Tuesday, June 13, 2017
When a REIT is Right
There are a number of reasons to invest in a REIT - a Real Estate Investment Trust. REITs give investors the investment potential of a diversified portfolio of commercial real estate with the advantage of liquidity through publicly traded shares. The structure can deliver income as a majority of profits are paid to investors as dividends. Equity REITs tend to perform well in periods when interest rates are low and property values are climbing - very much like our present economic circumstances. Some REITs can also provide a tax advantage as their dividends may qualify as capital gains that are taxed at lower rates.
Investors interested in the energy investing may overlook the REIT structure as a means to participate in renewable energy sources as well as efficiency and conservation solutions. Hannon Armstrong Sustainable Infrastructure Capital, Inc. (HASI: NYSE) is a REIT composed of a portfolio of debt and equity investments focused on energy efficiency and renewable energy markets. Hannon Armstrong provides financing for solar and wind projects using proven technology and supported by firm power purchase agreements. In the energy efficiency segment of the portfolio Hannon Armstrong works with Energy Service Companies or ESCOs that design and install energy efficiency solutions in commercial and industrial structures. Hannon Armstrong is assigned the payment stream from the improvements, for which it has provided financing.
In the twelve months ending March 2017, Hannon Armstrong delivered $16.9 million in net income or $0.39 per share on $36.8 million in total revenue. Operating cash flow during the period was $52.2 million. The REIT was able to pay a dividend of $1.26 per share over the last twelve months. The dividend has been increased to $1.32 per share, representing a yield of 5.8% at the current share price.
Investors seeking income might be particularly impressed by the dividend yield, but a bit leery of investing in risky asset to for the sake of income. It is noteworthy that the beta measure of price volatility is 0.97 for HASI. The quality of the portfolio should also provide comfort. The Hannon Armstrong portfolio includes high credit quality obligations from U.S. government entities and large corporations.
A REIT is not for every investor and may not be as exciting as a speculative investment in a new energy technology. However, for some investors with a green stripe down their backs, there could be a time when a REIT is right.
Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.