U.S. REITs: Flight to Quality

 

net leaseThis year so far net lease retail has gotten a head start on being the best performing REIT sector. Realty Income, National Retail Properties, and Agree Realty have been the companies with top returns, ranging between 9% and 14%. Their rally, however, has decreased dividend yields, generating discontent from dividend investors who do not appreciate reduced yields.

Investors are turning to net lease because they tend to be less volatile than the financial markets. Realty Income, for instance, has a beta of 0.12 for the last 36 months. That is, when the S&P500 varies by 1%, the stock only varies by 0.12% on average.

Also, net lease retail has a good record of paying dividends year after year. Realty Income, National Retail Properties and Agree Realty have been distributing similar or increasing dividends for many consecutive years (18, 26 and 5 years, respectively).

In addition, landlords love net leases because they push costs of maintenance, taxes and insurance to the tenant. Landlords like the convenience of not having to spend time and money maintaining the property. In the end, they benefit from a leaner cost structure and more stable funds from operations.

For all the reasons that I mentioned above, the increasing demand for net leases can be interpreted as a flight to quality.

Single Family Homes

At the same time net lease retail is experiencing a thriving performance, single family homes have been the worst performing sector so far this year. Last year’s announcement of the merger between American Homes 4 Rent (AMH) and American Residential Properties (ARPI) didn’t seem to help their stock performance in 2016. Since January, both AMH and ARPI stocks have dropped by almost 15%.

During the fourth quarter, activist Land and Buildings have tripled their position on ARPI.  On 31 December 2015, ARPI represented Land and Buildings’ second largest investment and Land and Buildings were one of ARPI’s largest shareholders. We don’t know yet if the drop is associated with a potential exit of Land and Buildings, which have applauded the merger decision.

As to the newly formed Colony Starwood Homes, the stock has been holding up better. Their 2016 return has been virtually flat. They will release Q4 results this Monday.

This week’s performance

This past week was another good week for REITs. We saw some familiar faces as top performing stocks. For instance, NorthStar Realty (NRF) has climbed to the top after the company has announced the sale of various investments, as well as the creation of a special committee to explore the possibility of recombining with its external manager NorthStar Asset Management. NRF stocks went up by 23%.

NRF rally must have been a relief for shareholders following weeks of poor performance. Nonetheless, there is still a long way to go if the company really wants to regain its November prices.

Check the reports for Dividend Yield by Sector and Weekly Returns.

Source: Realty Income Corporation(NYSE:O), National Retail Properties, In(NYSE:NNN), Agree Realty Corp.(NYSE:ADC), NorthStar Realty Finance Corp.(NYSE:NRF), Northstar Asset Management Gro(NYSE:NSAM), American Residential Propertie(NYSE:ARPI), American Homes 4 Rent(NYSE:AMH), Colony Starwood Homes(NYSE:SFR), Yahoo!Finance, SEC, Fast Graphs, Land and Buildings

Disclaimer: This is not a recommendation to buy or sell stocks. The highest-yield stocks are not necessarily the best portfolio investment choice. The purpose of this report — which is essentially a snapshot of information available on February 26, 2016 — is to reduce your stock analysis by enabling you to compare stock and sector performance. Please do your own due diligence before making any investment decision.

As of January 31, 2016, the equity REITs are constituent companies of the FTSE NAREIT All REITs Index. Companies whose equity market capitalization is lower than $100 million have been disregarded.

This report is not engaged in rendering tax, accounting, or other professional advice through this publication. No statement in this issue is to be construed as a recommendation to buy or sell any security or other investment. Some information presented in this publication has been obtained from third-party sources considered to be reliable. Sources are not required to make representations as to the accuracy of the information, however, and consequently the publisher cannot guarantee accuracy.

Disclosure: The author has no positions in any shares mentioned, and no plans to initiate any positions within the next 72 hours.

Making Sense of Single Family Home REITs

houses-691586_1280.jpgIf you lease a single family home, you won’t expect a real estate investment trust (REIT) to own it. This is because most real estate companies would rather invest in apartments communities that give them multiple properties for investment in one location. Renting out a single family home defies the aspect of scalability of the investment. Although it seems to be counterintuitive for a real estate investment trust (REIT) to own single family homes, they have been increasingly successful.

Single family homes can be costly for REITs because each house needs to be taken care of. This includes prospecting and acquiring individual homes, its renovation and repairs, marketing, maintenance and managing other matters, whereas in multiple housing properties some of these can be done at a collective level, thus reducing time, effort and expenditure. However, it can be argued that single family homes have the advantage of saving on costs of common area and amenities.

chart01Renting out of single family homes by local real estate businesses seems to make much more sense. It is much easier for them because local businesses know the positives of the location on a micro level and availability of infrastructure and other facilities like proximity to schools and shopping places, among others.

However, due to a large number of foreclosures following the Great Recession, some residential REITs have made good deals by acquiring a great number of such properties in Florida, Georgia, Illinois and Texas. These REITs acquire single family homes from various sources, but foreclosure is a common method among them.

chart02A positive for REITs is that foreclosure can be a lengthy process and can easily test anybody’s patience and money. A sizable company with an experienced management team would have stamina to better endure the procedures. Also, if a company operates in several states, it has to know the applicable rules for each state.

Since this is a relatively new business model for REITs, it hasn’t been thoroughly tested and there are multiple uncertainties on how these investments should be dealt with.

chart03.pngIf such companies can increase footprint density by aggregating multiple properties in nearby places or neighborhoods and building an efficient management system, then they are more likely to thrive. Both recent transactions – the purchase of American Residential Properties by American Homes 4 Rent and the merger of Colony American Homes and Starwood Waypoint (forming Colony Starwood Homes), which have overlapping areas, should benefit from some of the cost synergies.

Source: American Homes 4 Rent (NYSE:AMH), Colony Starwood Homes (NYSE:SFR)

Disclaimer: This newsletter is not engaged in rendering tax, accounting, or other professional advice through this publication. No statement in this issue is to be construed as a recommendation to buy or sell any security or other investment. Please do your own due diligence before making any investment decision. Some information presented in this publication has been obtained from third-party sources considered to be reliable. Sources are not required to make representations as to the accuracy of the information, however, and consequently the publisher cannot guarantee accuracy.

Disclosure: The author has no positions in any shares mentioned, and no plans to initiate any positions within the next 72 hours.