yield of 6.19%. As a REIT, EPR straddles the divide between diversified safety and concentrated efficiency. EPR is the landlord for 103 megaplex theaters, 9 entertainment recreation centers, 44 public charter schools, a dozen ski areas and finally three Schlitterbahn waterparks. Megaplex theaters, representing over half of this REIT's income, is EPR's engine for steady growth. Box office receipts have grown at a compounded rate of 3-4% since the 70s. With a 6.19% yield and trading at only 10.8x FFO, EPR is a good deal.

Tanger Factory Outlet (SKT) is down 16% from its high and now yields 2.9%. Tanger offers the lowest yield of the group. It is now trading at a reasonable 16.4x funds from operations (FFO). This REIT's competitive advantage is in its instant recognition among North American consumers: The factory outlets are known for name brand clothing at discounted prices. High barriers to entry include their recognized brand as well as geographic scarcity.

Realty Income (O) is down 26% from its high and has a dividend yield of 5.4%. Realty Income is a mega-diversified REIT known for its monthly dividend. They collect rent on over 2,600 properties spanned across a dozen or so retail industries. Over the past few years, Realty has shifted to tenants unaffected by e-commerce. They have also moved to tenants with higher income clientele, or at least low-income stores with deep value propositions. Management has been more selective with tenants regarding credit quality. In doing so, Realty Income has moved to a higher ground in preparation for rising interest rates.

A popular REIT among retail investors, Realty Income's stock has been run up and then dropped back to earth. It is now at a reasonable 16.6 times earnings.

Healthcare Trust of America (HTA) is down 22% from its high and has a dividend yield of 5.6%. HTA is the opposite of Realty. This a concentrated REIT focuses only on Medical Office Buildings: labs and doctor's offices on or "across the street" from medical campuses. This simplified business model makes the company easy to understand. HTA has not yet been public for one year and its market cap is only $2.38 billion. This small size gives it the agility to make "rifle shot" acquisitions in an industry that has growth prospects for decades out. Trading at 17.9x FFO, HTA could come down some more, but I believe this is a good company with a compelling story.

While equities in general have seen broad, downward pressure over the last few months, no sector has been savaged as REITs have. Could these names continue dropping? Yes. In fact, many of these are not yet trading at a discount to their average price-to-FFO nor are any yet below "fair value." However, I believe these names are all trading at reasonable valuations right now. Income-minded investors should consider them.

(Valuation data by FAST Graphs.)

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