What Better Tenant Can a REIT Have Than Amazon?

Chambers Street Properties (NYSE: CSG  ) IPO'd just over a year ago smack dab in the middle of a great year for IPOs.

Unfortunately, Chambers Street's stock didn't get the memo.

But don't let the lackluster stock performance since the IPO obscure what could be a great income opportunity. This office and industrial REIT has a strong tenant mix supporting its high dividend, and a low valuation offers investors downside protection in case interest rate jitters hit the REIT sector again.

Diversification? Who needs it? 
For investors looking for income from stocks, the most important thing to determine is if the dividend will be there quarter in and quarter out (or month in and month out).

That's why REITs that are highly dependent on one or two companies scare me. If a major tenant goes out of business, will the REIT be able to make the dividend? Realty Income (NYSE: O  ) , the model REIT for dividend safety, protects itself by keeping its top tenant, Walgreens Drug Store, to just over 5% of its overall portfolio

A REIT with its top tenant at almost 10% of its portfolio would usually cause alarm bells to go off in my head.

But as the title alluded to, Chambers big tenant is Amazon (NASDAQ: AMZN  ) , which I'm comfortably predicting will not go out of business anytime soon.

Amazon's strength coupled with the fact that the rest of the top ten tenants list include companies like J.P. Morgan, Raytheon, and Comcast means the risk of tenant overconcentration is greatly mitigated and the rent checks show up on time.

A well covered dividend
When the rent checks show up on time, the company can pay a generous dividend. CSG currently pays a $0.042 monthly dividend which equates to a yield greater than six percent.

Chambers earned a strong $0.16 adjusted funds from operations (AFFO) performance in the first quarter of 2014 meaning the ffo payout ratio is a comfortable 79%. The low payout ratio leaving some wiggle room to maintain the dividend in case of business headwinds or, the more likely scenario as I see it, a dividend increase is on the way. 

A taper tantrum part two?
Last summer when the Fed started hinting at the end of the bond buying stimulus and the possibility of higher interest rates, almost all interest rate sensitive sectors were hit hard. Below is a chart of the iShares U.S. Real Estate etf which fell off a cliff in the "taper tantrum" of the second half of 2013 before recovering in 2014.

IYR Chart

Although the market has digested the fact that the bond buying will end in October and interest rates will probably rise sometime in 2015, it's possible the Fed speeds up the timeline and the market sends REITs into another tailspin. If this scenario were to occur, I think Chambers Street would be less affected than other REITs due to its inexpensive valuation.

Annualizing the $0.16 in AFFO that Chambers Street earned in Q1, the stock trades a very reasonable 12.7 times adjusted funds from operations at Monday's $8.17 closing price.

The low valuation means that shares have less room to fall if there were a general REIT sell off, and offers the possibility of capital appreciation should the multiple expand. Industrial REIT competitors Monmouth Real Estate Investment Corp and First Industrial Realty Trust trade at over 18 times and 22 times AFFO respectively. If Chambers were to rise to those levels, this stock could have upside of over 40%!!

Am I a Fool to fall in love?
The combination of of a high dividend and low valuation is tough to find these days in the market. Income investors seeking value in the real estate sector should look to tie the knot with this REIT. 


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