A High-Dividend REIT With a Kicker [7%+]

A High-Dividend REIT With a Kicker

With a low share price, high dividend yield, and some unseen upside from properties in paradise, HRPT Properties Trust (NYSE: HRP) seems to offer compelling opportunities for Foolish investors.

If a REIT yields more than 7%, it's usually because the company has credit exposure that makes investors nervous, such as commercial mezzanine loans and B Notes, or subprime and Alt-A residential mortgages. (We all know there's a lot to be said about credit exposure these days.)

However, HRPT's biggest tenants in 2006 were the U.S. government, GlaxoSmithKline (NYSE: GSK), and Comcast (Nasdaq: CMCSA). Despite its high-grade tenants, the REIT's shares trade at $9.80. That's a roughly 39% tumble from its high, giving the stock an 8% dividend yield. The funds from operations (FFO) yield is even higher, at 11%, meaning that the company's making more than enough to cover its dividend.

I was perplexed by HRPT's valuation, so I recently spoke with its manager of investor relations, Tim Bonang, and his analyst, Katie Johnston, to try to understand what the heck is going on. Here's the breakdown.

Company snapshot
HRPT is a REIT that owns and leases about $5.8 billion and 60 million square feet worth of office and industrial properties, with a focus on government and medical office buildings. The company's property is located in 34 states and Washington, D.C.

Comparables
Although Tim noted that HRPT operates in many different and diverse markets, so do most such companies. Rival office REITs include Brandywine (NYSE: BRT), Mack-Cali (NYSE: CLI), SL Green (NYSE: SLG), and Maguire (NYSE: MPG).

Examining the forward FFO multiples for that peer group, I find that these firms trade anywhere between eight to 16 times 2007 estimated FFO, compared to nine times trailing FFO for HRPT. The company doesn't give forward guidance, so I couldn't do an apples-to-apples comparison. But based on its low historical multiple, we can safely assume that its forward multiple will be even lower. Why is HRPT valued so cheaply, compared to its peers?

An eye toward the long termTim noted that HRPT doesn't buy and flip its properties, instead holding onto them to produce income. As a result, the company doesn't report a lot of gains on sale, and its long-term approach probably doesn't excite investors hoping for a quick buyout.

In addition, HRPT's properties aren't marked to market. Instead, REITs take depreciation charges against the carrying value of their properties. HRPT is currently trading at roughly book value, which includes roughly $700 million of accumulated depreciation. Over time, real estate tends to increase, not decrease, in value; in 2006, HRPT sold five buildings for 30% more than historical cost. So it's reasonable to assume that HRPT's book value could be quite understated.

Whereas the aforementioned points are generally true of most REITS, the key difference is that investors give other REITs much more credit for having intrinsic values that exceed their book values.

Running a tight ship
HRPT actually has no employees, instead contracting out management of the REIT to Reit Management and Research (RMR). RMR also runs other REITs, including Senior Housing Properties (NYSE: SNH) and Hospitality Properties Trust (NYSE: HPT). Although some investors may fear that RMR's attention is spread too thinly, through the end of 2006, HRPT had appreciated 12.2% annually since inception on a total return basis.

The corporate structure also means that expenses can be leveraged quite nicely. HRPT's G&A expenses consume only about 4% of rental income; Tim noted that the company's peers spend 6% to 7% on average. Sarbanes-Oxley costs and other expenses, which might run $750,000 for a company, only cost REITs in general about $250,000, thanks to this ability to leverage G&A costs. Nice.

Island treasure
Lastly, HRPT has a nice catalyst buried in its balance sheet. The company owns 18 million square feet of industrial land in Oahu, Hawaii. Thanks to development and the passage of time, that land in Oahu has appreciated in value over the past couple of years, and Tim mentioned that rent renewal rates have increased between 50%-80%. Although it will take a while for leases to expire and rent increases to roll through the income statement, the Oahu property does seem like a very nice driver for future growth.

The bottom line
HRPT has a very nice collection of high-credit-quality tenants, a very efficient cost structure, at least one hidden asset, and a steady 8% dividend yield. Seems like a decent opportunity to me.
Further fully furnished Foolishness:

• Investor 007's Bond Dossier
• Parkway Looking Strong in Chi-Town
• The Lie About Growth and Value Stocks

reit, hrpt, high yield, real estate investment

Tax cuts, turbulent market make dividend funds popular

Tax cuts, turbulent market make dividend funds popular

Some investors are turning to dividend funds to wait out recent stock market turbulence after a one-year run-up. The popularity of the funds has also been aided by 2003 tax cuts, which had the effect of raising dividend payouts.


Dividend funds offer comfort in turbulent time
Associated PressPublished June 29, 2007
NEW YORK --

With the stock market having jitters after a strong run-up in the past year, some investors might want something more low-key.

Dividend funds, though still subject to the vagaries of the stock market, can give comfort to investors looking for more defensive arenas.

While dividend payouts have increased in recent years, thanks in part to federal tax cuts enacted in 2003, many of the large, established companies that are traditional dividend payers are sitting on record levels of cash. That makes it easier for them to pay dividends and repurchase shares.

The large-capitalization stocks that are typical dividend providers, such as those that populate the Standard & Poor's 500 index, operate differently from start-up companies that might be forced to reinvest most of their cash flow to support a nascent business.

Donald Taylor, a portfolio manager for the Franklin Rising Dividends Fund, looks not only for companies that make steady payouts but, as the name implies, also for those operations that are likely to boost their payments.

"We want companies that have a long record of consistent and substantial dividend increases," he said.

The fund screens for companies whose dividend has at least doubled over the past 10 years, though he notes that the approximately 45 stocks that make up the fund have done better than that.

On average the dividends in the portfolio have increased 22 years in a row.
Not surprisingly, many of the types of stocks that meet the fund's requirements are industrial, financial and consumer companies -- traditional dividend payers.

In recent years, Taylor noted, corporate earnings and cash flow have remained robust, giving many companies ample room to pay a dividend.

"Operating margins have been very strong and companies have been relatively cautious in reinvesting, so that leaves free cash flow strong," he said. "That leads to more and larger dividend increases and share repurchases."

Taylor cautioned that he avoids companies that boost their dividend payments at the expense of growth.

"What I'm not looking for is the dividend growing because of a big change in the payout ratio," he said. "Although there are certainly times when it's appropriate, it still has to be in the context of seeing the business grow in the longer term."

Jeff Tjornehoj, an analyst at fund-tracker Lipper Inc., offered a similar assessment.
"I would be cautious about pursuing yield without an eye for risk," he said. He noted that while there are companies with dividend yields above 10 percent, some might be in trouble.

"They got into that position because their stock prices are beaten down so badly," he said. "Just because a company's dividend yield is rising doesn't necessarily indicate bigger dividends. It can be the case that their prices are falling precipitously."

Tjornehoj said investors should consider the amount of turnover in a portfolio because some short-term gains can trigger higher taxes.

In general, Tjornehoj said, dividend funds aren't for people looking for the greatest returns but for a limited measure of dependability.

"They're not going to have returns that put everybody else to shame," he said. "If that's what you're looking for, then this may not be the type of fund that suits your needs. Take a broad view. Not only are you in it for the dividend but for the performance of the stock itself."

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dividend fuds, high yield, preferred stock, stock dividends