A REIT to Avoid – And One to Buy Now

4 | By Michael A. Robinson

The idea of a Sears Holdings Corp. (Nasdaq: SHLD) real estate investment trust (REIT) certainly sounds attractive.

Sears And the market was intrigued, sending shares up 31% in one day last week.

However, as tempting as it might be to buy into a newly forged REIT, Sears and its scheme are doomed. The company continues to lose customers to nimbler storefront competitors and e-commerce.

Most investors think of REITs as ways to invest in office buildings, apartments, and shopping centers – and then making cash dividends through the rent those places collect.

But what if there was a way to invest in the smartphone shoppers that are stealing Sears’ business and make REIT cash at the same time?

Today we’re going to take a look at just such a play together…

The Slow Unwinding

Today’s note is a sad one for me to write.

Ever since I can remember, my parents and I have shopped at Sears. We shopped there for clothes and just about everything else when I was growing up. And I’ve bought lots of tools and several major appliances there over the years.

But about three years ago, I stopped shopping there altogether. There are just too many other stores, both physical and online, to choose from that offer quality products at attractive prices.

Obviously, I’m not the only one who is deserting this once proud department store. The suburban Chicago-based company, which also owns Kmart (technically, however, Kmart bought Sears back in 2005), is bleeding customers.

And since 2005, Sears’ asset management-inclined executives have been “realizing” the company’s values more than going for the turnaround. That means they’ve closed hundreds of stores, let the remaining ones languish, and spun off Land’s End Inc. (Nasdaq: LE) – and they want to do the same with Sears Auto Centers.

More to the point, Sears doesn’t seem to have much to entice young shoppers. I have two teenage daughters, and not once has either girl ever mentioned wanting to go to our local Sears – or to buy something from its website.

And the numbers tell the story. Back in August, Sears reported a net loss of $573 million for the second quarter, or $5.39 a share, from $194 million, or $1.83, a year earlier. And revenue declined for the 30th straight quarter to $8 billion, down 10% from the same period last year.

Yes, the REIT news ignited the stock. Sears rose 31% the day word broke. That sounds impressive – until you realize the shares were still more than 7% off for the year.

And the day after the Nov. 7 REIT news, Sears stock turned right around, giving up nearly 9.5% for the session. That left the stock off more than 15% so far this year, compared with 11.4% gains for the tech-centric Nasdaq Composite Index.

Those who pounced on Sears ignored one big fact. In the same U.S. Securities and Exchange Commission (SEC) filing in which the retailer surprised us with the possible REIT, it also shared some same-old news. Comparable store sales for the third quarter fell 0.7% from the year-ago period.

The decline reflects weaknesses in consumer electronics, apparel and auto center sales, analysts noted. They now expect Sears to report third-quarter losses of up to $630 million in its Nov. 19 financial report.

Clearly, Sears is a deeply troubled company in an industry facing rapidly rising competition from online sales.

Consider that the market researchers at comScore recently reported big gains for both desktop and mobile e-commerce.

In this year’s second quarter, comScore said desktop e-commerce increased by 10% from the year-ago period.

But comScore found that mobile commerce rose nearly five times as fast, registering a 47% one-year increase. And by the end of this year, comScore expects mobile commerce sales to hit $35 billion.

Meantime, the forecasters at IDG estimate total global sales of smartphones, tablets and hybrid “phablets” to hit 1.48 billion units this year. By 2018, those mobile devices will see a 44.5% increase in shipments to 2.14 billon.

Invest in a Tower of Power

That’s why I think tech investors would do well to take a good look at American Tower Corp. (NYSE: AMT). This REIT stands to gain handsomely from that mobile revolution.

Here’s how it works.

The Boston-based company owns and operates 70,000 wireless and broadcast towers. And of those towers, 41,000 are located in nearly a dozen countries outside the United States., giving us solid but conservative exposure to overseas markets

American Tower operates 70,000 wireless and broadcast towers
around the world. This wireless tower is in Belleville, Michigan.

American Tower’s primary focus is leasing antenna space on multiple-tenant communications sites. The sites are rented out to wireless service providers, radio and television broadcast companies, government agencies and wireless data providers.

Its U.S. tenants include all of the Big Four service providers: AT&T Inc. (NYSE: T), Verizon Communications Inc. (NYSE: VZ), Sprint Corp. (NYSE: S) and T-Mobile US Inc. (NYSE: TMUS).

So, if you have mobile phone service, you’ve probably benefited from American Tower’s vast array of sites.

This is a company poised to profit from broad changes in the wireless world. The move to higher bandwidth for Web-surfing smartphones is driving competition among service providers, meaning they all need more towers.

Not only are mobile phones and tablets selling briskly, but so are apps, games, music and videos. These all add up to more traffic that requires more cell towers.

Founded in 1995, American Tower has been on a tear over the last several years, posting a series of double-digit sales gains. This is a company that benefits greatly from the old real-estate maxim – “location, location, location.”

Sixty-five percent of its U.S. towers are located in the top 100 markets.

And American Tower could gain even more heft. Later this month, the U.S. government is set to auction off radio frequency airwaves that can be used for wireless transmissions.

AT&T, Verizon and T-Mobile are expected to bid. In turn, Verizon is considering the sale of 12,000 of its cell towers, and American Tower has expressed an interest, though the two sides have not agreed on price or terms.

Even without all those new locations, American Tower still faces a lot of growth as wireless service providers keep adding new customers and needing more space for all that infrastructure equipment.

Plus, the company is working with commercial real estate companies to locate cell equipment on rooftops and have American Tower manage the systems. The company also provides Wi-Fi services for offices, restaurants and retail stores.

Ringing Up the Numbers

In the second quarter, management raised its outlook for the year due to what it called “favorable leasing demand for communications real estate.” It followed up with an overall strong third-quarter financial report.

Sales in the period increased 28.5% to $1.03 billion, and operating income rose 24.6% from the year-ago quarter to $384.8 million. Compared with the similar period last year, fully diluted earnings per share rose 11% to 50 cents.

With a market cap of $39.57 billion, American Tower is trading at about $99 a share. It has operating margins of 37.7% and earns 17.8% on stockholders’ equity. It has a payout ratio of some 72% for a 1.4% yield.

So far this year, shares of American Tower have gained 24%, more than twice the S&P 500’s 10.3% appreciation.

I believe that market-beating trend will continue because American Tower offers investors a winning combination – a steady annual dividend yield of about 1.4% and huge growth.

I see its stock jumping 15% within the year.

All of which makes American Tower an intriguing tech play – the company in a breakout sector that promises wealth through tech. Yet its stock offers us the kind of stability that lays a solid foundation for your portfolio.

4 Responses to A REIT to Avoid – And One to Buy Now

  1. Ric says:

    Mentioning Sears and Tower is a very interesting juxtaposition of words. You see, there was once an ivory tower called the Sears Tower in Chicago. And every once in awhile, management would come down from the ivory tower to inspect their empire. Unfortunately, they would announce their visits, so we make sure that all the shelves were fully stocked and the store was fully staffed. Then, management, after seeing that everything was fine, would go stick their heads back in the clouds at the ivory tower. The reason, of course, that SHLD shot up on the news wasn’t because people thought that Sears would turnaround. Oh, they bought SHLD (which I sold in 2005 after they bought K-Mart) because they figured that the property is worth more than the business. In San Mateo, CA, that property may be turned into a cinema multiplex with surrounding retail and restaurants; in other words, the property will be optimized, and it will not be a Sears store. In fact, the talk is that the retail will be a Target store. I did a stint at Target to see what it was like working for them and I do own Target shares. Ah, now you see how i research my stock purchases and sales … I work undercover, ha ha.

  2. Jim Leavenworth says:

    The article confirms that American Tower is a REIT, yet toward the end of the article it is stated the company sports a 72% payout ratio, this despite the fact that REITs are required to return no less than 90% of earnings to its shareholders. A clarification is in order.

  3. SAM says:

    Your reco about American Tower is confusing. It is a high priced share at $99 yielding only 1.7% which is too low for a REIT. We invest in REITS for the high yield and this should not be classified as a REIT.

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