3 Pure Play REITs With A Circle Of Competence

It’s true, diversification is a critical tool in any investor’s toolbox, but how important is it to own individual stocks that offer diversification of their revenues?

After years of sounding the plea of diversification, Real Estate Investment Trusts (or REITs) are shifting gears towards more dedicated property holdings.

Buzzwords like “focused” and “pure play” have replaced “diversification,” with REITs increasingly limiting holdings to one type of property or limiting their assets to a certain number of markets.

For some REITs, the allure of creating a “pure play” vehicle could make it worthwhile to spin off certain business lines into their own companies. By narrowing focus, a “pure play” REIT can provide a differentiated value proposition that establishes a single expertise that can likely attract more capital from investors.

Occasionally, the market will value the “pure play” REIT at a higher multiple since there is less complexity that ultimately reduces risk, a company with multiple sectors can distract management from focusing on its “circle of competence”.  As Warren Buffett famously said,

“You don’t have to be an expert on every company, or even many. You only have to be able to evaluate companies within your circle of competence . The size of that circle is not very important; knowing its boundaries, however, is vital.”

Buffet is unwavering about investing in companies that are within his “circle of competence” – meaning that it’s a business that he understands and can analyze.

By having a deep knowledge of the business – a “circle of competence” – Buffett can better forecast the company’s future performance, as he explained, “risk comes from not knowing what you’re doing”, so by staying in his circle of competence, companies can eliminate risk.

3 Pure Play REITs with a Circle of Competence

Tanger Factory Outlets (SKT) is a “pure play” outlet center REIT. The Greensboro-based company owns 43 properties in 212 states (coast to coast) and in Canada. The 14.3 million square foot portfolio has over 2,500 leases with many name-brand retailers including The Gap, Cole Hahn, Nike, Ralph Lauren, and Adidas.

Tanger has a proven 35-year track record of delivering quality outlet centers. Many projects are announced, but far fewer ever open for business. There is a tremendous opportunity for Tanger to continue to scale its business and distance itself from the competition. Since going public, Tanger has increased its annual dividend by over 23 years in a row.

Tanger has a market cap of $3.223 billion with dividend yield of 3.4%. In terms of valuation, I consider shares to be attractive today as the company’s P/FFO multiple is 14.x4x, seemingly cheaper than the larger mall peers.

Healthcare Trust of America (HTA) is a “pure play” medical office building REIT. The Scottsdale-based company owns 286 properties consisting of almost 16 million square feet located across 15 to 20 key markets in 27 states.

Currently, around 70% of HTA's assets are directly on hospital or academic medical center campuses. Another 27% are affiliated with large healthcare systems with over half of these in a high traffic area or on a multi-clustered MOB campus that is a community core location and critical to the healthcare delivery within the community.

For the full year of 2015, HTA's normalized FFO increased almost 11% to $196 million with normalized FFO per share increasing to $1.53 per diluted share, an increase of almost 5% compared to 2014. Normalized FAD per diluted share increased 8.6% to $1.39.

HTA has a market cap of $3.714 billion with a dividend yield of 4.1%. In terms of valuation, I consider shares soundly valued as the company’s P/FFO multiple is 17.4x. I would recommend patience on this one, or waiting on a pullback.

Retail Opportunity Investment Corp. (ROIC) owns 73 shopping centers encompassing approximately 8.6 million square feet. The “pure play” REIT is the largest publicly-traded, grocery-anchored shopping center REIT focused exclusively on the West Coast. ROIC is a member of the S&P SmallCap 600 Index and has investment-grade corporate debt ratings from Moody's Investor Services and Standard & Poor's.

2015 proved to be ROIC's strongest year since going public in 2007, whereby the company significantly exceeded many of the core growth and operating performance goals established at the outset of 2015. The company acquired a record $479.6 million of grocery-anchored shopping centers in 2015 that resulted in a 12.9% increase in Funds from Operations (or FFO) on a per diluted share basis.

ROIC has a market cap of $1.917 billion with a dividend yield of 3.7%. In terms of valuation, I consider shares soundly valued as the company’s P/FFO multiple is 18.8x. I would recommend patience on this one, or waiting on a modest pullback.

In closing, although buying pure plays may seem to reduce diversification, investors should look for diversification in their portfolios as a whole, not at the company level. If anything, pure plays will help manage risk by giving investors more control over the property sectors and markets the REITs are exposed to.

The author owns shares in HTA, ROIC, and SKT.

Brad Thomas is editor of Forbes Real Estate Investor and writes for Forbes.com. He is also writing a book, The Trump Factor, about presidential candidate Donald J. Trump.