Buy Rating On Retail REITs: Senior Analyst Sees Multiple Increases In Dividend Pays And Yields
February 16, 2010 - The Wall Street Transcript has just published REITs Report offering a timely review of the REIT sector. This Special Report contains expert industry commentary through in-depth interviews with public company CEOs, Equity Analysts and Money Managers. Please find an excerpt below.
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David M. Fick, CPA, is a Managing Director of Stifel, Nicolaus & Company. He joined the firm's research team in connection with Stifel's acquisition of Legg Mason's Capital Markets Group in December of 2005. Mr. Fick joined Legg Mason in 1997. Prior to Legg Mason, he was Senior Vice President of finance and compliance at Alex. Brown Kleinwort Benson, as well as Equity Vice President at LaSalle Partners when the two firms merged. Mr. Fick was also Chief Financial Officer of Western Development/Mills Corporation, and a practicing CPA and consultant with a national accounting firm specializing in the real estate industry.
Mr. Fick is an instructor at the Johns Hopkins University Carey Business School, where he teaches real estate finance, real estate accounting and taxation, and real estate capital markets. He has an M.B.A. from Loyola College of Baltimore and a B.S. from Towson State University. Mr. Fick is a member of the National Association of Real Estate Investment Trusts, the International Council of Shopping Centers, the Urban Land Institute and the American Institute of Certified Public Accountants.
TWST: In terms of particular property types and/or geographic markets, are there any you are relatively positive or negative about?
Mr. Fick: We are not big fans of saying, "Malls this year and hotels last year"; We do it because it's expected of us in the investment market but believe this is a stock-picking game and you can own good companies in any one of the property sectors. With that said, fundamentally we think office is overbought. Some investors don't understand just how tough it is and what a struggle it's going to be to buy occupancy. Net-effective rents will be very low for a long time, so we are underweighting office this year. Likewise, we think people are too optimistic about the lack of new supply in industrial and what that will mean in terms of market rents. There's an anticipation of real stabilization and then increasing market rents over the next 24 to 36 months, but we don't buy that - there is just too much existing supply.
We also believe that the minute market rents move a little bit, there will be new construction, and that will keep a damper on NOI. So we are negative on those two groups. We are more positive on the hotel space, which is the most levered to a recovering economy. And you might say these are somewhat inconsistent, but we are also positive outlook on the health care REIT space, which is the least levered to a recovering economy, but it has companies with very good balance sheets and the ability to spread invest. We would anticipate that over the next 24 to 36 months, you could see a doubling in market cap and in gross assets under control by the public health care companies, especially those focused on senior housing and assisted living. Cap rates never really compressed dramatically in the health care REIT space, so values have been more stable. The companies trade at huge premiums to net asset value, which means their cost of capital is very low. We see earnings growth on an external basis that we might not put in some of our other models. Going back to your first question, there will be three things that will characterize this year, and that will be the big news for the year.
The first is one that we have already touched on, and that is the blind pool phenomenon. Will there be a lot of new public REITs? Our bet is there will be new REITs. There will also be more capital raised by the existing REITs, but access to capital is a theme and creating new companies is a related theme. The second is that there will be strong dividend increases. The average REIT dividend will be increased 25% this year, and I don't think that's really recognized in the market. The last two years were characterized by what we call "the wall of shame." We sold the market the idea that REIT dividends were safe and stable in the long term, and it turned out that when stressed, that really that was not true.
However, those cuts are now behind us and many REITs cut beyond what is sustainable. Even General Growth had to pay 0.19 in December just to maintain REIT status. As a bankrupt company, they had to go to the court and say, "We need to pay this dividend" and get approval. We project that REITs like CBL will about triple their dividend this year. Simon will quadruple their cash dividend this quarter; they were paying partly cash and partly stock, and they will eliminate the stock element, which essentially quadruples the cash dividend yield that is currently being tracked by the major databases. So right now the sector looks like it has a 4% yield, but actually we would say that it has a 5% yield on a forward basis against today's prices. Therefore, we have a fairly positive outlook from here.
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