A Capitol Idea

I’ve been reading how people, especially young people, have been inspired by President-elect Obama to consider government service as a possible career. Combine this with substantially increased government oversight of the financial and automotive industries along with the proposed public works projects and what do you get? You get bigger government. A lot bigger. In the end, not only will we taxpayers be footing the bill for all of this but we’ll also be paying the salaries of everyone hired to implement these programs. How we do this is up to Congress but I’d be willing to bet that some fairly hefty tax hikes will be involved, even for middle-income folks. (Here in California Gov. Schwartzenegger is proposing a sales tax increase that in Los Angeles County could come to 10.25%!)

This got me thinking as to how we, the taxpayers, can at least recoup some of the monies we’ll be shelling out down the road. Let’s see…tons of new jobs…in Washington, DC…people needing places to live, work, and shop…hmmm. Spelling it out like this, the answer is pretty obvious: Real-estate investment trusts (REITs) with a heavy emphasis in the D.C. area. Note that the D.C. conurbation is the nation’s fifth largest metropolitan area and third largest office market after New York and Chicago. Its office market has traditionally been stable since the federal government is the major employer.

Real-estate cognoscenti are predicting that a turnaround in real-estate won’t be seen for at least another six months to a year or perhaps even longer. But with the Fed today promising that it will do whatever it takes to inject liquidity into the credit and mortgage markets, now would be a good time to start taking a look around the REIT aisle and readying our shopping lists.

REIT categories
REITS, or real-estate investment trusts, are corporations that can be involved in many aspects of the real-estate market. As long as they pass on a significant portion of their income to investors (at least 90%), they are exempt from corporate taxation. REITs can operate in any or all of the following categories: industrial, office, retail, and residential. So here’s my list of REITs that have a strong presence in our nation’s capitol listed according to category.

Office REITs
Boston Properties (BXP): The company has three major projects under development in the D.C. area. It leases over 8 million square feet of Class A office space in the Boston, Manhattan, and D.C. areas with about half that (4 million sq. ft.) in San Francisco and 2 million sq. ft. in Princeton, NJ. Fundamentally, it is outperforming its peers but the balance sheet is showing some quarterly cash-flow issues possibly due to several recent acquisitions. The company issued 4Q guidance above analysts’ estimates and is maintaining its current dividend. The dividend yield (D/Y) is 4.6%.

Corporate Office Properties Trust (OFC)*: This REIT focuses on strategic customer relationships and specialized tenant requirements in the government defense IT and data sectors. Its properties are typically concentrated in large office parks adjacent to government demand drivers and/or in growth corridors. It owns 253 office and data properties totaling 19.1 million square feet, most of which is concentrated in the D.C. area. (It has much smaller holdings in Colorado Springs, Princeton, and Philadelphia.) It prides itself on providing technically sophisticated buildings in visually appealing settings that are environmentally sensitive, sustainable and meet unique customer requirements (many of its buildings are LEEDS certified).
One potential problem I see with this company is that a Democratic-controlled Congress might well cut back on defense spending. (Congress is going to have to make some cuts somewhere to pay for all of Obama’s proposed new programs.) The company has been steadily increasing dividends for the past eight years. Current D/Y is about 4.8%.

Brookfield Properties (BPO): The company owns, develops, and operates premier assets in the downtown cores of high-growth North American cities including New York, Boston, Washington, D.C., Los Angeles, Houston, Toronto, and Calgary. Its skyline-defining portfolio attracts major financial, energy and professional services corporations which have high credit ratings and maintain long-term leases. The company’s performance through the years is distinguished by strong, consistent financial results and a track record of steady growth. Currently, it owns 15 properties in the greater D.C. area. It’s raised its annual dividend since 2001 and now is paying a D/Y of just over 8%.

Industrial REITs
First Potomac (FPO):
The company invests in light-industrial properties of at least 50,000 square feet in the D.C. area as well as the surrounding Mid-Atlantic states. It was recently upgraded based on the belief it can continue to obtain financing due to the small size of its assets, management competency, and the expected continuation of acquisitions via joint ventures. A price target of $10 was put on the stock which ended today up almost 11% to $7.65. The company has paid a steady dividend since 2004. Current D/Y is a hefty 17.8%.

Retail REITs
Washington REIT (WRE): Although this company is classified as a retail REIT, it has a diversified portfolio of 89 properties consisting of 14 retail centers, 25 office properties, 17 medical office properties, 23 industrial/flex properties, 10 multifamily properties all totaling 12.8 million square feet. This is a pure play in the D.C. area since all of its holdings are located here. The company lowered year-end guidance citing equity dilution and delay in proposed acquisitions. Fundamentally, the company’s balance sheet isn’t as strong as some of the REITs in the other categories, possibly due to the downturn in retail, but it still has managed to increase its annual dividend since 1992. Current D/Y is about 6.1%.

Saul Centers (BFS): The company’s portfolio consists of 50 community and neighborhood shopping center and office properties totaling approximately 8.2 million square feet. Approximately 80 percent of cash flow is generated from properties in the metropolitan Washington, D.C./Baltimore area. Revenues and income have been steadily increasing, although there was a small drop in the 3Q numbers. Dividends have been increasing since 2005. Current D/Y is 3.9%. Technically, the stock today broke through major resistance—a bullish sign.

Residential REITs
Most of the residential REITs that I researched operate across the U.S., but I did find one that is concentrated in the northeast, including substantial holdings in the D.C. area.

Home Properties (HME): The company operates 125 communities totaling close to 35,000 apartment units in the Northeast, Mid-Atlantic, and Southeast Florida markets. In its third quarter report, the company CEO said that occupancy was at 95.1%, the highest level since 2000. Clearly, the recession hasn’t caught up with this company yet. It has been steadily increasing dividends since 1994 inception. Current D/Y is 6.4%

I think that if there is an expansion in the D.C. area, the REITs that will benefit the most will be in the residential and office categories. Industrial properties could contract if Congress slashes defense spending, and unless consumers can be coaxed into opening their wallets, the retail markets could be lackluster as well. Some folks may object to the omission of Vornado (VNO) but I felt that even though it does have a significant commercial presence in D.C., it was just an average sized piece of its portfolio pie.

Technically, REITs have been taking a beating along with pretty much everything else, but today’s Fed news could be just the spark needed to ignite the real-estate and financial sectors. REIT stocks zoomed up 10-20% today but is it time to buy? I think so as many of them took out major resistance. Even if the stocks do head back down, most of them are still trading 30-50% off their September values. Plus, they pay a nice dividend and none of the REITs mentioned here have reported a dividend cut–at least not yet.

The time may be right to add some REITs to your portfolio.

*Symbol correction (dated 12/17/08): This symbol was originally given as COPT. The company did trade under that symbol when it was listed on the Nasdaq. It now trades on the NYSE under the symbol OFC. My sincere apologies for the error.

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