| Possible
New Additions to our Income Portfolio |
Published: April 27, 2004
Below you'll find a table of companies that I'm now
considering as possible new additions to our Income Portfolio. My staff
and I here at StreetAuthority are constantly researching and following
all of these picks, and we may add a few of them to this portfolio if
and when their risk/reward profiles meet our stringent investment
criteria.
| Company
(Symbol) |
Price
|
| AMB Property (AMB) |
$31.05 |
| CharterMac (CHC) |
20.30 |
| Hospitality Prop. (HPT) |
39.80 |
| Rouse Company
(RSE) |
43.33 |
| Southern Company (SO) |
29.23 |
AMB PROPERTY CORP. (AMB) -- With a market cap
of $2.6 billion and a diversified portfolio of 1,000 industrial
properties throughout the country and in several major global markets,
AMB is one of the world's leading industrial REITs (real estate
investment trusts). The firm focuses its attention mainly on properties
near airports, seaports and highway systems in major metropolitan
markets (such as Los Angeles, San Francisco, Chicago and New York) where
land and new development space are limited in supply. Its properties,
which house roughly 100 million square feet of rentable space, consist
mainly of high-traffic distribution and storage facilities.
The firm's main competitive advantage lies in its
enormous size. With a presence in most major U.S. cities and ports, AMB
is better suited to serve large multinational clients that need
distribution facilities in a variety of different markets. This
advantage will become all that much more prominent in the years ahead as
AMB continues to expand into new overseas markets. Although the firm
already has a presence in Japan, France, Singapore and Mexico,
international markets account for just 3% of AMB's annual revenues. The
firm's goal is to boost that figure to somewhere in the neighborhood of
15% in the coming years via aggressive international expansion.
Therefore, as global trade continues to increase in the years ahead, AMB
will be well positioned to grow along with it.
AMB also has a number of other things going for it.
For starters, the company is extremely stable thanks to the fact that it
requires most of its tenants to sign long-term (the firm's average lease
term is around six years) "triple net" leases. Under the terms
of those leases, AMB's tenants are required to pay all real estate
taxes, insurance and other operating costs associated with the property.
AMB also gains stability from the fact that no single tenant accounts
for greater than 3% of its rental income. In addition, the firm's 93%
occupancy rate (as of March 2004) is several percentage points above the
national average (roughly 89%).
AMB's long-term outlook remains solid and the company
is now poised to benefit from a recent rebound in the manufacturing
sector. On the downside, however, the company's occupancy rates have
slipped in recent quarters along with its rental rates. In fact, the
firm was forced to lower rents on lease renewals by -14.7% in the first
quarter of 2004 in response to weak demand and oversupply in the
industry. With this as a backdrop, company revenues and earnings have
remained fairly stagnant over the last few years. In addition, at 155%,
the firm's dividend payout ratio will likely prove unsustainable over
the long haul unless AMB can find a way to boost its operating profits.
AMB is a high-quality industrial REIT that should see
improving performance going forward thanks to recent acquisitions and an
improving operating environment. In addition, the firm's 5.5% dividend
yield pays investors to be patient here. However, given the risk factors
noted above, my staff and I would only be interested in the firm at the
right price. Although the stock is now much more attractive following a
recent decline from $37 to $31, I'd prefer to wait for a dip back into
the mid-$20s to give us a higher margin of safety on this investment. My
staff and I will continue to monitor the stock as a possible addition to
our Income Portfolio.
CHARTERMAC (CHC) -- CharterMac provides
financing solutions to multifamily rental housing developers as well as
a variety of investment products to institutional and retail investors.
The company's primary activity involves the purchase of tax-exempt bonds
issued by state and local governments across the country. The firm then
holds the majority of these bonds for its own account. In particular,
CharterMac specializes in the multi-family housing bond market. Because
these types of bonds are secured by first mortgage loans on underlying
properties, they tend to be fairly low-risk. What's more, since majority
of the firm's holdings (roughly 92% in recent years) are exempt from
Federal income tax, the company and its investors tend to pay very
little in the way of taxes.
My staff and I are attracted to the firm thanks to its
stable cash flows and solid $1.48 annual divided, which equates to a
+7.3% yield based on current share prices. Although that yield is quite
impressive, the real beauty of this company is the tax-advantaged status
of its dividend payments. Assuming that roughly 92% of the firm's
dividends are exempt from Federal taxes, and assuming a 35% tax bracket,
the firm's taxable equivalent yield for an investor's purposes is
slightly north of +11%! In addition, the company has boosted its
dividend at a compound annual rate of +8% since its inception in 1997.
If the firm can continue to deliver the same solid financial performance
going forward, then the stock should continue to climb steadily higher.
CHC has taken a big hit over the past month due to
fears of rising interest rates, dropping from a high of around $25 down
to recent lows near $20. Although the stock might hover around these
levels in the coming year as rates begin to rise, CHC should perform
well over the long haul. Meanwhile, the firm's rich +7.3% dividend yield
(which is all that much more impressive given that most of it is exempt
from Federal taxes) will pay investors to be patient here. With all of
these factors in mind, I've decided to add CHC to our Income Portfolio
at the opening bell on Tuesday, April 27th. My staff and I will initiate
coverage of the firm with a "Buy" rating and a 12-month price
target of $24.
HOSPITALITY PROPERTIES TRUST (HPT) --
Hospitality Properties buys, owns and leases hotels throughout the
United States. All told, this lodging REIT has about $3 billion invested
in 274 hotels. This diversified portfolio includes a total of over
37,000 rooms located in 38 states. All of the hotels that Hospitality
buys are operated by well-known brands, including Marriott, Wyndham and
AmeriSuites. These major operating companies lease the hotels from
Hospitality under long-term "triple net" leases. Under the
terms of these deals, Hospitality's tenants are required to pay base
rent regardless of industry fluctuations, plus pay for such expenses as
taxes, insurance and utilities. Most of the firm's triple net leases
require the lessee to pay a base rent plus 5% to 10% of total hotel
sales. Also, the lessee must stash away 5% of gross revenues each year
as a reserve for renovations and refurbishments.
Hospitality's main strategy is to acquire and lease
well-located hotels in the moderately priced brand-name segment of the
lodging industry. The company focuses on relatively new properties or
those that have undertaken or committed to undertake extensive
renovations. Hospitality's primary hotel brands include: Courtyard by
Marriott, Residence Inn by Marriott, Wyndham and AmeriSuites. The firm
has also invested in three major Marriott Hotels and Resorts.
With respect to Hospitality's stock, the firm is
currently paying out a solid +7.3% dividend yield to investors--a good
bit higher than the REIT industry average. And based on Hospitality's
historical dividend record, we believe the firm will continue to
increase its dividend payout in the years ahead. After all, Hospitality
is one of the few remaining hotel REITs that has managed to boost its
dividend steadily in recent years. Since 1995--its first year as a
publicly traded REIT--Hospitality has increased its dividend each and
every year.
The primary risks to Hospitality's shares include a
prolonged slump in business travel (this remains a major concern) or a
large number of defaults by its major tenants. Hospitality's properties
are also heavily concentrated in one major tenant, Marriott
International (MAR), which accounts for a large percentage of revenue.
Still, with projected FFO of well over $4.00 this year, the stock
appears to be reasonably valued relative to most other REITs in our
investing universe. On the other hand, given my concern about the
continued slump in business travel, as well as the potential for further
shocks to the travel market going forward, I would require an even
greater discount to today's levels (perhaps around $30) before I'd
purchase this stock.
ROUSE COMPANY (RSE) -- This $4.5 billion REIT
owns a diversified portfolio of more than 200 retail centers, office
buildings, industrial and mixed-use properties in 22 states across the
country. The firm's operations can be subdivided into three main sectors
-- retail (70% of net operating income), office (15%) and community
development (15%). This diversification has helped the firm to post
stable, growing financial results year in and year out.
On the retail front, Rouse owns one of the nation's
premier portfolios of upscale regional malls. Over the course of the
last several years, the firm has worked hard to improve the quality of
those retail properties by selling off underperforming locations and
acquiring more upscale properties located in densely populated areas.
This strategy of focusing exclusively on premium locations has kept its
occupancy rates high and has helped the firm boost its rental rates at
an above-average clip. Meanwhile, the company's office portfolio has
held up fairly well despite the poor job market. Rouse's occupancy rate
in this market is holding strong at 5% better than the national average,
and conditions here should improve throughout 2004 and 2005 as the
economy and labor market continue to improve. And finally, the firm's
master plan communities have performed well. Margins here are lower than
in the firm's other business lines, but rising land values have
nonetheless made this a profitable endeavor. To compliment its existing
communities in Columbia, Md. and Summerlin, Nev., the company plans to
expand this concept to a new plot of raw land it recently purchased near
Houston, TX.
Rouse isn't flashy, but it is a stable real estate
play that's selling at reasonable valuation relative to most other
diversified REITs. The company's dividend yield is slightly below the
REIT industry average at just 4.3%, but if you're looking to add a
diversified REIT to your portfolio at a reasonable price, then RSE is
one to consider.
SOUTHERN COMPANY (SO) -- In the post-Enron
market, it’s nice to find a stable, well-managed power producer such
as Southern Company. With 4 million customers and some 40,000 megawatts
of generating capacity, Southern is one of the country’s largest
electric utilities. The Atlanta-based firm, which is already the
dominant producer in the southeastern U.S., is now seeking to expand
into other high-usage markets. Its diverse operations include a solid
retail segment as well as a strong wholesale industrial business. In
addition, the company operates an energy-trading spin-off and a fiber
optics/wireless communications network that covers 127,000 square miles
in the firm's core operating region.
While electricity demand is always volatile, depending
as it does on economic and other factors, over the long haul the utility
market will continue to provide stable results. With a five-year
earnings growth rate of +5.4% in an industry marred by a declining
earnings history, Southern boast an impressive earnings record. Although
the firm's earnings are expected to come in flat this year, analysts
expect Southern's net income to ramp up by +3.6% in 2005 and continue at
a steady +5% a year beyond that.
When it comes to the stock's income characteristics,
Southern Company has delivered a steady annual dividend for over half a
century now. The stock currently yields a generous +4.8%. In addition,
its reasonable 68% payout ratio leaves the company with plenty room to
raise its annual dividend payment in line with its earnings growth. So
far this year, the company has already upped the ante, increasing its
annual dividend payment nearly +4% to $1.40 per share.
The stock is attractively priced at a P/E of around 15
times next year’s earnings compared to the industry average of close
to 20. The shares have trended steadily higher over the past few years,
and over the long term the company’s solid growth prospects should
continue to be reflected in its share performance. In the meantime,
investors will benefit from the firm's sizable dividend payment.
Although I'm not expecting much in the way of share price appreciation
from the stock, its stable financial position and solid +4.8% dividend
yield make Southern Company hard to ignore. As such, I've decided to add
the stock to our Income Portfolio at the opening bell on Tuesday, April
27th. My staff and I will initiate coverage of the firm with a
"Buy" rating and a 12-month price target of $33.
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