7 Residential REITs Offering Possible Inflation Protection

by: Zvi Bar

Many Americans believe that due to current economy, the dream of owning a home is no longer a sensible option. Indeed, a good deal are still walking away from real estate purchases made within the past decade. If these people aren’t going to buy a place, they are probably going to rent one (or move in with a relative). As a result, several investors have concluded that rental properties, especially if cash-flow positive, are a sensible investment. Additionally, rent tends to go up with inflation, so rental properties are one option for preparing for the believed coming inflation.

Residential REITs are a strong option for investing in rental apartments, student housing and other leased residential properties. These REITs usually pay healthy dividends and when rents go up with inflation so should the dividends. Trustees also often believe that REIT exposure is necessary to maintain a prudently allocated portfolio of assets, and to ensure that there is income sufficient to meet any current obligations.
This is part 1 of a two-part analysis of residential REITs. This part will discuss 7 residential REITs with a present market capitalization of under $3.2 Billion. Part 2 covers some residential REITs with higher market values. Several non-REITs also compete in this industry. There are also probably other REITs that meet these criteria, and please let me know if you would like others in particular included in future analysis. The REITs discussed in this part are, in alphabetical order:
  1. American Campus Communities Inc. (NYSE:ACC)
  2. Apartment Investment & Management Co. (NYSE:AIV)
  3. Colonial Properties Trust (NYSE:CLP)
  4. Education Realty Trust Inc. (NYSE:EDR)
  5. Equity LifeStyle Properties, Inc. (NYSE:ELS)
  6. Home Properties Inc. (NYSE:HME)
  7. Post Properties Inc. (NYSE:PPS)
REITs must distribute at least 90% of their taxable income in order to eliminate the need to pay income tax at the corporate level. As a result, most REITs offer a respectable yield compared to equities. Of course, some have below average yields and where there is a loss, rather than income, and/or significant debts to be paid, there should be no yield. Additionally, under the current tax laws, REIT dividends are usually subject to a higher tax a traditional corporate dividend (this can change as tax laws change). For the purposes of this analysis, yield includes regular and special dividends, for a total payout yield.
American Campus Communities Inc. (ACC)
  1. Current Yield: 3.85%
  2. Market Capitalization: $2.4 Billion
  3. Price to Cash-Flow: 17.8
  4. Price to Book: 2.0
  5. Short Position: 6%
  6. Yield Growth Analysis: A straight shooter, ACC has not altered its $0.3375 quarterly dividend through the real estate crisis. The $1.35 annual payout appears unlikely to change, positively or negatively.
  7. NOTE: ACC develops properties for college and graduate students.
Apartment Investment & Management Co. (AIV)
  1. Current Yield: 1.83%
  2. Market Capitalization: $3.2 Billion
  3. Price to Cash-Flow: 12.2
  4. Price to Book: 9.1
  5. Short Position: 8%
  6. Yield Growth Analysis: AIV’s payout has sloped downward lately, at least partially due to the sale of assets. In 2006, AIV paid out $2.40 and $4.31 in 2007, including a special dividend of $1.91 that if you remove means there was no increase. In 2008, AIV paid out a whopping $7.48, but that included three special dividends, and, again, if you remove those special dividends the ordinary payout remained unchanged. In 2009, AIV’s payout dropped to 40 cents (an 83% decrease from the prior unchanged, ordinary level) and in 2010, AIV’s payout dropped 25% further, to 30 cents (paid in thirds, not quarterly). Thus far in 2011, AIV has raised their dividend from 10 cents to 12 cents.
  7. NOTE: AIV properties are primarily multi-family properties disbursed throughout the United States.
Colonial Properties Trust (CLP)
  1. Current Yield: 2.88%
  2. Market Capitalization: $1.7 Billion
  3. Price to Cash-Flow: 13.9
  4. Price to Book: 1.6
  5. Short Position: 5.4%
  6. Yield Growth Analysis: Beyond an anomalous 2007 payout that included 2 especially large dividends associated with sales, CLP’s payout has sloped downward through the real estate crisis. In 2006, the total payout was $2.72. In 2007, the total payout was $13.29 (a 388.6% increase), but that included unusual special payouts, and the quarterly payout ended 2007 at 50 cents, which is below (26.4%) where it was in 2006. In 2008, the total payout was $1.75, after ELS cut the quarterly dividend in half to 25 cents to end the year. During 2009, the quarterly dividend was lowered to 15 cents, for a total of 70 cents (a 60% decrease). CLP maintained the 15-cent quarterly payout since then, including into 2011, paying 60 cents total in 2010.
  7. NOTE: Properties are throughout the ‘Sun Belt’ region.
Education Realty Trust Inc. (EDR)
  1. Current Yield: 2.48%
  2. Market Capitalization: $591.8 Million
  3. Price to Cash-Flow: 14.6
  4. Price to Book: 1.8
  5. Short Position: 4.2%
  6. Yield Growth Analysis: EDR’s payout has sloped downward through the real estate crises. In 2006, the annual payout was $1.10, which it lowered to 82 cents in 2007 (a 25% decrease), after the quarterly dividend was lowered from $0.2975 to $0.205 (a 31% decrease). EDR maintained the $0.205 though 2008, then halved it to $0.1025 at the start of 2009, and halved it again to 5 cents at the end of 2009, for a total payout of $0.3575 (a 56.4% decrease). In 2010, EDR maintained the nickel per quarter dividend, paying out 20 cents for the year (a 44% decrease). The dividend payout for 2011 has not yet changed.
  7. NOTE: EDR provides student housing.
Equity LifeStyle Properties, Inc. (ELS)
  1. Current Yield: 2.54%
  2. Market Capitalization: $1.9 Billion
  3. Price to Cash-Flow: 13.1
  4. Price to Book: 8.2
  5. Short Position: 4.3%
  6. Yield Growth Analysis: ELS’s payout has had significant growth since 2006, when the total payout was 30 cents. In 2007, ELS doubled the payout to 60 cents, via a 15-cent quarterly dividend. In 2008, the quarterly dividend was raised by 1/3 to 20 cents, for an 80-cent total payout. During 2009, the quarterly dividend was raised to 30 cents and the annual payout totaled $1.10 (a 37.5% increase). ELS maintained the 30-cent quarterly dividend throughout 2010, to total $1.20 (a 9% increase) and started off 2011 by raising the quarterly dividend from 30 cents to 37½ cents (a 25% increase), which would annualize to a payout of $1.50.
  7. NOTE: ELS owns retirement oriented properties in states known for retirement relocation, including Florida, Arizona, California and the Texas Gulf Coast.
Home Properties Inc. (HME)
  1. Current Yield: 4%
  2. Market Capitalization: $2.4 Billion
  3. Price to Cash-Flow: 14.5
  4. Price to Book: 3.3
  5. Short Position: 7.6%
  6. Yield Growth Analysis: HME’s payout was stable and slowly growing until 2010. In 2006, the total payout was $2.57, which was raised to $2.61 in 2007 (a 1.5% increase) when the quarterly dividend was raised by a penny. The 2008 payout was $2.65 (1.5% increase), after another penny per quarter raise, and 2009 totaled $2.68 (1.1% increase). In 2010, the payout was lowered to total $2.32 (a 13.4% decrease), after the quarterly dividend was lowered from 67 cents to 58 cents. HME started off 2011 by increasing the quarterly dividend to 62 cents, which would amount to an annual payout of $2.48 (a 6.89% increase).
  7. NOTE: HME principally owns low rise and/or garden apartment complexes in the mid-Atlantic region, including Washington, D.C., Baltimore, Philadelphia and New York.
Post Properties Inc. (PPS)
  1. Current Yield: 2%
  2. Market Capitalization: $2.0 Billion
  3. Price to Cash-Flow: 25.9
  4. Price to Book: 2.1
  5. Short Position: 12.3%
  6. Yield Growth Analysis: Through 2006 and 2007, PPS maintained a 45-cent dividend, for a total payout of $1.80 in both years. In 2008, PPS lowered the payout to $1.55 (a 13.89% decrease) when, at the end of the year, the quarterly dividend was lowered to 20 cents (a 55.5% decrease). From 2009 until the most recent quarter, PPS has maintained a 20-cent quarterly dividend, paying out $0.80 per year.
  7. NOTE: PPS’ properties are primarily mid-to-high-end apartment buildings throughout the southern U.S., with the most of the properties located in Atlanta and Dallas.
Please note the reasonably high short interest on several of these names, peaking at over 12% on PPS. Many still believe most to all residential real estate is overvalued and/or unlikely to appreciate for a while. Certain regions and cost levels are affected differently by different economic factors. For example, student housing and assisted senior housing may have some overlapping qualities, but also several significant differences. Also, Washington D.C. and Silicon Valley have similar and different factors for job growth and destruction risks.

Generally speaking, I believe rental units in locations less concerned with unemployment are probably going to do better than those where unemployment is high. Locations such as D.C., New York, and certain areas in Texas, among others, are well known for maintaining high employment rates. D.C., of course, has a significant level of government employment, which is generally secure and growing in volume. Student housing usually has a strong market, but in economic downturns students may choose to stay home, or their parents may choose that for them. Retirement locations are usually dependent upon the ability for people to retire, obviously, and the baby-boomers are just now entering that phase. Other opinions are welcome.

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 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.