Contrarian Ideas: Hedge Funds are Buying these Unprofitable REITS

Contrarian Ideas: Hedge Funds are Buying these Unprofitable REITS

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Real Estate Investment Funds (REITs) are considered a savvy alternative investment to stocks and bonds, and the next best thing to owning real estate.

What is a REIT?: REITs invest in many sectors, from office buildings to homes, hospitals and hotels. They are tradable on the stock exchange and required to distribute 90% of taxable income to investors through dividends.

Data and Diversification

So far, the MSCI US REIT Index has gained about 15.15% in 2012, and 30.87% over a full year. Job growth is helping the industry by filling the current vacancies, and creating enough new demand to increase rental rates.

“Homebuilders have mostly enjoyed improved sales trends this year, aided by low mortgage interest rates and a decline in the inventory of unsold homes.” reports CNBC. “The pace of foreclosures slowed sharply last year, and banks appear to be holding back from flooding the market with foreclosed properties.”

Business Section: Investing Ideas

If you’re interested in exploring REITs for your portfolio, we created a starting point for your analysis, especially if you’re a contrarian investor:

We started with universe of REIT companies and screened them for the bullish backing of institutional buyers, like hedge funds. It’s understood this investor class has more market and company information than the average investor, so their bullishness is something to take note of.

Then, we looked for REITS that were performing unprofitably relative to their industry average. Specifically, their gross, operating and pretax margins are below that of their peers.

Still, despite this red accounting flag institutional buyers are feeling optimistic on these names. Perhaps they see a trend that will soon benefit these names and reverse these accounting trends.

So what do you think, are institutional buyers on the right track? Use this list as a starting point for your own analysis.

 

1. Health Care REIT, Inc. (HCN, Earnings, Analysts, Financials): REIT – Healthcare Facilities. Engages in investment, development, and management of properties. Market cap at $12.63B. Net institutional purchases in the current quarter at 13.7M shares, which represents about 6.44% of the company’s float of 212.73M shares. TTM gross margin at 35.06% vs. industry average at 42.66%. TTM operating margin at 35.06% vs. industry average at 40.34%. TTM pretax margin at 13.17% vs. industry average at 21.59%.

 

2. Mid-America Apartment Communities Inc. (MAA, Earnings, Analysts, Financials): REIT – Residential. Engages in acquiring, owning, and operating apartment communities primarily in the Sunbelt region of the United States. Market cap at $2.74B. Net institutional purchases in the current quarter at 2.8M shares, which represents about 6.88% of the company’s float of 40.69M shares. TTM gross margin at 24.29% vs. industry average at 42.66%. TTM operating margin at 24.29% vs. industry average at 40.34%. TTM pretax margin at 11.19% vs. industry average at 21.59%.

 

3. Ventas, Inc. (VTR, Earnings, Analysts, Financials): REIT – Healthcare Facilities. Engages in investment, management, financing, and leasing of properties in the healthcare industry. Market cap at $18.9B. Net institutional purchases in the current quarter at 23.4M shares, which represents about 7.97% of the company’s float of 293.59M shares. TTM gross margin at 28.36% vs. industry average at 42.66%. TTM operating margin at 28.36% vs. industry average at 40.34%. TTM pretax margin at 15.95% vs. industry average at 21.59%.

 

Use the Turbo Chart to compare performance:

Written by Rebecca Lipman. Profitability data sourced from Fidelity, all other data sourced from Finviz. 

 

Use Kapitall’s Tools: Looking for ways to analyze this list?

Use this article snapshot as a launch pad (click here for help): Simply click on the links, and use Kapitall’s tab navigation to browse through the data…

 

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10 Responses to “Contrarian Ideas: Hedge Funds are Buying these Unprofitable REITS”

  1. Luke Warm says:

    VTR unprofitable? Apologies in advance, but you need to learn how to properly evaluate a REIT.

  2. Becca says:

    It depends what angle you're looking at it from. Here, as explained, we measured it by gross, operating and pretax margins relative to their peers. In this sense, VTR is well below average.

  3. Luke Warm says:

    I'm looking at it from the angle where you said it was unprofitable, 'relative to peers' was absent from the headline. Unprofitable companies generally don't tend to get best in industry debt ratings from the major agencies, especially when they have to pay out 90% of income as REIT's do. You need to use FFO or adjusted FFO to value REITs. Most other metrics are quite meaningless.

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