Having an interest in small-cap equities -- we like to call them hidden gems around here -- often means looking at companies with a short history. But on occasion, a company like AmREIT (AMEX: AMY ) comes public with management that has a long history of operating the business as a private entity. AmREIT, as the name implies, is a real estate investment trust, and it focuses on retail real estate in Texas. Though the company has been public for only a little over two years, CEO H. Kerr Taylor has 20 years of experience in the business to fall back on.
Like many REITs, AmREIT has a large dividend yield. And at 6.1%, AmREIT sports a larger yield than some of its local and national competitors, including Weingarten Realty Investors (NYSE: WRI ) , Kimco (NYSE: KIM ) , and Simon Property Group (NYSE: SPG ) , currently offer. That extra yield is available primarily because the company is an unproven entity in the public markets.
AmREIT's strategy is to focus on "irreplaceable corners," which the company defines as "premium retail frontage properties typically located on 'Main and Main' intersections in high-traffic, highly populated affluent areas." Such a focus should deliver long-term value to shareholders, and given that traffic patterns don't tend to change much, every property AmREIT picks up for reasonable prices in high-traffic locations offers a competitive advantage.
AmREIT had a big 2004. The company doubled its assets while keeping its use of debt below the company's required level of 55% of total assets. With the use of debt limited to fund property acquisitions, the company raises capital primarily through selling additional shares of stock in classes that do not trade publicly but are entitled to a fixed dividend payment. The other classes of shares may cause dilution in the future, because they can be converted into the Class A common shares that trade publicly or, for a fee, can be called by the company and retired after a specified time period. Class D shares, for example, can be called after one year or are convertible after seven years.
On the downside, AmREIT's earnings per share for 2004 came in at a loss of $1.19. That figure would set off alarms at most companies, but for AmREIT, the loss is due to noncash charges. The more important figure to focus on with AmREIT is adjusted funds from operations, or AFFO. In AmREIT's case, AFFO was up 17% to $0.63 per share, giving the firm a dividend payout-to-AFFO ratio of 76.2%.
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Fool contributor Nathan Parmelee does not own shares in any of the companies mentioned.
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