Tuesday, August 24, 2010

A Small Cap REIT With A Nice Dividend Yield

Let’s take a look at a small cap stock that you have probably never heard of. This company operates in the real estate industry and makes it money leasing space to tenants. As investors already know REIT’s pay some of the best dividends in the stock market. This is because REIT’s are required to distribute 90% of their earnings back to shareholders.

Saul Centers (BFS) is a tiny retail real estate investment trust. The mall operator manages a real estate portfolio of 52 shopping centers and office properties. The majority of the company’s properties are located in the metropolitan Washington, DC/Baltimore area. Eighty percent of the company’s revenues are derived from this region.

Saul Centers has a $750 million dollar market cap and has earnings of $160 million dollars annually. The company has done surprisingly well surviving a difficult economic environment for mall owners. Many REIT’s such as General Growth Properties were driven to the verge of bankruptcy by huge debt loads and declining mall rents. Saul Centers has been able to lease out 92.9% of its existing property space. There are other encouraging trends at Saul Centers.

The company saw a 1.4% increase in net income and a 0.8% increase in same property revenues. This is very encouraging in a sector in which many mall operators are struggling to lease out space especially anchor stores. Saul Centers took advantage of the low interest rate environment and recently refinanced nearly $100 million dollars worth of debt set to mature in two years. The refinancing lowered the company’s debt maturing to below $70 million.

Company management has been buying stock personally. It’s always encouraging when the CEO is buying shares of his own company. It shows that the CEO believes in the direction of the company. CEO B Francis Saul II recently bought $3.6 million dollars of the company’s stock. This is a significant amount of compensation for a CEO that only makes $180,000 in salary.

At $40 a share, the stock currently sells for 17 times this year’s earnings. Saul Centers is attractive because of its 3.5% dividend yield. This is actually lower than the historical dividend yield of 4.1%. The company is currently paying out $1.44 per share to shareholders. The company should be able to sustain its dividend. The current payout rate is 62% and the refinancing has lowered the company’s debt servicing costs. The company has increased its cash position from $20 million to $28 million dollars and has been able to generate $68 million dollars in free cash flow.

An improving cash position and better debt outlook makes Saul Centers Inc. a nice dividend play.


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