Stock Quotes in this Article: AVB, DLR, HCP, KIM, SPG

BALTIMORE (Stockpickr) -- What started out as a stellar year for real estate investment trusts, or REITs, has become a rough one in just a few months. Since the word "taper" entered investors' vocabulary, they couldn't unload these unique names fast enough -- but now, it looks like they've overdone it.

And that's creating a big opportunity for anyone willing to step in and buy.

It's not shocking that Bernanke and company torpedoed REIT prices by talking about tapering their unprecedented asset buying. You see, despite their usefulness as a way to get exposure to real estate in your portfolio, REITs are really purpose-built income generation machines. U.S. tax rules give REITs the ability to pass on the vast majority of their income to investors in the form of dividends, and as a result, these vehicles can sport higher yields than most conventional corporations.

So, the potential that the Fed's break pumping will raise interest rates makes REITs look less attractive. Yes, if the Fed stops buying treasuries, it's very likely we'll see yields rise – but the notion that REITs suddenly become less attractive because no one wants to buy treasuries anymore is crazy. And it ignores the fact that the Fed is likely to keep the federal funds target rate near zero. Translation: REITs are due for a bounce.

With so many names sporting impressive yields after getting sold off this summer, investors who take the plunge into real estate investment trusts could be sitting on very favorable dividend payouts for as long as they hold. That's why we're taking a closer look at five REITs worth owning to call the Fed's taper bluff this fall.

Simon Property Group

Bigger is sometimes better in REITs, and Simon Property Group (SPG) is the best example of that. SPG is the largest retail REIT in the world, with close to 250 million leasable square feet of space in North America, Europe, and Asia. U.S. malls and shopping centers are still Simon's biggest business – together, they contribute about 80% of the firm's top line numbers.

Retail REITs have enjoyed some impressive growth in recent years, buoyed by consumer sales numbers that have been equally impressive. Since SPG is a mall operator, it's incentivized on sales -- its leases are worked out so that the firm collects a share of tenants' gross. But retailers are happy to pay what it takes for Simon's property management, after all, the firm's top mall properties generate as much as twice the national average revenues per square foot, thanks to good demographic choices in the firm's property portfolio.

The venture abroad provides a new opportunity for growth at Simon. The firm already owns an established portfolio of retail property in Europe, thanks to a major stake in European retail landlord Klepierre, and it's been ramping up its own exposure to emerging markets like China and Brazil. As the global economy continues to warm (a key tenant of the Fed's taper justification), SPG should continue to benefit financially. Right now, the firm pays out a 3.1% dividend yield.

HCP

REITs can offer something special if they have niche exposure – that's a big part of what makes healthcare name HCP (HCP)so interesting. HCP owns hospitals, medical office buildings, and senior housing/nursing facilities, giving it expertise in the healthcare arena that conventional landlords don't have. As major demographic shifts play into HCP's positioning in the years ahead, investors should win out.

The aging baby boomer population is ramping up demand for every type of tenant HCP leases property to. Because HCP is the landlord, not the service provider, it's able to take advantage of the increased demand for healthcare services without being subjected to regulatory headwinds. Even if legislation squeezed margins for hospitals, for instance, it doesn't change the fact that those facilities still need physical locations.

That's changing with the introduction of the RIDEA structure, which has enabled senior housing REITs to participate more actively in their properties' operations. While HCP has 21 senior housing facilities that take advantage of the arrangement, the vast majority of its properties don't (another 420). That conservative approach is favorable – investors who want direct exposure to a healthcare P&L should buy a healthcare stock, not a REIT.

HCP's diversified collection of property types makes it a stellar dividend generator. Right now, this $19 billion name pays out a 5% yield.

Digital Realty Trust

Digital Realty Trust (DLR) is another example of a niche REIT name that pays out a mountain of a dividend. Digital Realty owns datacenters, Internet gateways and high-tech manufacturing facilities, 117 properties comprising more than 17 million square feet of leasable space in all. And that high tech exposure has helped to finance a 5.9% dividend payout.

DLR's focus on high-tech tenants is attractive, particularly its datacenters. Because demand for datacenter capacity continues to grow (as technology like cloud computing becomes more and more popular), DLR is another niche name that should continue to have big industry tailwinds pushing at its back. And since its properties are more specialized than most, tenants have much higher switching costs than a conventional retailer does.

Like most REITs, Digital Realty signs long-term triple-net leases with tenants. That means that the firm isn't responsible for variable costs like insurance, maintenance, or property taxes, and can instead just collect a predictable stream of income that it passes onto investors. That fact (and a high yield) should makes this name attractive to income seekers in 2013.

Kimco Realty

Kimco Realty (KIM) is a retail REIT that's in transition. KIM is one of the oldest real estate investment trusts in the country, and that means that it owns some old properties and old leases. The combination of revamped properties and lease expirations for tenants who are currently paying less than market value should help spur revenue growth in the near-term.

Kimco's bread and butter is neighborhood shopping centers. In total, the firm owns around 900 properties, comprising more than 130 million square feet of leasable space. Unlike most retail REITs, however, Kimco owns a large number of properties in joint ventures with other firms (around half of its property portfolio). Joint ventures are a positive for Kimco because the firm can deploy capital other than its own while collecting a management fee from its partners for its role in running those properties. That gives KIM more wherewithal to put to work on its revamp in the next couple years.

Big bets in markets like Mexico and South America haven't completely panned out for Kimco, but rather than wait it out, the firm has been exiting its investments in the emerging market and doubling down on the U.S. It's a good strategy because it's a safer strategy, and it keeps the firm's 4% dividend payout protected. With nearly one-in-five tenants paying below-market rent on soon-to-expire leases, KIM should see a top line jump as it re-signs retailers to fresh deals.

AvalonBay Communities

Generally speaking, residential REITs aren't as attractive as landlords that focus on commercial tenants. That's because residential leases are generally short-term, government housing protections make it difficult to evict renters who don't pay, and sustained low mortgage rates and home prices have made buying a home cheaper than ever before. But AvalonBay Communities (AVB) is the exception to the rule.

AvalonBay is one of the biggest residential REITs in the world, with 173 communities in its portfolio that span approximately 51,000 apartment units -- and more are on the way. Because AvalonBay focuses its portfolio in affluent metro areas from New York to San Francisco, the firm has enjoyed strong demand and occupancy despite the housing hiccups. And it maintains levels of profitability you'd normally expect to see in a commercial REIT.

AVB has been working hard to expand its business in recent years. It's continuing to build out its housing portfolio with new projects, and recent huge acquisitions have helped provide instant scale increases lately. New initiatives to court younger, less established tenants could be very successful as long as the economic cycle remains intact along the way. Currently, AvalonBay pays out a 3.3% dividend yield.

To see these five REITs in action, check out the REITs to Buy in 2013 portfolio on Stockpickr.

-- Written by Jonas Elmerraji in Baltimore.

 

RELATED LINKS:

 

 

 

 

Follow Stockpickr on Twitter and become a fan on Facebook.

At the time of publication, author had no positions in stocks mentioned.

 

Jonas Elmerraji, CMT, is a senior market analyst at Agora Financial in Baltimore and a contributor to TheStreet. Before that, he managed a portfolio of stocks for an investment advisory returned 15% in 2008. He has been featured in Forbes , Investor's Business Daily, and on CNBC.com. Jonas holds a degree in financial economics from UMBC and the Chartered Market Technician designation.

 


Follow Jonas on Twitter @JonasElmerraji