Bulls always have long shopping lists. But when a bear has enough confidence to become a buyer, it’s worth paying attention.
Portfolio manager Joel Beam is so negative on his sector that his real-estate focused fund is actually shorting the real estate market. That said, he’s finding a few high-paying investments in the space worth buying, including preferred shares of American Homes 4 Rent (ticker: AMH ) and Colony Capital ( CLNY ), as well as common shares of Franklin Street Properties ( FSP ) and American Realty Capital Properties ( ARCP ).
The manager of the Forward Select Income Fund ( FFSLX ), Beam says he’s concerned about the lofty valuations of real estate investment trusts. “The fund’s positioning is more conservative now than it has been in 14 years,” he says. The fund invests largely in preferred shares, which pay a fixed dividend and are higher in the credit structure than common shares, lending them bond-like qualities. Their prices tend to fluctuate less than common shares while providing higher payouts.
Another sign of the fund’s conservative outlook is its cash-positive position. Since he launched the fund in 2001, it has been 15% leveraged on average. The biggest single position is a short on the U.S. real estate market in the form of the iShares U.S. Real Estate ETF ( IYR ). “I’m long what I like but I’m short the overall market,” says Beam, “[The Real Estate Market] happens to be dominated by big blue chip companies, which to my mind are expensive. ”
Beam describes himself as a “true believer” when it comes to preferred shares. “I’ll take less of a total return in exchange for more dividend income and more security,” he says. Preferred shares are particularly appealing in the real estate sector, according to Beam, because most are cumulative, meaning any missed dividend payments will be made up before common shareholders receive any payouts, and they traditionally trade at cheaper valuations to preferreds in other sectors.
The $1.8 billion Forward Select Income Fund has returned an average 10.42% annually over the past three years, better than 91% of its category peers, according to Morningstar. The fund has a 3.3% yield.
Barrons.com asked Beam to share five real-estate picks.
American Homes 4 Rent: The $3.5 billion company was founded by Wayne Hughes, who also founded the largest self-storage REIT, Public Storage. American Homes 4 Rent, the largest single-family home REIT, owns 35,000 properties. The company has three series of preferred shares: Series A (AMH-A) and B (AMH-B) yield about 4.9%, while series C (AMH-C) pays 5.4%. Shareholders get a piece of the housing recovery through an accrual tied to the house price index. Beam says the complicated structure has caused the preferred shares to trade at a discount. He also likes the company’s common stock.
Colony Capital: Beam likes the recently initiated series C shares, which are trading at a discount to par. Colony is in the early stages of transforming from a mortgage REIT, which means it generates most revenue from interest on mortgage loans, to what Beam describes as “a diversified real estate company with a lot of asset management functions wrapped within a REIT structure.” Colony Capital Series C (SCLNY-C) shares yield 4.9% and have a five-year call protection.
American Realty Capital Properties: American Realty Capital Properties is a common equity holding that, Beam acknowledges, “has lots of problems.” Beam avoided ARCP for years. “We said they just seem to be on an acquisitions pace that no one can keep up without making a mistake.” In 2014 the company became the target of an SEC inquiry related to its accounting practices. Since then the company has cleaned house, getting rid of its management team and launching an internal probe that found no irregularities in the value of its portfolio. With shares now around $9, the company is trading at about 12 times adjusted funds from operations, compared to an average around 24 times for the REIT market. “At a certain price everything turns to fertilizer,” he says. (In other words, it can grow.) Beam says the company is not out of the woods yet, but with the ongoing problems fully priced in, the shares are trading at a good entry point.
Franklin Street Properties: Beam says he is adding exposure in the office-property sector, which he says is the most unloved portion of the REIT market. He believes sentiment is too negative, especially for suburban office real estate, and views Franklin Street Properties as a play on the improving economy. The company, with a market value of $1.2 billion, has a geographically diverse portfolio of about 40 buildings. Shares sport a robust 6.6% dividend yield, which is covered by the company’s cash flow. In this case Beam likes the high-yielding common shares.
Lexington Realty Trust: Another play on office real estate, Lexington Realty Trust ( LXP) primarily owns suburban office property. Beam likes the series C preferred shares (LXP-C), which yield about 6.6% and trade a bit below their $50 par value. Beam says the Lexington Realty Trust has been improving its business, raising common equity capital while selling off legacy assets and focusing on its core suburban office properties. “In a landscape of things that aren’t very cheap, this one feels safe,” says Beam.