September 29, 2009

Researching REITs - Digging Deeper

Last week I wrote about how I was researching REITs to see if I could find a good value or two. In my first step I did a simple screen for REITs with dividend yields >9% and then crossed off anything with negative earnings. That left me about 9 potential investments. I looked at the basic financials of those and crossed 6 of them off my list for various reasons. That left me with three REITs that I thought warranted a closer look which are:

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

The primary way that I am going to 'dig deeper' into researching these 3 REITs is to read the recent annual reports.

I should take a moment to again note that I'm not a financial advisor nor a professional in the finance industry in any way. My discussion of stocks should not be taken as financial investment advice.

Northstar Realty

One thing to note about Northstar is that right now the basic financial summary is showing a very large earnings level. This seems due to a substantial unrealized gain on investments from 2008 being reflected in the stats. I took a look at their 2008 Annual Report. A few key things I found: Page 5 of the annual report has pie charts showing the distribution of their loans both by sector and location. Their loans are spread across various types of real estate and spread all around the country. Page 11 has a table about the properties they own. 60% of their property value is in healthcare and 25% is in office space. Page 30 shows that barely over 1% of their loan portfolio was non performing. So they are well diversified, they have properties mostly in fairly stable healtcare industry and their loan portfolio isn't showing large defaults. These 3 points are all positive items. On the other hand my primary concern about Northstar is the potential risk in all the loans they carry. Northstar's stock has been over $8 within the past 52 weeks and right now trades under $4, so there is lots of room for the price to rebound.

Mission West Properties

Their 2008 annual report is on their website. They have 111 properties in Silicon Valley with a 66% occupancy rate. The list has the names of their tenants and the rent paid per property. Microsoft and Apple are on the list and those two tenants pay about 25% of the rent that Mission West receives which is a pretty positive point for them. Only 2% of their leases are due to expire in 2009. They refinanced $115M in debt in 2008 at a 6.2% rate for 20 years. Their tenant base and financial situation seems fairly good, but on the negative side they are not well diversified at all and all of their income is dependent on the Silicon Valley area and primarily high technology companies. Mission West stock price is about $6.70 right now and it had a high of $9.88 so its down about a third from its 52 week high.

UMH Properties

Their website is at The 2008 annual report is available on their site. On page 2 of the report they say that they have a portfolio of about $25M in home loans. These loans are made to individuals who have bought mobile homes on their properties. On page 7 of the annual report they list the financial figures for 2004 to 2008. Funds From Operations (FFO) has dropped every year for the past 5 years. In 2004 their FFO was over $11M and in 2008 it had dropped to about $5.5M. Overall UMH seems to be in OK shape, but the general trend of FFO is very concerning. UMH stock price hit its 52 week high of $9.09 earlier in August. Since then it has dropped back down to $7.88 so its not far from its recent peak.

In summary the good and bad points of each REIT are:

Northstar : good - well diversified with good financials and lots of room for stock rebound, bad - risk of loan defaults
Mission West : good - healthy financials and some good tenants, bad - all their eggs in one small basket
UHM : good - generally healthy state and reasonably safe business, bad - poor trend in financial performance in recent years

Tomorrow I'll talk about which of the 3 REITs I decided to buy.

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