The stock market is inefficient - it always has and always will be. If the market was efficient then share prices would always reflect the true value of a company and its assets - which, in reality is impossible as it is not possible to place a true value on the earnings and assets of a company at any one point in time.
The inefficiency of the market is what allows canny investors to make money, buying a good company for a low price, etc.
Within this piece, rather than analyzing each company and reaching a conclusion, the companies are set out as a comparison and the discrepancies between the two groups becomes startling obvious.
I have assumed that the most important part of investing in a REIT is yield, the second book cost, or the price of the stock in relation to the value of its assets - the lower the price book ratio, the more value that is on offer.
Four REITs To Avoid
Net Debt to Equity
Revenue Expense ratio (EX dividend payouts)
Shareholder Equity Excluding Intangibles
Price to tangible asset value
(consistent growth or constant payout)
American Tower Corp (NYSE:AMT)
Simon Property Group Inc. (NYSE:SPG)
Plum Creek Timber (NYSE:PCL)
Apartment Investment & Management Co. (NYSE:AIV)
American Tower Corp.
First up is American Tower. The company offers a poor dividend yield of only 1%, which can be easily bettered elsewhere (as I write the US 10-year is offering 1.67% ). This low yield, in my opinion, is not enough to compensate for the risks the company has on its balance sheet. In addition, the company has only been paying a dividend for one-and-a-half years, which gives me no confidence in the company's payout.
Striping out goodwill leaves the company with negative shareholder equity, meaning it is impossible to calculate a tangible asset value per share for the company. That said, the company does have the lowest revenue-to-expense ratio in the group, although this is not enough to make up for its balance sheet failings.
The short dividend history, low yield and poor balance sheet, mean that American Tower Corp. should be avoided.
Simon Property Group
Simon Property offers a yield of 2.6% and has a debt to equity ratio of 3.7x (interest costs are covered 4x by revenue). However, the company has the best current ratio in the group, so has plenty of liquidity over the short term at least.
Expenses account for 78% of the company's income and currently the shares are trading at 9.6x the value of its tangible assets.
Simon Property has been paying out dividends to shareholders for nearly ten years but with such a low yield on offer this can be bettered elsewhere - with companies that have a longer payout history and higher yield.
Plum Creek Timber
Plum Creek has paid a dividend since 1989, which almost puts in it in the same league as the companies below. However, the company slashed its dividend in half during 2002, raised it every year from then until 2007 and then maintained it - so the company's payout history is mixed.
Currently, Plum Creek trades at 7x the value of its tangible assets and its current liabilities are only covered by current assets once, which makes the balance sheet look risky, the company overpriced and the dividend insecure.
Apartment Investment And Management
AIV is perhaps the most overvalued company in this piece. Yielding 3.1%, the company has a debt to equity ratio of nearly 5x (interest costs are covered 4x) and a current ratio of less than one. Additionally, expenses account for 105% of the company's revenue, excluding dividends.
Lastly, the company is trading at 5x the value of its net assets and has only maintained its dividend payout for four years.
With their high share prices in relation to asset values and relatively low dividend yields, the companies above are no match for the REITs below.
Four REITs to Consider
Price to tangible asset value
National Retail Properties (NYSE:NNN)
Urstadt Biddle Properties (NYSE:UBA)
HCP Inc. (NYSE:HCP)
Federal Realty Investment Trust (NYSE:FRT)
It is a no brainer as to why investors would choose any of the REITs above when these REITs offer higher dividend yields, trade closer to the net value of their assets and have long impressive dividend histories - Federal Realty Investment trust only offers a 2.6% yield but the company has been consistently paying out and raising its dividend for 45 years and the security of the payout is priced into the yield.
National Retail Properties
National Retail offers investors a 4.1% dividend yield and only trades at 1.9x the value of its assets. The company has a debt to equity ratio of 0.7x and has consistently raised its dividend payout for the last 23 years.
Urstadt Biddle Properties Inc.
UBA offers investors the largest yield in this piece at 4.6%. The company has consistently raised its payout for the last 19 years and is only trading at 1.5x the value of its assets. UBA has a debt to equity level of 0.3x.
HCP inc is a healthcare REIT and as such is always in demand. Indeed, the company has maintained and consistently raised its dividend every year for the last 27 years. In addition, the company trades at only 2.3x the value of its net assets and has a debt to equity ratio of 0.8x - a strong company with a dependable dividend yield.
Federal Reality Investment Trust
FRT, as I have written above, is the most expensive stock in the group but is also appears the have the most secure dividend, with a payout history dating back 45 years - a better dividend history than that of McDonald's (MCD), Exxon Mobil (XOM), Pitney Bowes (PBI) or AT&T (T).
That said the company does have a net to equity level of 1.7x but interest costs are covered almost six times by revenue.
So overall, with the four REITs just above all trading closer to the value of these assets and offering better dividend incomes with longer payout histories, it makes no sense to invest in any of the REITs at the top of this article, all of which appear to be highly unstable in comparison.