September 22, 2009

Researching For a Good REIT Purchase

I bought a couple REITs in my Roth IRA and one of them already doubled. I sold half my stake in that REIT. Now I'm looking for another good value to invest that money so I figured I'd take a look at the REITs out there to see if any represented good buys right now.

I did a quick screen of all the REITs with dividend yield of 9% or more.
There were only 9 REITs with yields that good at the time of my screen. I discarded any REITs that have negative earnings. I looked at each REIT and then decided if I'd cross it off my list or take a closer look.

Below are the REITs that come up on my screen and what I found from looking at the Yahoo financial page for each.

Note: I am not a financial advisor or financial expert. What I present here is my own opinion and does not represent investment advice.

#1 Northstar Realty Finance (NRF)

This one looks good in a lot of ways. They have a lot of assets and cash. They have pretty good revenue compared to the share price. The PE is a tiny 0.4 right now. Their dividends have gone down but are still paying a hefty yield. The main potential problem with Northstar is that they invest in real estate investments so they may have bad debt on their books. But they also have pretty substantial direct ownership in physical properties. I'll investigate this one further.

#2 Medical Properties Trust (MPW)

I think that medical property is a very safe bet. Medicine is pretty recession proof and you don't often see hospitals or medical professionals closing shop. If anyone outside government is going to pay their rent with safe reliability I think it would be medical industry. One negative on MPW is that they only have about $7 million in cash. Thats not very much for a REIT with $1.1 billion in assets and over $560 million in debt. Looking at their quarterly cash flow it seems they're barely able to pay their dividends. Back in Q1 they sold 12 million shares of stock for $5.40 a share. I'll cross this one off my list.

#3 One Liberty Properties (OLP)

This one looks ok at first glance but they are paying dividends with 10% cash and 90% stock rather than 100% cash. I think the fact that they are paying dividends in stock is a sign that they are probably having cash problems. Looking at their balance sheet you can see that their assets have been dropping and their income statements show that their income is dropping. They also don't seem to have a lot of cash on hand. This one doesn't look very strong financially and the trends aren't looking good. I'll cross this one off my list.

#4 Extra Space Storage (EXR)

OK my first thought is that if this company deals in storage rental properties then that would be a good business to buy into. I think Americans spend way too much money on storage rentals, but that would be a good thing for a company that owns those properties. Unfortunately closer examination of the REIT turns up a couple negatives. First they have suspended dividends until Q4 and they only expect to pay $0.24- $0.30 then. That brings their total dividend for 2009 to something around $0.50 to $0.55 and makes the yield actually about 4.5% to 5% range. Another big negative that I saw is that they are paying dividends in 10% cash and 90% common stock. Because of the situation with their dividends, I'll cross this one off my list.

#5 PMC Commercial Trust (PCC)

PMC is primarily in the business of originating commercial real estate loans. Most of their loans are under a Small Business Administration program and are guaranteed by the SBA to an extent. They've cut dividends two quarters in a row. Their dividend rate seems to fluctuate a lot from quarter to quarter looking back a couple years too. I'll cross this one off my list.

#6 Glimcher Realty Trust (GRT)

They have negative earnings. They've cut their dividends a couple times in the past two years. Its a retail REIT so they are dependent on the retail industry. Their debt went up a bit in 2008 and their equity / debt ratio isn't very good at around 0.9 level. I'll cross this one off my list.

#7 Mission West Properties (MSW)

Mission West specializes in R&D properties in Silicon Valley. That is a fairly narrow focus on in properties in one local market that are mostly dependent on the high tech industry. Their financials look OK but nothing fabulous. Right now the dividend rate is 8.7% which has been dropped since Q1. They have a decent amount of cash on hand. This one looks OK with no major problems but I am a little concerned that they aren't diversified enough. I'll investigate this one further.

#8 UHM Properties (UHM)

This REIT invests in mobile home parks. Their financials are fairly stable and they have actually been generating cash in the past few quarters. Their cash balance is not great but not horrible. This one looks interesting and doesn't have any major negatives. I'll investigate this one further.

So that leaves me with 3 REITs that I will investigate a bit further:

Northstar Realty (NRF)
Mission West Properties (MSW)
UHM Properties (UHM)

Next time I'll
look at the annual reports for each of these and see what I can dig up in those.

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