Friday, November 8, 2013

REITS: An Unloved Sector for Dividend Investors

On Friday, a day when the markets were up strongly, most REITS suffered 2 – 3% losses. This is a sector that has gone from market darling to dog in less than 6 months, with many stocks down 20% or more from their highs for the year. But as value and dividend investors know: where there's heavy selling, there's potential opportunity.

With low interest rates, and a recovering real estate market, many REITS have been on a buying binge this past year that initially excited the markets and pushed up prices, but now the hangover is setting in, leaving some possible bargains to nibble away at.

The sectors I currently like in REIT-dom are health care and triple-net. With the aging of America, I expect hospitals, doctor offices, and senior care facilities to do well, and this area tends to be recession resistant and hasn't suffered from overbuilding that has hurt other areas. Triple-net REITS have historically more consistent performers than say office buildings and provided greater diversity and less tenant risk. Most triple-net REITS maintained their dividends through the most recent financial while retail and office REITS were forced to cut their dividends.

Some REITS on my watch list include:

NameTickerCurrent PriceP/FFOYieldBuy Price
Omega HealthcareOHI$31.4512.56.10%$30.00
Healthcare Trust of AmericaHTA$10.7917.95.33%$10.50
Realty IncomeO$40.0617.05.45%$39.00
American Realty Capital PropertiesARCP$12.5814.97.24%$12.50
W. P. CareyWPC$64.1415.65.36%$62.00
Medical Properties TrustMPW$12.8112.86.25%$12.50

Investors should be aware that REITS are highly leveraged investment vehicles and because they are required by law to payout a large percentage of their earnings as dividend, they usually raise money for investments through borrowing and by issuing new common or preferred shares. Quality of management is key to whether REITS will be able to grow their dividends and share price over time.

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