US REITs: The Next Corporate Bonds
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Under the prevailing ultra-low interest rate environment, where the 10-year Treasuries are offering only 1.88%, US REITs are the next best alternative to corporate bonds providing regular income. Therefore, investors looking for attractive risk-adjusted total returns should consider income-producing real estate investment trusts as part of their regular income portfolios. Barclays recommends half a dozen REITs it considers income investors should check out this year. The current dividend spread to Treasuries is attractive and Barclays projects 9% average annual REIT dividend growth over the next five years. Among Barclays top picks are Essex Property Trust (NYSE: ESS), Prologis (NYSE: PLD), Alexandria Real Estate Equities (NYSE: ARE), Simon Property Group (NYSE: SPG) and Boston Properties (NYSE: BXP). These REITs offer the highest yields with attractive valuations and potential risk-adjusted growth.
Barclays Credit Research believes bond valuations are stretched and expects the total returns in 2013 for much of the US credit market will not exceed coupon payments as downward pressure on interest rates puts pressure on bond prices. Besides, investors have flocked to government, corporate and municipal bonds over the last four years; yield opportunities among these bonds appear to have constrained. Bond-like equities present a good alternative in such times. Barclays expects the low interest rate environment will continue to persist in 2013, and companies that have solid business models and sustainable dividends present solid investment opportunity. The US REITs industry in particular offers good risk-adjusted returns and attractive relative value, particularly as commercial real estate fundamentals continue to improve and produce healthy earnings and dividend growth. Barclays expects dividend growth will act as a hedge against inflation.
Across the REITs types, occupancy has increased, driven by higher demand and limited supply. The landlords have gained the bargaining power required to raise rents. The rate of fundamental recovery appears to be moderate in the multi-family space, which has rebounded earlier than other property types. Typically, equity REITs also benefit from low interest rates as they are levered investments and take advantage of refinancing opportunities. Finally, the real estate that these REITs own and manage is also considered an inflation hedge, as properties are long-duration, tangible assets with cash flows that increase as inflations increases. Currently, the NAREIT Equity dividend yield of 3.6% is 1.44% above what the S&P 500 has to offer.
Essex Property Trust
Essex remains the top pick of Barclays for 2013 as it is poised to generate 6.7% growth in NOI, 100 basis points better than the industry average. It is an apartment company focused on high barrier to entry West Coast markets. The northern and southern California and Seattle markets in which the company operates offer better than average employment growth, largely technology related. Additionally, in California it is more difficult to build new product due to its lengthy entitlement process. Barclays expects a 7.6% annual five year dividend growth rate.
The company is an industrial REIT and forms part of the S&P 500. Prologis has investments in the Americas, Europe and Asia, and Barclays expects above-average earnings growth, driven largely by improving global industrial fundamentals. The stock offers a dividend yield of 2.9%, and Barclays projects a 12.3% annual five year dividend growth rate.
Simon Property Group
The company is classified as a regional malls REIT and is part of the S&P 100. It is considered to be the largest REIT in the world with a market cap of over $80 billion. The company is expected to complete around $1 billion worth of development projects in 2013, which will contribute to healthy growth. The stock offers a dividend yield of 2.8% and is projected to grow its dividend by 15% on average during the next five years.
Boston Properties is part of the S&P 500 and is classified as an office REIT with large concentration in Boston, New York, San Francisco and Washington DC. The company is well positioned to grow, and its strong balance sheet warrants premium valuations. The regions in which the company operates are among the strongest office markets in the US over the next few years. The stock offers a dividend yield of 2.4%
Alexandria Real Estate Equities
The company provides research lab spaces to bio-tech and pharmaceutical industries. Trends in the life sciences are driving high occupancy and positive rent spreads for its facilities across the country. The stock offers a dividend yield of 3.1% and Barclays expects a 9.8% five year dividend growth rate.
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