Hedge Funds’ Most-Favored REITs This Quarter

Real estate investment trusts (REITs) should reside the equity portfolio of each long term-oriented investor. As a general rule, investors of all types are mostly attracted by REITs mainly because of their tendency to provide relatively high levels of current income and offer strong opportunities for long-term capital appreciation. In fact, REITs seem to resemble the “perfect” type of stock, which provides both current income in the form of dividends and long-term capital appreciation. Analysts at some top-tier investment banks believe that REITs will enjoy strong returns in the upcoming year, mainly because of limited new supply across the United States, robust economic growth, as well as attractive valuations. Although REITs tend to generate lower returns than high-growth stocks, their dividend payments are usually quite solid thanks to the stable and somewhat predictable revenue streams obtained from various types of “tenants”. Nonetheless, investors should not overlook a possible rising interest rate environment, which could put downward pressure on REITs given their capital-intensive nature. That being said, the following article will lay put a list of five REITs favored by the hedge fund vehicles monitored by Insider Monkey.

At Insider Monkey, we track around 730 hedge funds and institutional investors. Through extensive backtests, we have determined that imitating some of the stocks that these investors are collectively bullish on can help retail investors generate double digits of alpha per year. The key is to focus on the small-cap picks of these funds, which are usually less followed by the broader market and allow for larger price inefficiencies (see more details about our small-cap strategy).

#5 Vereit Inc. (NYSE:VER)

– Hedge Funds with Long Positions (as of December 31): 35

– Value of Hedge Funds’ Holdings (as of December 31): $1.33 Billion

There were 35 hedge funds from our system with stakes in Vereit Inc. (NYSE:VER) at the end of December 2015, down from 44 registered at the end of the prior quarter. It is not surprising that the smart money industry was jettisoning their REIT holdings during the fourth quarter, considering that the Federal Reserve raised interest rates for the first time in almost a decade during that quarter. Vereit is a full-service real estate operating company that primarily generates income from its diversified portfolio of 4,435 retail, restaurant, office and industrial real estate properties. The REIT’s funds from operations (FFO) totaled $585.2 million for 2015, which increased $436.1 million year-on-year. As REITs are mostly judged by their FFO metrics, Vereit appears to have had a great 2015. Just recently, analysts at BMO Capital Markets upgraded Vereit to ‘Outperform’ from ‘Market Perform’ and raised the price target on the stock to $10.50 from $10. Shares of Vereit are 7% in the red year-to-date. At the end of February, the company’s Board of Directors declared a quarterly dividend of $0.1375 per share, which denotes a current dividend yield of 6.55% for the stock. Larry Robbins’ Glenview Capital trimmed its stake in Vereit Inc. (NYSE:VER) by 23% during the December quarter to 17.37 million shares.

#4 Crown Castle International Corp (NYSE:CCI)

– Hedge Funds with Long Positions (as of December 31): 38

– Value of Hedge Funds’ Holdings (as of December 31): $1.69 Billion

As in the case of the previous REIT, the hedge fund sentiment towards Crown Castle International Corp (NYSE:CCI) declined in the final quarter of 2015. The number of funds tracked by Insider Monkey with stakes in the company dropped to 38 from 46 quarter-on-quarter. The REIT owns, operates and leases shared wireless infrastructure such as towers and rooftops, and small cell network supported by fiber. To be more specific, Crown Castle International owns and leases roughly 40,000 towers and 16,000 fiber miles in the United States, including Puerto Rico. In late February 2016, Deutsche Bank initiated coverage on the REIT with a ‘Buy’ rating and a price target of $98, saying that the wireless infrastructure operator represents “the ‘cleanest’ play on U.S. mobile infrastructure spending”. Deutsche Bank analysts suggest that Crown Castle’s nonexistent exposure to international markets simplifies its story, as well as “de-risks cash flows given the health and stability of the U.S. Wireless market”. The REIT pays out an annualized dividend of $3.54 per share, which marks a current dividend yield of 4.16%. Jacob Doft’s Highline Capital Management added a 1.88 million-share stake in Crown Castle International Corp (NYSE:CCI) to its portfolio during the final three months of 2015.

#3 American Tower Corp (NYSE:AMT)

– Hedge Funds with Long Positions (as of December 31): 38

– Value of Hedge Funds’ Holdings (as of December 31): $2.50 Billion

The number of funds from our system bullish on American Tower Corp (NYSE:AMT) declined to 38 from 42 during the December quarter, whereas the value of their stakes increased to $2.50 billion from $2.35 billion quarter-on-quarter. American Tower is a real estate investment trust that owns, operates and develops multitenant communications real estate. The REIT’s business mainly involves leasing space on communications sites to wireless service providers, radio and television broadcast companies, among others. The REIT’s asset portfolio primarily includes towers and distributed antenna system networks. American Tower substantially expanded its portfolio last year, after Verizon Communications agreed to lease the rights to 11,324 communications towers and sell 165 towers to the REIT for approximately $5.06 billion in cash. As a result, the REIT’s U.S. property segment revenue, which accounts for 66% of total revenue, increased to $3.16 billion in 2015 from $2.64 billion in 2014. Earlier this week, American Tower announced that its Board declared a quarterly cash distribution of $0.51 per share. Philippe Laffont’s Coatue Management disclosed owning 2.63 million shares of American Tower Corp (NYSE:AMT) in its 13F for the fourth quarter.

#2 Equinix Inc. (NASDAQ:EQIX)

Hedge Funds with Long Positions (as of December 31): 47

Value of Hedge Funds’ Holdings (as of December 31): $3.51 Billion

Surprisingly, the smart money sentiment towards Equinix Inc. (NASDAQ:EQIX) increased in the fourth quarter of 2015, as the number of funds with long positions in the REIT went up to 47 from 42. The money managers monitored by our team accumulated 20.30% of Equinix’s outstanding common stock at the end of 2015. Many unsophisticated investors already know that the Internet is a collection of independent networks that form a network of networks, while Equinix’s International Business Exchange (IBX) data centers represent the physical points where the interconnection between networks occurs. Just recently, the global datacenter and networking interconnect provider announced plans to open new IBX data centers in Tokyo, Dallas, Sao Paulo and Sydney as part of its expansion strategy. The REIT generated revenues of $2.73 billion during 2015, more than the $2.44 billion figure in 2014 and $2.15 billion in 2013. Shares of Equinix have advanced 36% over the past 12 months. Let’s not forget to mention that the REIT pays out an annual dividend of $7 per share, which equates with a current dividend yield of 2.28%. Stephen Mandel’s Lone Pine Capital had 2.11 million shares of Equinix Inc. (NASDAQ:EQIX) in its portfolio at the end of 2015.

#1 Northstar Realty Finance Corp (NYSE:NRF)

Hedge Funds with Long Positions (as of December 31): 48

Value of Hedge Funds’ Holdings (as of December 31): $796.16 Million

Northstar Realty Finance Corp (NYSE:NRF) is the most popular REIT among the hedge funds tracked by Insider Monkey as of the end of 2015. Nonetheless, the popularity of the REIT declined significantly during the December quarter, with the number of funds invested in Northstar Realty Finance slid to 48 from 59 quarter-over-quarter. Northstar Realty Finance is a diversified commercial real estate company whose portfolio primarily includes healthcare, hotel, manufactured housing communities, net lease and multifamily properties. Earlier this year, Land and Buildings, an activist firm, issued a letter to NorthStar Asset Management Group Inc. (NASDAQ:NSAM), urging the external manager and advisor of NRF to explore strategic alternatives to maximize shareholder value. One of those alternatives includes the recombination of NSAM with NRF. Northstar Realty Finance has seen its shares decline 21% since the beginning of 2016. Lee Ainslie’s Maverick Capital owns nearly 3.66 million shares of Northstar Realty Finance Corp (NYSE:NRF) as of December 31.

Disclosure: None