There was a great piece by Doug Kass the other day on how to spot bubbles in the market. I agree with his conclusion that the market may be slightly overvalued but we're not in bubble territory yet.
I also share his concern with the huge amount of IPO and follow on activity in the new issue market we have seen in 2013, which seems to be accelerating. We saw the same phenomenon in 1999 and 2007 in front of significant market declines. Twitter (TWTR) is the poster child for excessive valuation in the current IPO space, achieving a price-to-sales valuation three times that of Facebook (FB) when that social media stock came public last year.
That is not to say I avoid new public entities altogether. However, unless I get an allocation from my broker to flip a hot IPO, I tend to stay on the sidelines when companies come public. I will play in the area with overlooked IPOs that did not generate much hype when they came public. I have found that if you can stay out of the frothy end of this space, there are some bargains to be had.
Initial public offerings (IPOs) for real estate investment trusts (REITs) have generally not generated much buzz as they have come to market over the past two years but there are some attractive values in the space. Here a couple of recently public REITs I like there that have good yields and solid prospects.
Armada Hoffler Properties (AHH) is a full-service real estate company with extensive experience developing, building, owning and managing high-quality, institutional-grade office, retail and multifamily properties in markets throughout the Mid-Atlantic states. Although the business has been around for over three decades, the company just went public in May of this year.
The stock has fallen some 20% since the REIT became public. Several insiders have used the decline to add to their holdings, which should be viewed as a vote of confidence. In its first quarter as a public company, the REIT slightly beat FFO (funds from operations) expectations.
AHH has a 6.7% dividend yield currently and its properties have an over 93% occupancy rate as of its last reported quarter. Revenues are projected to increase over 40% in fiscal 2014 as new developments come online. Given the company's growth prospects and high dividend yield, the shares are not expensive, as they are trading at less than 12x FFO.
Spirit Realty Capital (SRC) is a publicly traded real estate investment trust. The firm primarily acquires across the U.S. single tenant operationally essential real estate. This REIT went public in the back end of 2012. I have owned it for several months -- I bought when rising interest rates caused the entire REIT space to decline this summer.
The REIT has the same property (single tenant) niche as Realty Income Corporation (O) and National Retail Properties (NNN). On a forward FFO basis, Spirit sells at a 25% discount to either of its bigger brethren in this space. Its dividend of 5.3% is also slightly higher that its competition.
Spirit's portfolio has a 99% occupancy level and its average lease term runs longer than a decade. Insiders have a significant stake in the firm and there has been next to no insider selling, even after lockups have expired. As it continues to expand, revenue growth should clock in at over 40% for this fiscal year, and just slightly lower growth is expected in fiscal 2014.