Real estate cycles come and go and the best operators stand the test of time. In the real estate business they say it's all about location, location, location. When I look at Real Estate Investment Trusts (REIT), I'm looking at management, management, management. I want to invest in REITs that have ridden the cycles up and down and are prepared for the next down cycle. The following are five that should be in every investor's portfolio for not only income, but long-term capital appreciation.
Kimco Realty Corporation (NYSE:KIM) Yield: 3.80%
Kimco Realty was founded in 1966 by Milton Cooper and Martin Kimmel. The company went public in 1991 in the first REIT offering. Milton Cooper at 83 years young is still the company's Chairman. Kimco is North America's largest owner of neighborhood shopping centers with 896. The REIT has been in the shopping center business for over 50 years and has navigated the market ups and downs to become a $9 billion REIT (check out Kimco's retail opportunities).
Kimco is currently trading at a new 52-week high of over $22 per share. The company just completed the $3.3 billion acquisition of Albertson's, Acme, Jewel-Osco, Shaw's and Star grocery chains with their partner Cerberus Capital. Kimco already owns many of the shopping centers with these stores as tenants.
Kimco is currently trading at one of the lowest price to funds from operations (FFO) ratios, 18 times. Worth noting is that its FFO payout (annual dividend payment divided by FFO) is the highest of the five REITs listed at 68%. The REIT also has one of the lowest long-term (5-year) expected FFO growth rates at an annualized 4%.
Equity Residential (NYSE:EQR) Yield: 2.90%
Equity Residential was founded in the same year as Kimco Realty by Billionaire Sam Zell. The company owns multi-family properties in the U.S. Their portfolio consists of 152,821 units spread out over 529 properties in 24 states and the District of Columbia. Equity Residential is properly positioned to capitalize on the current housing trend in the United States.
Prior to the real estate crash in 2008, the American dream was to own a home. After many people lost their homes and life savings, that trend has now changed and most choose to rent rather than own. The demand for apartment rentals has been strong because of that fact and looks set to continue.
Equity Chairman Sam Zell is known in investment circles as the "Grave Dancer." He is known for making large contrarian bets at the bottom of the business cycle. This strategy has allowed him to build Equity Residential into the largest apartment owner in the U.S. and make him over $4 billion along the way.
Equity is one of the best positioned REITs from a growth perspective. The company has beat earnings each quarter of the last year and has the highest expected 5-year EPS growth rate of the five REITs listed. Analysts expect Equity to grow FFO at an annualized 8%. The REIT trades in the middle of the pack at 20 times FFO, but has one of the best FFO payout ratios at 58%.
Boston Properties Inc. (NYSE:BXP) Yield: 2.60%
Boston Properties was founded in 1970 by Mort Zuckerman and Edward Linde. Zuckerman is the company's Chairman while Linde's son Douglas is the company's President. The company owns "Class A" office buildings in Boston, San Francisco, New York, District of Columbia, and Princeton New Jersey. Zuckerman has become a Billionaire by focusing on buying the best properties in prime locations. These properties command the highest rents and typically these tenants are least impacted in bad times.
Effective April 2nd Owen Thomas will become the company's new CEO. He is currently the Chairman of Lehman Brothers' Holdings and oversaw the disposition of Lehman's assets, including the $15 billion sale of Archstone Enterprise LP to Equity Residential and AvalonBay Communities (NYSE:AVB). By bringing in Thomas, Boston Properties will likely look to expand overseas into London or Asia. Mr. Thomas was the former head of Morgan Stanley Real Estate and Morgan Stanley Asia. He brings considerable overseas expertise with him as the new CEO of Boston Properties. With Boston Properties trading near its 52-week low, this is a good opportunity for long-term investors to buy (see what hedge funds think about Boston).
Boston expects first quarter 2013 FFO per share to come in between $1.19 and $1.21. The REIT also increased its guidance for 2013 FFO per share to the range of $5.06 to $5.18, from the prior range of $5.00 $5.15. Boston does trade at the highest P/FFO ratio at 20.5 times, but it has the lowest FFO payout at 53%. Analysts also expect Boston to grow FFO at an annualized 5% over the next five years.
Vornado Realty Trust (NYSE:VNO) Yield: 3.50%
Vornado Realty Trust is controlled by Billionaire Steven Roth. The company owns prime properties in New York, northern Virginia/DC, San Francisco, Merchandise Mart in Chicago, and significant stakes in Toys "R" Us and Alexander's. Vornado also has a significant stake in J.C. Penney (NYSE:JCP) but just recently sold 40% of their stake in the firm (read more about Vornado's sale).
Investors in Vornado must understand that investing in Vornado is like investing in a real estate hedge fund. Chairman Roth makes big, bold bets on what he thinks are undervalued real estate assets. These properties can be in the retail or office sectors.
For instance, Vornado was the highest bidder for the World Trade Center prior to 9/11, but Chairman Roth balked at the final terms. Vornado actually outbid Silverstein Properties by $30 million, but Silverstein agreed to terms that was unacceptable to Vornado and Silverstein won the bidding. Vornado had offered $3.25 billion for the 99-year lease. This is an example of the types of deals that Vornado likes. Investors have to decide if an aggressive strategy from Vornado is right for them.
Vornado trades at the "cheapest" price to funds from operations ratio of the five REITs listed here at 16 times. What's more is that this REIT also has a low FFO payout ratio at just 56%. The REIT has also managed to beat earnings over the past two quarters.
Simon Property Group Inc. (NYSE:SPG) Yield: 2.90%
Simon Property Group is the largest REIT in the United States. Simon currently owns 393 properties comprising 264,000,000 of gross leasable area in North America, Europe and Asia. The company was founded in 1960 by brothers Melvin and Herbert Simon. Current Chairman and CEO David Simon is the son of co-founder Melvin Simon.
Recently insiders at Simon have been purchasing the stock along with Billionaire Ken Griffin's Citadel Investments. Simon is now Citadel's 5th largest holding (see his top five). The JPMorgan Realty Income Fund has Simon as their #1 holding. JPMorgan sees REIT yields growing between 3% and 4% over the next 5 years.
Simon has beat earnings expectations in each of the last four quarters. The REIT does trade at 19.8 times FFO, but has a low 58% FFO payout ratio, but analysts expect long-term (5-year) FFO to grow at a solid 6% annualized.
The above 5 REITs represent different sectors and strategies in real estate investing. However, all 5 are run by the original founders or the founder's families. They have made fortunes for themselves and their investors all while paying healthy dividends.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.