By Marshall Hargrave
After identifying the most popular stocks among hedge funds (see our full Top 10 here) according to their third-quarter 13F filings, we have decided to break down the top 10 REIT stocks that hedge funds love. The REIT industry, notably specialized REITs in hospitality and healthcare, should see positive growth from a rise in job growth and expansion due to freeing up of the credit markets. Our list includes 400 hedge funds and prominent investors that are required by the SEC to disclose their public equity holdings quarterly. In descending order, we have outlined the most-loved REIT stocks based on the aggregate number of funds owning each.
Hedge Fund Owners
Newcastle Investment Corp.
Starwood Property Trust
Two Harbors Investment Corp
Annaly Capital Management
General Growth Properties
Simon Property Group
American Capital Agency Corp.
American Tower Corp
Weyerhaeuser Company saw a net increase of 3 filers and called 23 filers owners to be tied for the third most popular REIT stock at the end of last quarter. As one of the largest integrated forest products companies, sales for this timber REIT should be up over 5% in 2012 and 2013 on strong housing start growth. Weyerhaeuser is relatively new to the REIT status and still pays a dividend yield that is well below its major timber REIT peers at 2.5%, while Rayonier yields 3.5% and Plum Creek 4%. Weyerhaeuser's current FFO payout is only around 40%, while the historical average of major peer Plum Creek is near 90%. Assuming Weyerhaeuser boosts its FFO payout to be more in line with Plum Creek, the company's dividend yield should reach 4%-4.5% in the interim.
General Growth Properties Inc came in tied for third with 23 filers. General Growth focuses on regional malls and has a dividend that yields 2.3%. We like General Growth's geographical diversification with operations in 41 states and believe the REIT can provide investors with growth alongside its income dividend. Recent earnings numbers show increased FFO per share of 5%, and General Growth is attractive from a valuation standpoint as well, trading at the low end of its peers on a P/B basis at 2.6x - while Realty Income is at 3.1x and Macerich is at 2.7x. Billionaire James Dinan made General Growth one if his newest stock picks for 3Q (see billionaire Dinan's new picks).
Simon Property Group, Inc. (SGP) came in tied for third after a net increase of 6 filers - the largest increase of our 10 stocks - with a total of 23 filers. Simon is another regional mall REIT that pays a higher dividend yield than General Growth at 2.9%. This REIT expects to grow operating revenue solidly over the next few years with higher rents and acquisitions. Simon is also seeing improvements in occupancy rates, with occupancy up to 94.6% in 3Q 2012, compared with 93.8% in 3Q 2011. Simon is an international operator with operations in the U.S., Europe, Japan, Brazil, and China. This international diversification is a big positive and also adds to the value opportunity presented by Simon, where the mall REIT trades at 30x trailing earnings, but only 18x forward earnings.
American Capital Agency Corp. was in second with 25 filers after a net increase of five filers last quarter. American Capital is an investor in agency mortgage backed securities and pays the highest dividend yield of our 10 REITs at 15.8%. Although the expected growth is limited for American Capital - five-year expected EPS CAGR of 2% - this REIT might provide investors with one of the best value opportunities. The REIT trades at a P/B of just under 1.0 and a book value of $32.50, one of the lowest P/B ratios of our 10 REITs. Its rich dividend represents an annual payout of $1.7 billion for the REIT, but it appears American Capital is abating concerns on whether it can continue to pay out such a high yield. American Capital is now generating some $500 million per quarter in cash from operations and has over $2.5 billion of cash on hand. Billionaire Paul Singer made American Capital one of his new dividend picks during 3Q (see Singer's top stock picks).
American Tower Corp was the top REIT stock loved by hedge funds in 3Q with 33 filers owning the stock. American Tower owns the largest portfolio of wireless broadcast towers in North America, but pays one of the lowest dividend yields at 1.2%. American Tower also has one of the highest P/E ratios at 40x earnings. We believe the hedge fund industry's interest in American Tower has a lot to do with the future growth of the REIT; it has one of the highest expected long-term annual EPS growth rates at 22%, and is also steadily growing its cash from operations. American Tower only recently completed its REIT status conversion and will soon be able to enjoy the tax benefits, which should unlock more cash flow to return to investors. Billionaire Ken Griffin with Citadel Investment Group was the top fund owner in American Tower as of the end of 3Q (check out Griffin's newest stock picks).
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.