What the World's Largest Sovereign Wealth Fund Will Buy Soon
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The NBIM executive quoted in the Journal article stated, "We like having partners -- 50% owners or thereabouts." For tax purposes the SWF will set up domestic REITs in the U.S. in which it plans to hold, at most, a 49% stake. "I don't know when we will get comfortable with other structures," he said.
Gateway cities like Boston, New York and Washington with strong prospects for both population growth and economic expansion are the SWF's priorities. The NBIM executive wants areas where there is a lack of real estate supply, "...though he acknowledged that staying in that tight-knit pocket of markets could have the fund missing out on activity in other hot markets like Dallas or San Francisco."
Like all disciplined and selective investors, the SWF of Norway knows that it'll probably miss some great deals in those hot markets, "...but we're OK with that," the executive said. That's the way some of the largest REITs in the U.S. operate as well.
Examples include Vornado Realty Trust (VNO) , a New York-based REIT that specializes in mainly commercial property. VNO has a market cap of $14.75 billion and a dividend yield of around 3.5% with a payout ratio of 93%. The chart below shows its one-year price and free cash flow history. VNO trades at a forward PE of 15.54.
VNO data by YCharts
A very unique way to participate in the office REIT space is with Government Properties Income Trust (GOV) , an office REIT with about $1.7 billion of office properties in 31 states and Washington D.C. As its name implies, it likes to rent properties to government tenants. In fact 71% of GOV's annualized rental income comes from the federal government.
GOV pays a generous 7.4% dividend representing a payout of 158%. Its total debt in the most recent quarter ending Sept. 30 was a staggering $610.71 million, which is high for a REIT with an operating cash flow (TTM) of $99.28 million.
Its revolving credit line is approximately $550 million. You can visit its informative Web site to see the latest quarterly earnings results and GOV's credit rating. Oftentimes a higher yield and payout ratio means that the credit rating will be lower than a more conservative REIT like VNO, which only yields 3.5%.
Getting back to the Norwegian SWF, before it expands to areas like Asia it will scour the U.S. market for the best real estate deals. The SWF is "looking for partners with a long timetable as well as deep pockets. The fund is set up to hold investments for decades if need be," meaning it may hold a piece of property through a number of boom-and-bust cycles, according to the Journal article.