Collecting Riches From REIT Niches (Part 1)

Includes: AMT, PCL, PENN, RYN
by: Activist Stocks

REITs in general are a great way to collect dividends and income, but we decided to take look at some of the niche REITs. Niche, or specialty, REITs can cover a variety of industries, including health care, storage, timber and hotels. The rebounding economy and job growth should help increase many of the specialty industries that the REITs below operate in, thereby helping push the REITs higher.

In the REIT industry, two big moves of late have been the spinoff of CBS' outdoor advertising unit into a REIT, and Penn National's (PENN) plans to form the first ever casino REIT.

Although Penn National is currently not a REIT, it has plans to spin complete its new structure in 2014. The casino company is up 28% since its November 2012 announcement.

The positives for this upcoming REIT is that the outlook for gaming is positive, on the back of loosening consumer spending. Although the consumer spending environment has been pressured over the past couple of years, declining unemployment should help promote increased leisure spending. Penn has operations spread across the U.S., providing some diversification compared to other casino operators that are focused on Las Vegas. The number of states with legal casino gambling is also expected to grow, which should bode well for the regional operator Penn (see why Penn is the top casino company).

The Penn REIT spinoff will include one company, PropCo, owning the physical buildings (17 casino properties) and another, Penn National Gaming, operating the casinos. Nearly all of Penn's pretax income will go to PropCo, which will then pay out nearly all of the rental income to shareholders. The casino REIT, PropCo, is expected to pay shareholders an approximate $2.36 dividend per Penn share.

Fellow Seeking Alpha contributor Brad Johnson does speak about the concerns over the overexposure of PropCo to the casino industry (see his Betting On A Casino REIT article), but he also makes a pretty good case for the to-be REIT. Although my article is meant to be more of a focus on the specialty REITs, and not a comparison to some of the more diversified property REITs like Realty Income, I do have to mention that I am also a fan of Realty Income. See see why I agree with Luxor Capital on the Realty Income - American Realty deal.

Rayonier (NYSE:RYN) and Plum Creek Timber (NYSE:PCL) are two of the top timber REITs in the market. Rayonier pays a 3.2% dividend yield and Plum Creek a 3.4% dividend yield. For timber REITs, the residential construction recovery should help boost demand and earnings over the interim. Standard & Poor's expects housing starts to be up more than 20% in 2013, leading to increased demand for various timber products (read more about the timber outlook).

Value beyond increased housing demand. Rayonier not only owns and manages lumber producing timberlands, but manufactures specialty pulp and cellulose fibers. These fiber and pulp operations are growing rapidly and could endanger Rayonier's REIT status if the segments' profit growth continues to outpace its income from timber. Alex Klabin of Senator Investment Group also sees large upside for Rayonier in the scenario that the REIT has to spinoff its fiber operations. Klabin pitched this idea back in Nov. 2012 at the Invest for Kids Conference, where he believed the REIT was undervalued by 30% to 60%. Since the IFK conference the stock is up only 10%, suggesting more room to run.

Plum Creek is the largest publicly-held timber REIT, and owns the largest and most geographically diversified private timberland in the U.S., but is it the best timber REIT investment? There is no doubt the economies of scale are their for Plum Creek, yet it does appear that the prospects are already calculated in the stock's price. On a price to funds from operations basis, Rayonier is much cheaper than Plum Creek:

Rayonier Plum Creek
Price to FFO 14.34 27.51

Compare Rayonier's 14.3 P/FFO multiple to the U.S. REIT universe's 2012 FFO multiple of 17 (according to Credit Suisse) and the timber REIT is not only cheap relative to its top competitor, but also across the market.

However, Plum Creek does have inherent value in its land holdings, where Plum Creek plans to develop some 100,000 acres over the next 15 years, which will be positive as real estate prices rise.

American Tower (NYSE:AMT) pays the lowest dividend of the REITs listed, with a yield of 1.2%, but the REITs FFO payout ratio is one of the lowest at only 29%, which could suggest room to grow its dividend over the interim.

American Tower owns and operates over 47,000 communication towers in the U.S. The company is the industry leader in wireless tower services, and plans to continue expansion internationally. During the third quarter international operations accounted for 30% of tower revenues. Notable expansions include Brazil, Mexico and India. Behind China, India is the second largest growth market for wireless service

The revenue generated from leasing is generally recurring, and the company has more than $19 billion in non-cancellable backlog leases, which is around seven years worth of revenue. The average lease that American Tower has with its top four U.S. customers is more than eight years - these long-term contracts help with providing visibility and insight into the cash flow generating abilities of the company.

The uptrend for American Tower revenues is impressive, with estimates of 15% growth in 2013 and 11% in 2014. This should come by way of higher lease activity for current towers and the adding of new towers. As the number of wireless subscribers continues to grow, American Tower should see key benefits from wireless carriers seeking to build out and improve their coverage networks, with notable upgrades to LTE. Billionaire Ken Griffin of Citadel Investment Group is also a big-backer of American Tower, owning over 2 million shares (check out Griffin's newest picks).

In closing, the casino REIT, Penn National spinoff, will be an interesting play and the first in the industry. The casino industry has been a long-time source of controversy, but there is no denying the benefits to state budgets, which will in part drive more states to consider legalizing casino gambling. The two timber REITs should perform well on rebounding construction, while American Tower benefits from the accelerating number of mobile subscribers. As earnings rise, so should dividend payments. Meanwhile, the trailing twelve month FFO payout ratios indicate Rayonier and American Tower already have room to boost payments:

FFO Dividend Payout
Rayonier 27%
Plum Creek 96%
American Tower 29%

In Part 2 I will touch on the top REITs in such industries as self-storage, data centers, gas stations and movie theaters.

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.