What Better Tenant Can a REIT Have Than Amazon?

Chambers Street Properties has a great tenant portfolio and is a bargain in the real estate sector with a safe six percent yield.

Jul 16, 2014 at 5:13PM

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. 

Chris Walczak has no position in any stocks mentioned. The Motley Fool recommends Amazon.com. The Motley Fool owns shares of Amazon.com. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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