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Real Estate Investment Trusts: An Overview of Three Property Players

 9 min read / 

Real Estate Investment Trusts (REITs) are comparable to mutual funds, which allow multiple investors to gain ownership of real estate ventures or operate commercial properties. They can be thought of as shares and most can be traded on major stock exchanges. REITs usually pay out all their taxable income in the form of dividends, and so pass on the tax to investors as shareholders then have to pay income taxes on the dividends they receive.

There are two main types of these trusts: equity REITs and mortgage REITs. Equity REITs generate income through rent and the sales of long-term properties, while mortgage REITs invest in residential and commercial mortgages. In the UK, REITs have various criteria which must be met in order for them to continue operating. These include having to distribute at least 90% of their taxable income in the form of dividends in each accounting year, to invest at least 75% of their entire assets in real estate, and to derive at least 75% of their gross income from rental payments, interests on mortgages or sales of real estate.

The main reason that investors are attracted to REITs is that it allows them to invest in real estate without having the massive capital required to purchase tangible real estate. REITs also provide investors with investments that are much more liquid than tangible real estate. They also offer an easy way for investors to diversify their portfolios, and high-dividend yields too.

However REITs also have a number of disadvantages: their performance obviously depends on the performance of the housing market, and rising interest rates can have a negative effect on their level of profitability. What follows is an analysis of REITs which have performed particularly well in recent times:

Great Ajax Group

Great Ajax Group (AJX) is a REIT that acquires, invests, and manages a portfolio of mortgage loans secured by single-family residences and single-family properties. Incorporated at the beginning of 2014, the Great Ajax Group is a very new corporation – but one whose fundamentals are nothing short of astonishing for a firm of its age.

The firm boasts a current ratio (current assets/current liabilities) of 13.50 and recorded earnings-per-share growth of 409.30% this year. Its price-to-earnings ratio of 7.68% is also very desirable – as is its small market cap of $247.94m, which may indicate that large investors and/or managed funds have thus far overlooked this particular REIT.

In addition to the already impressive fundamentals outlined above, the firm also has an annual dividend yield of 7.53% and very healthy net profit margin of 44%. As shown by the price chart below, Great Ajax Group’s share price has shown relatively low volatility since May 2016 and has been trading within a fairly uniform range.

However there are some considerations which investors should take into account before investing in Ajax. Over the time period discussed earlier, while volatility was low the firm’s share price nevertheless fell by about 5.7%. This is by no means a catastrophic reduction, but the share price continues on a slight downward trend.

There was an area of support (which has been outlined on the price chart below with a white shaded rectangle) that has been tested several times and not been breached – which indicates that it is a strong area of support. If this support area was to be breached then investor confidence may fall, and there may be an acceleration in the fall of Ajax’s share price.

In addition to this, the firm has a debt-to-equity ratio of 1.54 which indicates that it may not be able to generate enough cash to cover its debt obligations. This may be a major concern to investors as REITs are very susceptible to downturns in the housing market.

Displaying AJX 28-2-17.jpg

Source: TradingView

Apple Hospitality REIT Inc

Apple Hospitality REIT specialises in hotels and has 235 properties with over 30,000 guestrooms, the majority of which operate under Marriott or Hilton brands, across 33 states in USA. These premium hotel brands have a proven record of continually attracting travellers. Just like many other REITs, Apple Hospitality Inc boasts a very impressive annual dividend yield of 5.94% which makes it a very attractive long term investment for income seeking investors.

It has a market cap of $3.4bn but experiences a lot less volatility than other comparable REITs as it is relatively young (having had its IPO just over 2 years ago) and so is relatively unknown to many other investors. Apple Hospitality’s balance sheet is “very strong with debt being less than 28% of capitalisation and the company has an unusually attractive collection of assets for a REIT with such a low leverage”, according to Seeking Alpha.

It also has a good level of insider ownership, which increases investor confidence, and is operating at a very impressive gross margin of 55%. With regards to technical analysis, Apple Hospitality faces an area of resistance around the $20.60 price level. This area has been tested several times over the course of 2016 but the price was unable to break out above it.

As can be seen on the chart below the price is once again testing its resistance area, and investors will be paying close attention to forthcoming events to see if this resistance area can finally be breached – which would lead to sharp increases in the share price. Apple Hospitality’s stock rallied circa 16.3% towards the end of 2016 and into the beginning of 2017 but, as is shown by the relative strength indicator (RSI), does not appear to have been overbought, which suggests that there is potential for a further upward move.

Displaying APLE 28-2-17.jpg

Source: TradingView

Bluerock Residential Growth REIT

Another REIT which has so far been generally overlooked by investors, Bluerock Residential Growth, has a small market cap of just $298.1m and a portfolio which contains 28 apartment complexes in the south of America. The company states that their objective is to “maximise long-term stockholder value by investing in properties which show a clear potential for us to drive substantial growth” and that they “partner with leading regional owner/operators to improve properties and operations” which gives them an advantage over their competitors.

Their modern and sizeable complexes, which consist of high-quality facilities in desirable locations, are seeing rapid population growth. On the 27th February 2017, it was reported by Yahoo Finance that BlueRock Real Estate was among the fastest-growing sellers of real estate-related direct investment products marketed through independent broker-dealers.

It is also reported that despite a year of significant contraction across many real estate-related investment vehicles, the capital raise for Bluerock’s direct investment product suite grew by 160% in 2016. Bluerock Residential Growth currently offers investors an enticing dividend yield of 9.2%, however a debt-to-equity ratio of 4.11 will cause investors some concern as will their currently negative operating profit margin. By analysing the price chart for BRG we can see that throughout the entirety of 2016 the share price has been following a generally upward trend (represented by the light blue line). This upward has been tested 3 times and each time has withstood downward price pressure which indicates that the uptrend is relatively strong.

By analysing the below price chart for Bluerock, it can be seen that throughout the entirety of 2016 the share price has been following a generally upward trend (represented by the light blue line). This upward movement has been tested 3 times, and has each time withstood downward price pressure which indicates that the uptrend is relatively strong. The current set-up indicates that there may end up being an ascending triangle formation as the rising price approaches the resistance area around $14.00. This type of formation usually indicates that the price may break through the resistance area and continue on its upward trend, with an RSI of 39 offering no clear argument to this theory.

Displaying BRG 28-2-17.jpg

Source: TradingView

Sabra Healthcare REIT

Sabra Healthcare REIT (SBRA) is a different kind of REIT, whose portfolio consists primarily of independent living and memory-care facilities in the USA and Canada, but their secondary focus is acquiring skilled nursing and transitional care facilities in the USA. Sabra Healthcare REIT originate loans and make preferred equity investments when presented by an attractive investment of an almost developed property, or one which is fully developed but has no stable operation in place.

This REIT may be an attractive investment as there will likely be increasing demand for healthcare housing in America due to its ageing population. As of December 31, 2016, Sabra’s investment portfolio included 183 real estate properties held for investment (consisting of 97 skilled nursing and transitional care facilities, 85 Senior Housing facilities, and one acute care hospital, 10 investments in loans receivable (consisting of four mortgage loans, one construction loan, one mezzanine loan, three pre-development loans and one debtor-in-possession loan), and 12 preferred equity investments.

Like the majority of REITs, Sabra Healthcare’s annual dividend yield and gross margin are high (6.23% and 97.8% respectively). Further research is required to establish why both quarterly revenue growth and quarterly earnings growth year-on-year are down (-7.5% and -8.7% respectively) as this may be of some concern.

The company’s debt-to-equity ratio of 1.19 is larger than ideal, however it is not large enough to prompt concerns over leveraging amounts. With regards to technical analysis it can be seen that Sabra enjoyed a very successful 2016, with its share price increasing from $15.16 in February to $24.42 at the very end of the year. The stock found support at the upward trend line (light blue line) numerous times during a year which drove the price higher, whereas before, on the 27th October, it broke below the trendline. Usually when a support level is broken it then becomes an area of resistance and this can be seen by the share price ‘rebounding’ off the trendline three times after it broke below it.

The highlighted area around the $26 mark once gain indicates an area of resistance which was tested three times before the price recently finally broke above it. Sabra’s share price is now at a very interesting point. As stated above, the former resistance area is expected to become an area of support now that the price was able to break above it.

However, it is also expected that the price will face resistance to higher prices being reached, due to the blue trend line. In addition to this, an RSI of 70.46 indicates that the shares may be overbought and that a retracement is likely. It will be interesting to see which of these two contradictory forces comes out on top.

Displaying SBRA 28-2-17.jpg

Source: TradingView

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