This is part 2 to a 2-part analysis of office REITs. You can find part 1 here. The REITs discussed in this part are, in alphabetical order:
- Government Properties Income Trust (GOV)
- Highwoods Properties Inc. (HIW)
- Kilroy Realty Corp. (KRC)
- Mack-Cali Realty Corp. (CLI)
- SL Green Realty Corp. (SLG)
- Vornado Realty Trust (VNO)
As mentioned previously, REIT investors tend to invest in the asset class to gain exposure to real estate as a hard asset that is not highly correlated to the general stock market, and for the dividend income stream that the REIT model necessitates. By law, REITs must distribute at least 90% of their taxable income in order to eliminate the need to pay income tax at the corporate level.
This is an analysis of the value and dividend growth rates of REITs that primarily own and offer office space. Office REITs are sensitive to economic cycles, the strength of the American consumer, entrepreneurial production and several other factors. Companies offering such space also have geographic and population density factors to consider, as well as possible state and local tax/regulation issues.
A continued economic downturn will undoubtedly weaken the demand for office space, as businesses will not expand and fewer new ones will be attempted. Conversely, improving economics should bolster expansion and entrepreneurial endeavors. Inflation is often weathered well by such companies, where rents are raised in accordance with the new value of money, but this does take some time to occur.
Government Properties Income Trust (GOV)
- Current Yield: 6.27%
- Market Capitalization: $1.1 Billion
- Price to Cash-Flow: 15.5
- Price to Book: 1.4
- Short Position: 4.1%
- Yield Growth Analysis: GOV paid 90 cents that year. In 2010, it paid $1.22 (a 35.5% increase, though 2009 was not a complete year). GOV is expected to pay $1.68 in 2011 (a 37.7% increase).
- NOTE: GOV’s properties are primarily offices and warehouses that it rents out to the United States government and various state governments.
Highwoods Properties Inc. (HIW)
- Current Yield: 4.72%
- Market Capitalization: $2.6 Billion
- Price to Cash-Flow: 14.1
- Price to Book: 2.6
- Short Position: 14.1%
- Yield Growth Analysis: HIW has been a straight shooter through the recent real estate crisis, maintaining the same $0.425 quarterly dividend and $1.70 annual payout.
- NOTE: HIW owns office, industrial, and retail properties primarily located within the southeastern United States.
Kilroy Realty Corp. (KRC)
- Current Yield: 3.39%
- Market Capitalization: $2.2 Billion
- Price to Cash-Flow: 15.1
- Price to Book: 2.2
- Short Position: 13.7%
- Yield Growth Analysis: KRC’s payout was slowly growing until 2008, after which it was cut. In 2006, KRC had a 53-cent quarterly dividend and $2.12 total annual payout. In 2007, KRC raised the quarterly dividend to $0.555, paying out $2.22 (a 4.7% increase). In 2008, KRC raised the dividend to $0.58, paying out $2.32 in total (a 4.5% increase). During 2009, KRC lowered the quarterly dividend to $0.35 and paid out $1.63 (a 29.7% decrease) in total and maintained that dividend into 2010, paying a total of $1.40 (a 14.11% decrease).
- NOTE: KRC primarily owns suburban office and industrial property in southern California.
Mack-Cali Realty Corp. (CLI)
- Current Yield: 5.11%
- Market Capitalization: $3.0 Billion
- Price to Cash-Flow: 15.0
- Price to Book: 1.6
- Short Position: 2.6%
- Yield Growth Analysis: CLI reduced its payout at the onset of the financial crisis, but has since kept it stable. I 2006, CLI raised its quarterly payout to 64 cents from 63. CLI’s annual payout was $2.56 in both 2007 and 2008. During 2009, CLI lowered the quarterly dividend to 45 cents (a 29.6% decrease), and paid out a year-end total of $1.99 (a 22.6% decrease). In 2010, CLI maintained the 45-cent quarterly dividend policy and paid out a total of $1.80 (a 9.5% decrease). CLI has since continued the 45-cent dividend into 2011, with no present indications of a change on the horizon.
- NOTE: CLI’s properties, despite the Cali in its name, are primarily offices located in suburban, mid-Atlantic areas between Washington, D.C. and New Jersey.
SL Green Realty Corp. (SLG)
- Current Yield: 0.48%
- Market Capitalization: $6.5 Billion
- Price to Cash-Flow: 20.5
- Price to Book: 1.4
- Short Position: 7.3%
- Yield Growth Analysis: SLG’s once fast growing dividends have sustained substantial declines since the start of the real estate crisis, but now appear to have bottomed out. At the end of 2006, SLG raised its quarterly dividend from 60 cents to 70 (a 16.6% decrease). At the end of 2007, SLG raised it again, from 70 cents to $0.7875 (a 12.71% increase), and the annual payout peaked at $2.8875 (a 15.5% increase over $2.50 in 2006). At the end of 2008, though, SLG halved the quarterly dividend to $0.375 and paid out $2.7375 for the year (a 5.2% decrease). Within 2009, SLG’s dividend was slashed to 10 cents (a 73.3% decrease) and paid out a year-end total of $0.675 (a 75.3% decrease). In 2010, SLG maintained the 10-cent quarterly dividend and paid out a total of 40 cents (a 40.7% decrease). SLG has maintained the 10-cent dividend for the last 8 quarters, including into 2011, with no present indications of a change.
- NOTE: SLG’s properties are almost exclusively located within Manhattan.
Vornado Realty Trust (VNO)
- Current Yield: 2.93%
- Market Capitalization: $17.2 Billion
- Price to Cash-Flow: 25.7
- Price to Book: 2.9
- Short Position: 3.3%
- Yield Growth Analysis: VNO’s payout declined through the real estate crisis but appears stable and climbing again. In 2006, VNO raised its quarterly dividend from 80 to 85 cents and distributed an extra 54-cent dividend at the end of the year, for a total payout of $3.79. At the end of 2007, the quarterly dividend was raised to 90 cents and the annual payout of $3.45 (a 6.1% increase or 8.9% decrease depending on whether you count the 2006 special dividend). In 2008, VNO again raised the quarterly dividend, this time from 90 cents to 95, for a total payout of $3.65 (a 5.8% increase). In 2009, VNO first raised its dividend to $0.9659, its peak, before cutting it to 65 cents, for a total payout of 3.2204 (an 11.77% decrease). VNO maintained the 65-cent quarterly dividend through 2010, paying out 2.60 (a 19.2% decrease), and increased the dividend to 69 cents to start off 2011. Assuming VNO maintains the current 69 cent dividend through 2011, it will pay out $2.76 (a 6.1% increase).
- NOTE: VNO’s office properties are primarily in New York City and Washington, D.C., but it also owns retail locations across the country and Chicago’s Merchandise Mart.
Several of the calculations used in deriving REIT dividend growth depend upon presumptions about each REITs adjusted funds from operations (AFFO), or cash available for distribution. AFFO is usually calculated by deducting straight-lined rent (average rent over the lifetime of a lease) and reserves for costs that cannot be directly recovered from tenants, such as general maintenance. Such analysis is always subject to change based upon future events and actions by the REITs and their tenants.
Please note the reasonably high short positions on several of these names. Many REITs, though down from their peak prices, have appreciated considerably since the market collapse in late 2008 into early 2009. Some individuals believe a correction is in order, while others may find that real estate is simply overvalued and likely to continue to depreciate over the next few years. Opinions differ and are certainly welcome.
There are also other REITs that exist in this industry; please let me know if you would like others in particular included in future analysis.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Disclaimer: Data is derived from company reports and filings. Yield is but one consideration in choosing an investment, and each investment should be considered relative to the total portfolio. None of the information in this article constitutes a recommendation for or against any investment or that such is suitable for any specific person.