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REITs: Repositioning for Growth

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David Fick, CPA
Stifel Nicolaus
[email protected]

With two years of financial upheaval, investors are now dusting off and trying to figure out what to do with remaining assets. We believe this is good for REITs, which have an answer.

REITs were up 28.6% in ’09 vs. down 38% in ’08, down 16.8% in ’07, up 35.9% in ’06, and up 0.2% over five years. REITs were comparable to the overall market gains for 2009: S&P 500 was up 23.5%, Dow Jones Industrials up 18.8% and NASDAQ up 43.9%.

Stock picking beat sector allocation: Every sector had outperformers. Eight REITs had total returns above 100%; 57 REITs gained more than 20%.

Our 2010 REIT sector predictions: Debt markets will continue to show the way — with reasonable credit for reasonable borrowers on reasonable terms.

Total sector return: 10% up to June 30; 5% for the year (essentially dividend only), with the RMS Index at 817 (vs. 12/31/09 of 778).

Stock picking will beat sector allocation. Stocks with increasing dividends will outperform. There should be many more dividend increases than cuts for equity REITs.


Todd Thomas, CFA
Jordan Sadler
KeyBanc Capital Markets

We reiterate our Hold rating, though we remain positively biased toward shares of Cedar Shopping Centers following our investor meetings.
The RioCan alliance continues to slowly attract the interest it deserves.

Demand for traditional grocery anchored shopping centers is strong. The asset type that CDR owns and is attempting to acquire in the RioCan joint venture is growing in popularity given its defensive attributes and predictable cash flows.

Leasing remains resilient and consistent. Cedar continues to see positive rent spreads on lease renewals of 7-9% and does not expect this to abate in the near term. To date, the company has renewed more than 50% of its 2010 lease expirations.


Andrew DiZio, CFA
Janney Capital Markets
[email protected]

National Retail Properties maintained strong occupancy within its portfolio and continues, by our estimate, to generate cash flow well in-excess of its dividend obligation. Acquisitions represent the primary earnings and dividend growth driver for the REIT, and National Retail continues to see a lack of attractive opportunities in the marketplace as traditional drivers of deal flow — retailer expansion and new store acquisition — have remained stalled.

We view accretive acquisitions as the eventual catalyst for NNN, and believe the stock’s $1.50/share annual dividend pays investors to wait. The company’s 7.5% yield, in conjunction with our $22.50 fair value, implies potential total return of 20.2% over the next 12 months and continues to merit our Buy rating.


David M. West, CFA
Davenport & Company
[email protected]

W. P. Carey continues to increase its regular dividend and declares a special dividend as well. WPC increased its quarterly dividend from $.500 to $.502 per share, marking the 35th consecutive quarterly dividend increase. Given the background of a recession and an uncertain real estate market, we feel this is a remarkable achievement and highlights the conservative nature in which WPC is managed. The company also declared a special dividend of $.30 per share that was partly attributed to higher levels of taxable income. Both payments are payable on January 15, 2010 to shareholders of record on December 31, 2009.

WPC recently announced it closed a $33 million sale/leaseback for the North American headquarters of Mori Seiki Ltd., that is located in the Chicago area.

Gordon DuGan, WPC’s President and CEO, recently made a presentation to our firm that underscores the firm’s attractive business model and conservative approach to its finances. Combined with the upside to our current target, investors have the potential for 20%+ returns combined with the attractive current yield.