Wall Street analysts note that management teams at the storage REITs see an additional 0.5% to 1.5% of occupancy gains in 2016. While that may seem small, that is an immediate increase to top and bottom line numbers. According to other Wall Street analysts, net rents are up nicely year over year, driven mostly by Extra Space and other sector leaders. This could position the industry well for the upcoming fall leasing season.
Extra Space Storage unitholders receive a 3.87% distribution. The $105 Jefferies price target is well above the consensus target of $93.73. Shares closed most recently at $80.55.
This company is in one of the fastest growing arenas of the REIT industry. Omega Healthcare Investors Inc. (NYSE: OHI) is a skilled nursing REIT that owns over 900 health care properties, principally skilled nursing facilities. These assets are currently leased to 83 third-party operators across 42 states.
In the research report, the analysts cited numerous reasons for liking the company:
1) Omega’s tenants generally have lower exposure to Medicare which is where the funding pressure is; 2) Only 7.6% of revenues come from tenants with rent coverage below 1.0x, 3) The company has some of the highest rent coverage ratios in the SNF-focused Healthcare REIT sector, and 4) The tenant base is well diversified. The current stock price implies that the majority of the $110 million of annual rents from tenants with an EBITDA rent coverage below 1.2x is at risk – and our analysis suggests this is too dire of a scenario.
Shareholders are paid a very strong 6.63% distribution. Jefferies has a $38 price target, and the consensus target is $36.38. Shares closed most recently at $36.20.
Senior Housing Properties
This is another health care REIT paying a big distribution. Senior Housing Properties Trust (NYSE: SNH) is an externally managed trust that has the majority of its assets under management primarily in independent living (29%) and medical office buildings (41%), along with investments in assisted living (24%), skilled nursing facilities (3%) and hospitals/specialty (3%). As of the first quarter this year, the company owned 428 properties in 38 states and Washington, D.C.
Hedge funds have piled into shares of the company since the beginning of the year. In fact, 16 of them owned shares of Senior Housing Properties Trust at the end of the second quarter, up by five funds from the end of the first quarter. Although some analysts are concerned about potential oversupply in the senior living sector, the company’s management has executed very well, and Senior Housing Properties isn’t very leveraged versus its net operating income.
Shareholders are paid a huge 7.0% distribution. The $19 Jefferies price target could be poised to be raised. The consensus target is $20.10. The stock closed above both levels Wednesday at $22.34.
It is important to remember that REIT distributions can contain return of capital. With the Federal Reserve very reluctant to raise rates, and even if it does the increases will be tiny, these all make good sense for growth and income accounts.