REITS Aren’t Cheap

By on September 27, 2010

The Lonely Value Investor has posted an article at Seeking Alpha taking skeptical look at REIT valuations. Yields on many REITs are around 3% with nearly all earnings being paid out due to the requirement that companies with an REIT structure pay out 90% of taxable income to shareholders. This doesn’t leave much for the growth of the company. But REITS are priced as if they can produce a fair amount of growth. The Lonely Value Investor questions the assumptions being made. Many large cap equities are generating 8-10% earnings yields, so it’s a reasonable question to ask.

Just look at mall operator Simon Property Group (SPG). Its 2.5% dividend yield would imply an earnings yield, cap rate, or whatever for the whole company of less than 3%. Round up if you want. Either way, precious little margin of safety exists. At best, it seems like a very full price to pay for a collection of mall properties. Or am I missing something? Is retail booming? Mall retailers in particular? You’d think so given SPG’s valuation. Sorry, but I can’t suspend my disbelief. Our local mall (a Simon property) is a ghost town. Maybe all the rest are thriving. They better be.

Look through the whole collection of retail REITs from factory outlets to strip malls and it’s the same story. Whether it’s Taubman (TCO), Tanger Factory Outlet Centers (SKT), Realty Income (O), or even Saul Centers (BFS), you’re lucky to break 4 percent for current yield or even total earnings yield. Been shopping lately? Was there a line?

SMA Comment: The SMA portfolio has one REIT, Rayonier (RYN), and another company (Weyerhaueser) that is planning to convert to REIT status. These are primarily asset plays due to their large holdings of timber. RYN is mentioned in the article as possibly being overpriced. RYN has been a stellar performer for the portfolio so it is definitely on the expensive side relative to its historical valuation. Does that make it a sell? Maybe, but its 4% yield is competitive in this low yield environment.

Source: Seeking Alpha
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One Comment

  1. Parag

    September 27, 2010 at 6:28 am

    No one knows ahead of time which trend is the one which may stay for many months and create the huge gains. All we know for certain is the stock market can spend more time trending when compared to they’ll spend in the trendless sideways trading.
    What is the stock market

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