By most measures, the real estate market is improving. Some even call it a mini-boom. Can the individual investor take advantage of this?
Besides buying rental property and becoming a landlord or investing in the obvious (home builders and home improvement centers), one way is to invest in the trend is through real estate investment trusts (REIT).
REITs that own or invest in apartment buildings and upscale malls are particularly attractive right now, both for capital gains and dividend growth. Other types of REITs, such as those that operate hotels and industrial properties, can also be considered, although they have been lagging behind their peers somewhat.
Taubman Centers, Inc. (NYSE:TCO) operates several high-end malls including the exclusive Beverly Center in Los Angeles, home to 160 different high-fashion clothing stores and related businesses.
Although sporting an elevated P/E of around 30, Taubman Centers, Inc. (NYSE:TCO) still remains a good value. The company has reported 25% cumulative sales growth over the last six years in spite of the housing crash and the subsequent financial crisis that it triggered. This figure is much higher than the rest of the segment, and this growth should continue and probably accelerate as the industry and economy keep improving.
The likelihood of continued cash-flow growth also bodes well for future dividend increases. The stock currently yields 2.30%.
Another company to consider is Simon Property Group, Inc (NYSE:SPG), which is the largest REIT in the country and currently operates 393 properties comprising over 264 million square feet.
Simon has also been growing in spite of the crash with EPS, revenue, and dividends all posting double-digit improvements over the last five years. That should continue well into the future based upon the property portfolio, general economic trends, and the good management practices typically exhibited by the company.
The stock yields 2.60% and the dividend is currently $4.60 per share.
One of the biggest players in the apartment segment is Equity Residential (NYSE:EQR), which grew out of the savings and loan crisis of the 1980’s and 1990’s, and now has apartment buildings valued at $38 billion in its portfolio. There is size in numbers when it comes to Equity Residential (NYSE:EQR).
A big advantage for the company is that it is firmly entrenched in high-profile markets which are rapidly growing such as New York, Boston, Los Angeles, San Francisco, and Washington, and it will be tough for competitors to overcome that.
Equity Residential (NYSE:EQR) is expected to grow in-line with, or maybe a bit more than, the rest of the industry. That should help generate enough cash to allow the dividend to keep flowing to investors. The stock currently yields a tidy 3%.
Because of high capital costs associated with building and maintaining hotels, REITs in this segment may not be as good to invest in as malls and apartments. Operators have to plow more of the cash it earns back into the business to keep up the properties. Theoretically, this means lower returns for shareholders.
However, in spite of this, some have done reasonably well.
One of them is RLJ Lodging Trust (NYSE:RLJ) which owns 147 hotels and just added a few more properties in Houston, a key location for them. Earnings, revenue, and even the dividend have grown modestly over the last two years. The company recently reported net cash flow of $34 million, up from $10.5 million during the same period last year. RLJ also increased its outlook for the rest of the year.
A potential negative is a P/E of 44. The stock may not be a value play right now.
One way to profit from the uptick in real estate besides actually owning a property is to buy stocks of companies known as real estate investment trusts (REIT).
I identified a few above. They operate malls, apartment buildings, and hotels, among other types of buildings. In addition to share price appreciation, most offer healthy dividends which provide income.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.