Atmosphere Right for REITs

 | Sep 24, 2013 | 10:00 AM EDT  | Comments
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Stock quotes in this article:

edr

,

cldt

The 10- treasury yield has pulled back to the 2.7% level after touching 3% earlier this month. The driver of the pullback was Wednesday's decision by FOMC to pass on "tapering" for now. The market, however, was expecting some drawing back from the $85 billion a month the Federal Reserve is currently purchasing of government and mortgage debt.

I believe the Federal Reserve is on hold for the rest of the year as it transitions to a new Fed chairwoman and waits for some signs of stronger economic and job growth. It will also be hoping that Congress and the Obama administration can get through the upcoming debt limit and budget talks without doing anything that could derail the already tepid economy.

The 10-year looks like it is probably in a 2.5% to 3% range for at least the near term. REITs become more attractive in this environment. They provide good yield, interest rates have stabilized and property values should continue to appreciate provided the economy continues to bump along.

In addition, commercial and mortgage REITs were one of the best performing sectors during the debt limit debacle of 2011. It looks as if we could be heading for a repeat of that episode soon (more on that in another column this week). Investors looking for yield at attractive valuations within the sector should consider the two following REITs.

Education Realty Trust (EDR) is one of America's largest owners, developers and managers of collegiate housing. The REIT owns or manages 67 communities in 24 states with more than 37,000 beds. The shares are down some 20% from recent highs due to the recent sharp rise in interest rates. Insiders seem to believe this pullback is a buying opportunity as several have added over $300,000 in new shares over the past two months.

The shares yield a healthy 4.7% and the company increased its payout by 10% earlier this summer. The company recently divulged that fall 2013 same-community pre-leasing occupancy was 93.6%, a 290-basis point improvement over the prior year. It also noted it is seeing 3% to 5% rent increases across the communities it owns and manages.

Organic growth and new development are powering over 25% revenue gains this fiscal year and current analyst projections call for almost a 20% increase in FY2014. The company has a solid balance sheet, has more than doubled operating cash flow since the end of FY2010 and the stock provides a low beta which should appreciate if market turmoil rises in the coming weeks.

Chatham Lodging Trust (CLDT) is a real estate investment trust that invests in upscale extended-stay and premium-branded hotels. The company owns interests in 74 hotels totaling 10,117 rooms/suites, comprised of 22 hotels it wholly owns with an aggregate of 3,022 rooms/suites in 12 states and the District of Columbia. It also holds a minority investment in two joint ventures that own 52 hotels with an aggregate of 7,095 rooms/suites.

I have held this REIT since April of 2012 when I first profiled it on these pages. It has appreciated more than 40% since then, not including dividends. It is still attractive as the company continues to execute well and I added some to my position when the stock experienced a 10% dip on rising interest rates this summer. The hotel sector continues to show improving occupancy and increasing revenue per available room.

The REIT yields 4.3% and pays a monthly dividend. Most of its properties have been recently renovated and the company is run by Jeffrey Fisher. Fisher took Innskeeper Trust from seven hotels in 1994 to 74 hotels in 2007 before the company was eventually sold. He produced average low double digit annual returns for shareholders over that time frame. Revenue growth is tracking to better than 15% gains this fiscal year and CLDT sells for 12x forward funds from operations.

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