After a banner 2013, the overall market has had a challenging start to 2014. However, these four companies have been crushing it: Alexander Real Estate (ARE -0.66%), BioMed Realty Trust (NYSE: BMR), CommonWealth REIT (EQC 0.77%), and Sun Communities (SUI 0.46%) early on in 2014 vs. the S&P 500. Their relative out-performance can also be seen when compared to the Vanguard REIT Index ETF (VNQ 0.20%) a good yardstick to measure sector performance.
Why CommonWealth stock may have popped
Current management finds itself under siege by activist shareholders seeking to replace the entire board of directors. CommonWealth REIT is externally managed, and two large shareholders feel current management interests are not aligned with common shareholders. This evolving situation explains the stellar performance of CommonWealth shares year to date.
CommonWealth is an office REIT with a $3 billion market cap. The company pays shareholders a quarterly dividend of $0.25, which yields 3.86% annually based on the $25.91 share price at close of market Feb. 6, 2014.
The stock has had a huge run up so far this year, and at current price levels, it does not appear to be much of a bargain for new investors. It might be wise to let the dust settle and see which direction the winning management group will lead the company moving forward.
What's new under the sun?
Sun Communities is a $1.72 billion market cap REIT that owns 190 manufactured home and recreation vehicle, or RV, communities totaling 69,800 developed sites. Sun primarily makes money renting the sites to homeowners and RV tenants, as well as generating revenue from home sales. On Jan. 7, 2014, Wells Fargo upgraded the manufactured housing REIT sector to Overweight, and upgraded Sun Communities to Outperform citing positive home sales trends.
More positive news from Sun Communities came on Jan. 23rd when the company provided 2014 guidance, including:
- A target $0.08 increase in distribution per common share
- A midrange estimate of funds from operations, or FFO, per share increase of 11.23% over 2013 FFO
- Average annual rent increases of 3.2%
In general, guidance was upbeat, and the relative stock outperformance seems to reflect the positive news. Sun will host an earnings call on Feb. 20, 2014 to discuss the quarter ending December and full year results for 2013. Sun common stock is currently yielding an attractive 5.3%, even after the recent increases in the stock.
The Life Sciences REIT sector is growing
Alexandria and BioMed, with market caps of $5 billion and $3.8 billion, respectively, are the two main players when it comes to developing and owning laboratory/office assets.
These facilities are typically utilized by science research institutions, biotech, pharma, government agencies, and related industries. The complex needs of this client base provides a competitive moat for these two specialty REITs.
Each recently reported strong leasing activity and significant acquisitions. In addition, financial metrics appeared to be strong both companies. Based upon the conference calls future growth drivers for the life science sector include:
- 46 U.S. biotech companies priced IPOs in 2013, the most in 13 years
- 59% of all FDA drug approvals in 2013 were by Alexander clients
- BioMed in 2013 had the best leasing year in company history including 34 new tenant relationships
Investors should be aware these companies own land and are active in developing complex build-to-suit solutions for clients -- so in any given quarter, future earnings could be a bit lumpy. Interested investors should review the detailed 2013 financial and operating results available in the companies' filings. But here is some back-of-the-envelope math to ponder:
Based upon the mid-range FFO guidance of $4.70 per share and a stock price of $71.08, Alexander is currently trading at 15 times FFO for 2014 -- with a dividend yield of 3.83%.
For BioMed, based upon mid-range FFO guidance of $1.42 per share the stock price of $19.79 indicates it is trading at 14 times FFO. BioMed is currently paying a dividend yielding 5.05%.
Value investors may be attracted to BioMed over Alexander in the short-term based upon valuation and yield. However, life science appears to be a growth story, so investors need to do some homework regarding which REIT is more likely to provide accretive growth moving forward. Of course, you could also invest in both of them if you believe that growth in life science will continue to accelerate.
Sun Communities also appears to have good visibility for growth opportunities and pays a competitive 5.3% dividend. CommonWealth REIT stock appreciation appears to be more speculative, so long-term investors should be cautious regarding this high-flyer in the office REIT sector.