Realty Income Corp (O), Douglas Emmett, Inc. (DEI): This Real Estate Firm Still Looks Attractive

Rental rates likely to fall at Douglas Emmett, Inc. (NYSE:DEI)

Douglas Emmett, Inc. (NYSE:DEI) has rental rates in its portfolio that are about 5% to 10% higher than the market average according to Morningstar estimates. That means as these leases renew, the rates could fall more in line with the market prices. This would mean a decrease to the revenue at Douglas Emmett, Inc. (NYSE:DEI).

Furthermore, leases that are signed now will be agreed to based on rates that are still relatively low, despite anticipated increases in rent at Los Angeles Country and Honolulu (locations where the company conducts most of its business.) These leases last around five years, which is a long time to be waiting before it can increase rates to market level (assuming that level increases over that period.) The company will likely heighten its returns on leases that are struck after this year, however, as that is when the rental increases are likely to take place.

Analysts expect small increases to revenue of 2.5% this year and 1.4% next year. These increases are very modest. Earnings per share looks a bit better, with an 8% increase expected this year and 4% in 2014. That’s not enough to spark my interest, unfortunately.

Where to put your money

One of these stocks is not like the other. Buy Realty Income Corp (NYSE:O) and avoid AIMCO and Douglas Emmett, Inc. (NYSE:DEI) if you know what’s good for your portfolio. I’m tempted to jump ship altogether in the real estate market due to pending interest rate increases and the substantial hikes in share prices at these companies in the last couple years. However, the extremely long-term contracts at Realty Income Corp (NYSE:O) have my eyes watering for joy at the prospect of investing in a company that will have a pretty reliable income in good times and in bad.

Phillip Woolgar has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Phillip is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

The article This Real Estate Firm Still Looks Attractive originally appeared on Fool.com is written by Phillip Woolgar.

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