In REITs We Trust

 | May 21, 2012 | 10:00 AM EDT
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The market has been frustrating for investors over the past two months, as the indices have given up most of their gains from the first quarter. The markets are starting feel a bit oversold, even with the legitimate concerns around whether Europe can resolve its debt crisis.

Although still defensive, I am starting to put some of my dry powder to work, especially in equities that pay strong dividends and have low valuations. One sector that is showing improvement is commercial real estate investment trusts. Occupancy rates are increasing, lease rates are starting to move up, earnings have a long way to go before they get back to pre-crisis levels and financing conditions are improving, allowing operators to restructure their balance sheets on favorable terms.

Here are two REITS that I like right now.

Kite Realty Group Trust (KRG) owns interests in a portfolio of 62 operating and redevelopment properties that include shopping malls, parking garages and other commercial assets with three more properties currently in development. Four reasons KRG is a solid buy at under $5 a share:

  • Over the past year, insiders have been net buyers of shares and the company has been in business for more than 40 years and seen its share of business cycles. Its peak earnings of 2007 were $1.26 a share.
  • The stock yields just below 5%. The payouts have been stagnant since it had to cut back significantly during the financial crisis. However, its operating cash flow has increased 60% to 2011 from 2009, so look for the company to begin increasing distributions in the next 12 to 18 months.
  • The stock is cheap at less than 11x forward earnings and just 94% of book value. Leasing activity has shown slow, consistent improvement, rising to 93.3% from 90% between the first quarter of 2010 and the fourth quarter of 2011. It has a very solid tenant base that includes Publix Super Markets, Ross Stores (ROST) and PetSmart (PETM).
  • The median analysts' price target for the stock is $6 per share. Standard & Poor's has a Buy rating and a $6 target.

Mack-Cali Realty (CLI) invests in office and office/flex buildings and developable land primarily in the eastern U.S. Four Reasons CLI is a buy at just over $26 a share:

  • CLI yields a robust 6.7% and Fitch just affirmed its "BBB" credit rating. The company produced earnings of $3.56 a share before the financial crisis, about 40% above current levels.
  • The company has met or beaten earnings estimates each of the last four quarters. Two of beats were more than 30% above consensus.
  • The stock is selling at a very reasonable 10.3x forward earnings and just over 8x operating cash flow.
  • S&P has a Buy rating and a $32 price target on CLI. The median analysts' price target is $30 a share.

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