Real estate investment trusts, or REITs, are a favorite tool of many investors who are willing to take some risks to score some very nice gains. Whether investing in residential properties, office and retail space or hotels, REITs have a reputation for offering stellar dividends to go along with potentially impressive share price gains. Today, we'll look at five REITs with this kind of potential: Apartment Investment and Management (NYSE:AIV), Equity Residential (NYSE:EQR), Host Hotels & Resorts Inc (NYSE:HST), Simon Property Group Inc (NYSE:SPG) and Vornado Realty Trust (NYSE:VNO).
Apartment Investment and Management
Located in Denver, Co., Apartment Investment and Management specializes in apartment investment opportunities. Stock in the $3 billion company is currently trading near $24.75 per share, with a 52-week range of $20.08 - $28.12 and a one-year target of $25.25. The company also pays a $0.72 annual dividend (for a yield of 2.9%), up from its trailing annual dividend of $0.48.
Although REITs are often considered speculative investments due to the struggles of the real estate market, Apartment Investment and Management has great potential. The company missed its 4th quarter revenue target, but managed to exceed expectations for its earnings per share. The company's sales were 2.3% higher year-to-year, but it missed the revenue forecast of $268.5 million, coming in at $263 million. Although the company pays a very nice dividend, its projected growth this year is flat and its price to book ratio is an unwieldy 12x. It appears unlikely that 2012 will be the kind of year to draw new investors, and I recommend buyers avoid the stock at this time.
Equity Residential is another REIT that focuses the majority of its efforts in multifamily housing. With experts predicting another strong year for apartment building construction, Equity looks to be one of the firms that will enjoy the surge. Trading around $58 per share, the stock is above both its 52-week range ($48.46 - $63.86) and its 200-day moving average mark of $56.50. The company pays an annual dividend of $2.27, for a yield of 3.9%, while projecting a 5% share price increase with its one-year target of $61.50.
While its 2011 revenue grew by over 10%, its earnings fell flat, tumbling by 45% as the market pressures forced down demand and prices. This by itself would not be so troubling, but the sale by insiders of over 150,000 company shares in the first two weeks of February adds to my concern. In the absence of any additional negative news, I think investors who currently have positions should hold them, but I would not suggest taking new positions in Equity Residential at this time.
Host Hotels & Resorts Inc
As is often the case, business and vacation travel is typically insulated from economic trouble, and the sectors can recover more quickly. Host Hotels & Resorts Inc is a REIT that specializes in owning hotels, with holdings in the United States, Canada, Mexico, Chile, the UK, Spain, Italy and Poland. The company experienced a positive 2011, generating a 13.5% increase in quarterly revenue, highlighted by a 4th quarter funds from operation total of $224 million, up from the $191 million it recorded for the same period in 2010.
Although the company's decision to pull out of a proposed deal to purchase the Grand Hyatt in Washington, D.C., had a negative effect on its net income, Host Hotels & Resorts still recorded 4th quarter net income of $17 million, a huge improvement of its $6 million loss in the previous year.
While the increase is great news for the company, the current share price of $17 isn't expected to hold, with one-year target estimates coming in around the $15 mark. With Host Hotels & Resorts paying a less-aggressive $0.20 dividend (for a yield of 1.2%), the potential is investors will experience a net loss during 2012. I recommend not making any purchases with the company at this time, or at least waiting for a price pullback before initiating.
Simon Property Group Inc
Simon Property Group is a REIT that not only operates in residential, but also in malls and outlet retail properties. The $40 billion company is based in Indianapolis, IN, and recently announced that it exceeded 4th quarter estimates for its revenues ($1.17 billion versus $1.14 billion) and GAAP earnings per share, with $1.24. The stock currently trades around $135.50 per share, with a 52-week range of $99.60 - $139.63 and a one-year target of $143.25. The company pays a very good annual dividend of $3.80, for a yield of 2.8%.
With its share price climbing more than 28% in the past year, investors will be pleased to see that companies like Imperial Capital have even bigger expectations for Simon Property in the coming year. Citing Simon's predictable earnings and solid balance sheet, Imperial is forecasting a target of $150 per share. I agree with this more aggressive target, and expect the company to build on its big 4th quarter. I am rating Simon Property Group as a solid buy at this time.
Vornado Realty Trust
Like Simon Property, New York-based Vornado Realty Trust specializes in investment, ownership, and management of commercial-use real estate properties. The company has a capitalization of $15.4 billion, with a price per share of $84.75 and an annual dividend of $2.76, for a yield of 3.3%. Among its holdings, Vornado controls the area around New York City's Penn Station. Like many of the other REITs, the company enjoyed a quarterly revenue increase in 2011 of 7.2%, while watching its earnings tumble 48.4%. The company's price to book of 2.73 indicates that it is somewhat overvalued, while its beta 1.81 speaks to a heightened volatility.
Vornado has experienced a nice run so far in 2012, with a 10% gain in share price during the past six weeks. The concern is that the run is short-lived; a concern that is bolstered by its price to book of 2.73, a price to earnings ratio of nearly 20 and a one-year target estimate of just $85. Lacking any sense of momentum heading deeper into 2012, I see Vornado Realty Trust as a hold until the company starts moving once again.
Owning Your Piece of a REIT
With their potential for gains in share price and steady dividends, REITs are often very good investment targets. The current environment requires research to decide which shares are best to hold. Of the group we considered, Simon Property Group is my favorite, and I would recommend buying at this time. Apartment Investment and Management, Equity Residential, Host Hotels & Resorts Inc and Vornado Realty Trust all have potential, but have been sluggish enough that it is better to hold off on new purchases at the moment.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.