This Real Estate Firm Still Looks Attractive

Phillip is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Despite many real estate companies realizing record profits, the companies' stocks are being hit hard from the Federal Reserve's May announcement that it would taper off its asset repurchase program. Still, one of the following three companies stands out as a solid investment that will have you locked into profits.

Realty Income is the real deal

Realty Income (NYSE: O) has solid footing with its long-term leases. The company will focus on these while decreasing the number of new developments and acquisitions. This refining period will allow the company realize greater profit margins from the long-term leases, which often require less capital than many of the large-scale projects -- and they're more reliable.

Often, the sale-leaseback agreements with tenants garner long-term contracts (about 15 years) that ensure capital is consistently coming to the company. These types of agreements put the responsibility of property taxes, maintenance and insurance on the tenants, saving Realty Income a pretty penny.

Analysts also like this system. Consensus agreement pegs earnings per share as rising by 18% this year, and another 6% in the next. Restructuring costs could increase operating expenses, as the anticipated earnings per share is just a small fraction of expected revenue growth this year (57.1%) and next year (11%.) This stock shows a lot of promise with its exposure to the rental market, and that could help it dodge a potential bullet with the expected increase in interest rates.

AIMCO is barking up wrong skyscraper

Apartment Investment and Management's (NYSE: AIV) move to focus on more upscale locations that don't have a lot of space to work with is a challenging move to support. By focusing on one segment, the company will slim its portfolio and reduce its diversification. Furthermore, the upscale market will suffer a swift blow during an economic downturn as people look for cheaper housing. For now, I say all the power to AIMCO for focusing on this market, but without an exit strategy into cheaper properties it seems that the firm is walking a tightrope across an open volcano. 

AIMCO is likely distracted by several perks in the sector including rent that generally increases faster than inflation and a higher barrier to entry. Those perks are pointless if no one is able to afford the rent, however.

Analysts see AIMCO increasing its profits in the next couple years, but I caution investors to be prudent about what could be lurking after 2014. The economy is rainbows and butterflies right now, but you should always be cautious about what's to come and not bank on a firm for its short-term potential growth. Analysts think the company will increase its revenue by 4.3% this year and 2.1% next year. Even the short-term profits aren't something to go singing in the rain about.

Rental rates likely to fall at Douglas Emmett

Douglas Emmett (NYSE: DEI) has rental rates in its portfolio that are about 5% to 10% higher than the market average according to Morningstar estimates. That means as these leases renew, the rates could fall more in line with the market prices. This would mean a decrease to the revenue at Douglas Emmett. 

Furthermore, leases that are signed now will be agreed to based on rates that are still relatively low, despite anticipated increases in rent at Los Angeles Country and Honolulu (locations where the company conducts most of its business.) These leases last around five years, which is a long time to be waiting before it can increase rates to market level (assuming that level increases over that period.) The company will likely heighten its returns on leases that are struck after this year, however, as that is when the rental increases are likely to take place.

Analysts expect small increases to revenue of 2.5% this year and 1.4% next year. These increases are very modest. Earnings per share looks a bit better, with an 8% increase expected this year and 4% in 2014. That's not enough to spark my interest, unfortunately.

Where to put your money

One of these stocks is not like the other. Buy Realty Income and avoid AIMCO and Douglas Emmett if you know what's good for your portfolio. I'm tempted to jump ship altogether in the real estate market due to pending interest rate increases and the substantial hikes in share prices at these companies in the last couple years. However, the extremely long-term contracts at Realty Income have my eyes watering for joy at the prospect of investing in a company that will have a pretty reliable income in good times and in bad.

The Motley Fool's chief investment officer has selected his No. 1 stock for this year. Find out which stock it is in the special free report: "The Motley Fool's Top Stock for 2013." Just click here to access the report and find out the name of this under-the-radar company.

 


Phillip Woolgar has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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