Hedge Funds Are Betting on These REITs in 2018

Stocks are the best investment in a bull market, but they are often associated with at least some degree of uncertainty, since it’s difficult to predict when a rally might end and the high volatility will erase the gains. Bonds are much less risky, but also generate substantially lower returns. One asset class that is known to provide stable returns over the long run is real estate. People need housing and they are paying rent, thus providing the owner of the rented property with a stable cash flow.

However, holding physical properties can cumbersome and transactions involving real estate are plagued by bureaucracy, paper work and even fraud. On the other hand, investors can easily buy shares of real estate investment trusts. REITs give investors the opportunity to get some exposure to real estate, without actually owning any properties. Investors in REITs get the opportunity to get some benefits from a growth registered by the stock over the long run and also enjoy regular and substantial dividend payouts, since REITs are required to pay most of their profits to investors.

Currently, there are many concerned voices on the Street, saying that the interest rates hikes that Fed is planning this year, will hurt REITs. For one, higher rates, will increase their borrowing costs, thus reducing their profits. In addition, alongside higher interest rates, bond yields will also go up, which will draw more investors away from REITs. However, the yield of many REITs is much higher than the 10-year Treasury, which makes them more appealing.

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In addition, while the Fed raising rates will affect REITs’ costs, the economy is strong and the rates suggest further strengthening. A stronger economy, means people have more income and companies are also growing, which increases demand for housing and commercial real estate.

There is another very good reason why investing in REITs this year is a good idea: the recent tax reform. Under the Tax Cuts and Jobs Act, REITs are classified as “pass-through” investments, which lowers the taxes on dividends from REITs. In addition, REITs will be able to enjoy some deductions, such as a 20% deduction on pass-through entity income.

In this way, REITs should be a part of a diversified portfolio, but the question is which REITs to choose, since not all of them are focusing on housing or office real estate, but on a variety of other industries, such as data centers, warehouses, industrial facilities, etc. Here’s where our research can come in handy. At Insider Monkey, we follow over 650 hedge funds and analyze their quarterly 13F filings and assess the hedge fund sentiment towards thousands of stock. We use this data to identify the best stocks in the small-cap space that the best-performing hedge funds are invested in. These stocks are part of our small-cap strategy, which has outperformed the market by more than 20 percentage points in the last four year, and we share these stocks in our quarterly newsletters. In addition, we monitor around 140 activist hedge funds and cover one of them every month and determine the best way to imitate that hedge fund (see more details).

When it comes to REITs, they are far from being hedge funds’ most popular choices, but, nevertheless, many hedge funds are invested in REITs. Interestingly enough, most popular REITs among hedge funds in our database are not those focused on housing and it looks like dividend yield is not the most important metric that hedge funds are focused on. There is one particular type of REITs that has attracted the most attention from hedge funds, as you can see on the next page, where we will discuss five most popular REITs, which also saw an increase in the number of bullish investors during the last year.

In Prologis Inc (NYSE:PLD), there were 30 funds holding shares at the end of 2017, up by three both over the quarter and over the year. Prologis Inc (NYSE:PLD) is an Industrial REIT that owns around 687 million square feet of industrial and logistics facilities in 19 countries. The REIT has a dividend yield of 2.85%, based on the dividend of $0.48 per share that the company declared last month, up from the previous $0.44. Prologis Inc (NYSE:PLD)  reported fourth-quarter core funds from operations (FFO) of $0.67 per share, slightly topping the consensus estimate of $0.66. For the full year, the company posted FFO of $2.81 per share, up from $2.27 a year earlier and in 2018, Prologis expects FFO between $2.85 and $2.95 per share. Last month, Reuters reported that Prologis Inc (NYSE:PLD) had offered Amazon.com, Inc. (NASDAQ:AMZN) a warehouse near Sao Paulo, Brazil, as the eCommerce giant plans to expand its operations in the country.

Macerich Co (NYSE:MAC) saw the largest increase in popularity among hedge funds in our database last year. During 2017, the number of funds long Macerich Co (NYSE:MAC) jumped by 16 to 33 and during the fourth quarter that number increased by seven. The owner and developer of high-quality regional malls, outlets and shopping centers in the US is currently paying a dividend of $0.74 per share, which gives its stock a yield of $5.01. In 2017, Macerich Co (NYSE:MAC) registered FFO of $3.83 per share, down from $4.07 in 2016 and saw an occupancy of 95% across its portfolio. For 2018, Macerich Co (NYSE:MAC) expects FFO per share in the range of $3.92 to $4.02. The REIT should thrive in the current economic environment, marked by low unemployment rates and higher wages, which gives households more disposable income, which in turn should grow retailers’ sales.

Next in line is data center REIT Equinix, Inc. (NASDAQ:EQIX), in which there were 42 funds holding shares at the end of 2017, up from 37 funds a quarter earlier and from 33 funds at the end of 2016. Equinix, Inc. (NASDAQ:EQIX) is the largest provider of retail data center co-location and interconnection services, which operates over 145 data centers in 15 countries. The company became a REIT in 2015 and currently has a dividend yield of 2.20%, based on the dividend of $2.28 per share declared in February. In December, Equinix, Inc. (NASDAQ:EQIX) agreed to pay $792 million in cash for Australian data center operator Metronode, which will expand its presence in Asia-Pacific region by the addition of 10 new data centers and four new metros. The transaction is expected to be completed in the first six months of 2018. In addition, Equinix, Inc. (NASDAQ:EQIX) has recently introduced SmartKey, a key management/encryption service as a Software-as-a-Service solution.

Finally, we got to the two most popular REITs among the investors in our database: American Tower Corp (NYSE:AMT) and SBA Communications Corporation (NASDAQ:SBAC), both of which operate wireless towers. There is also Crown Castle International Corp. (REIT) (NYSE:CCI) among the five most popular REITs, but we don’t cover it in more detail in this article because it saw a decline in the number of bullish investors last year. The hedge fund interest towards wireless tower operators can be justified by the prospect of launching 5G in the US, which will require more investments from telecom companies. Moreover, President Donald Trump’s national security team has reportedly considered the launch of a nationalized 5G network as a way to counter the threat of China spying on US phone calls, but regulators and the industry are opposed to this move.

Let’s now take a look at each REIT individually. SBA Communications Corporation (NASDAQ:SBAC) saw the number of hedge funds long its stock increase to 43 from 40 during the last year, but it also declined by two during the fourth quarter. What’s important to mention is that, while SBA Communications Corporation (NASDAQ:SBAC) operates as a REIT since last year, when it completed its reorganization, it does not pay a dividend and it does not plan to pay one for the next couple of years. The company had been struggling until recently and it won’t pay dividends due to loss carryovers, although its profits show signs of growth and hedge funds seem to be betting on it and are not drawn away by the high earnings multiple of 194.

American Tower Corp (NYSE:AMT) is the favorite REIT among hedge funds by a big margin. At the end of 2017, there were 58 funds long the stock, up by one over the quarter and higher than 54 funds a year earlier. American Tower Corp (NYSE:AMT) is the largest independent owner of wireless towers, with over 146,000 tower sites across the world. Earlier this month, American Tower Corp (NYSE:AMT) has declared a dividend of $0.75 per share, which gives its stock a yield of 1.80%. In November, the company acquired 20,000 towers in India, with the deal expected to close in the first half of this year. In its outlook for 2018, American Tower Corp said it expects tenant billings growth in the US and strong demand in other regions. It also pointed out that it is confident that the Indian mobile industry is a good opportunity as it completes the consolidation and major network investments will be on their way to introduce 4G service in the country.

Disclosure: none