For REIT investors the key measure of profitability is the use of FFO (funds from operations) instead of net income. Accordingly, utilizing net income calculations are less meaningful (than FFO) due to the concept of depreciation. In accounting, real estate depreciation is always treated as an expense, but in the real world, not only have most properties retained their value over the years, but many have appreciated substantially.
As a general rule, rising land prices, increased construction costs, increasing rental income, and property improvements all characteristics for asset appreciation. Conversely, a REIT's FFO adds back real estate depreciation and that preferred calculation is a more meaningful measurement for calculating REIT cash flows.
One way that investors can determine which REITs are viewed as growth oriented stocks is to analyze historical increases in FFO. By examining the cash flow histories, investors can determine which REITs (or which REIT sectors) are growing faster than historical averages or related peer REITs. In this article I opted to include nine equity REITs that have exceeding historical FFO growth norms (of around 4 to 5 percent annually) or those who had higher than average five year FFO growth rates.
Nine Strong REIT Growth Plays
Taubman Centers (TCO) is a luxury mall REIT founded by A. Alford Taubman in 1950 and the company converted to a REIT in 1992. Taubman's operates around 26 properties (23 owned) and the company was the only mall REIT not to reduce dividends in 2009 and the company has never reduced its dividend since the IPO in 1992 (20 years in a row). First quarter (2012) FFO was $44.79 million - up 23.8 percent from the previous quarter. From 2010 through 2011, Taubman grew FFO by around 78 percent. The current dividend yield is 2.4 percent.
Realty Income (O) is a triple net REIT that owns 2634 properties, located in 49 states, which are occupied in 136 retail and other consumer businesses in 38 different industries. Often referred to as the "monthly dividend company,® Realty Income has paid a stable and increasing distributions since it went public in 1994. First quarter (2012) FFO was $60.955 million - up 6.86 percent from the previous quarter. From 2010 through 2011, Realty Income grew FFO by around 29 percent. The current dividend yield is 4.2 percent.
Digital Realty (DLR) is a specialty REIT that owns around 102 properties comprising 19.1 million sf including 2.4 million sf held for redevelopment. Digital boasts a diversified tenant base - 1,600+ leases with 500+ tenants, including leading global companies across various industries. First quarter (2012) FFO was $132.55 million - up 12.71 percent from the previous quarter. From 2010 through 2011, Digital Realty grew FFO by around 31 percent. The current dividend yield is 3.8 percent.
Extra Space (EXR) is a self-storage sector REIT operating 882 properties that include 359 wholly-owned facilities (41 percent of portfolio), 340 joint venture facilities (38 percent of portfolio), and 183 managed facilities (21 percent of portfolio). By focusing on revenue performance, Extra Space has led the self-storage REIT sector for the last 24 quarters in average same-store performance. First quarter (2012) FFO was $33.106 million - up 40.93 percent from the previous quarter. From 2010 through 2011, Extra Space grew FFO by around 38 percent. The current dividend yield is 2.6 percent.
American Campus Communities (ACC) is a campus housing REIT that owns 124 student housing properties containing approximately 76,100 beds. Including its owned and third-party managed properties, ACC's total managed portfolio consists of 152 properties with approximately 99,500 beds. First quarter (2012) FFO was $44.397 million - up 11.54 percent from the previous quarter. From 2010 through 2011, American Campus grew FFO around 29 percent. The current dividend yield is 3.0 percent.
Simon Property Group (SPG) is a mall REIT headquartered in Indianapolis, Indiana and the retail REIT is the largest publicly traded retail real estate company in North America with assets in almost all retail distribution channels. The company acquires, owns and leases a diverse portfolio of shopping malls in North America, Europe, and Asia. . First quarter (2012) FFO was $648.652 million - up 13.67 percent from the previous quarter. From 2010 through 2011, Simon grew FFO around 38 percent. The current dividend yield is 2.5 percent.
HCP Inc. (HCP) is the largest medical REIT and the product diversity of the company allows it to capitalize on opportunities in different markets based on individual market dynamics, and provides a hard-to-replicate competitive advantage over its peers.. First quarter (2012) FFO was $267.93 million - up 78.99 percent from the previous quarter. From 2010 through 2011, HCP grew FFO around 26 percent. The current dividend yield is 4.5 percent.
I decided to include two newer REITs that both have just over two years of cash flow history. Both of these REITs have achieved considerable growth by acquisition and the prospectus for continued FFO growth is strong.
Excel Trust (EXL) is a shopping center REIT and since its initial IPO in April 2010, the company has built a high-quality platform with more than $850 million of assets under management. First quarter (2012) FFO was $6.643 million - up 89.82 percent from the previous quarter. From 2010 through 2011, Excel Trust grew FFO around 711 percent. The current dividend yield is 5.4 percent.
Retail Opportunity Investment Corporation (ROIC) is a shopping center REIT with around 35 shopping centers (and 3.9 million square feet) in three states. ROIC has built up an impressive portfolio of necessity-based retail properties, anchored by national and regional supermarkets. First quarter (2012) FFO was $8.84 million - down 22.83 percent from the previous quarter. From 2010 through 2011, ROIC grew FFO around 479 percent. The current dividend yield is 4.2 percent.
The Road Map to Dividend Increases
The above nine REITs have grown cash flows by infusing new equity and debt capital to expand. By acquiring properties at fair valuations and by utilizing cheaply priced capital, these REITs should grow income accretively and continue to provide investors with dividend growth. Here is a snapshot of the average five year historical FFO for seven above-mentioned REITs (excludes ROIC and EXL) since they are less than five years old).
Of course, FFO growth is certainly a measure of future cash flow performance; however, one of the best indicators of cash flow measurement is sustainable dividend performance. By selecting REIT stocks with increasing funds from operations, future performance trends can be identified, resulting in a valuable road map for future dividend growth.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.