Real estate investment trusts have been out of favor recently as investors assess the impact of rising interest rates on the sector. Several leading income experts -- and contributors to MoneyShow.com -- see upside potential for investors seeking long-term value and yield.
Todd Shaver, BullMarket.com
The reason to own Vornado Realty Trust (VNO) is simple: the REIT's portfolio consists of a unique and unrivaled collection of real estate properties in New York City.
Vornado is as close as it gets to being a pure-play New York City real estate company, deriving 89% of its operating profit within some of the scarcest and most valuable submarkets in the world.
The property mix breaks down into high-end retail (30%, 96% occupancy), Fifth Avenue and Times Square (50%, very long-term leases), and Penn Plaza (19%, a central transportation hub primed for a once-in-a-lifetime redevelopment).
Vornado has ventured outside New York City only to bid on the most prestigious properties in the country's most thriving cities. It owns the prime franchise assets in San Francisco (555 California Street) and Chicago (the Merchandise Mart), which together account for 11% of net income.
Now is the time in the cycle when the smart real estate investors sell properties and build up cash. Vornado built cash and sold assets in the most recent quarter, taking the conservative long-term approach we want to see. They also pushed away from acquisitions at top prices.
They identified another $1 billion of assets to be sold, including the 666 Fifth Avenue venture with Kushner Companies, which Vornado is reportedly negotiating to sell back to its partner.
All in all, the company is in great shape for whatever is to come, whether it means weathering a weaker economy or going on offense if opportunities to buy new properties emerge.
With trophy assets coveted worldwide and a best-in-class management team now focused exclusively on dominating the NYC market, the track record of value creation looks likely to continue. Should market conditions get challenging, a solid balance sheet will protect the company.
And the crown jewel: Net Asset Value (NAV) currently stands at $96. We are getting a bargain discount picking up shares at current levels. Could this stock someday trade at a premium to net asset value? Absolutely!
Chloe Lutts Jensen, Cabot Dividend Investor
We haven't had a REIT in our portfolio for some time, because anticipation of Fed rate hikes has made the sector volatile and unrewarding in recent years. However, I suspect rate hike expectations have plateaued for now. Markets already expect three or four hikes this year.
I've had my eye on STAG Industrial (STAG) for a while. I like the REIT's focus on warehouses (over 80% of their 356-property portfolio), which are in high demand from e-commerce companies competing to ship faster and faster. The federal government is also a major tenant.
And I like their track record: funds from operations (or FFO, a widely-used measure of REIT cash flow) have increased every year since the REIT came public in 2011. Last year, adjusted FFO increased by 29%.
Most importantly, the REIT pays monthly dividends. STAG's history of dividend payments isn't long (seven years), and its pace of dividend growth is slow (about 3% over the past five years), but payments have been steady and the stock's payout ratio is reasonable for a REIT (84% based on FFO).
Finally, the stock is at an attractive entry point. STAG just completed a 20% correction as interest rates surged, finally finding support in early February. That's a big drawdown (risk is always higher with high-yield stocks) but presents a good buying opportunity for us. It also defined a nice support level around $22.50 to watch should things go south.
The warehouse REIT will report first-quarter earnings May 1, after the close. Risk-tolerant high yield investors can buy STAG here for monthly income. Word of warning to the tax-sensitive: the dividends don't qualify for the lower dividend tax rate.
Ned Piplovic, DividendInvestor
Getty Realty (GTY) is a REIT that specializes in the ownership, leasing and financing of gas station and convenience store properties. Its property portfolio recently consisted of 907 properties; nearly half of its current properties are in the New York-New Jersey-Connecticut tri-state area.
The property leases typically have initial terms of 15 or 20 years with successive renewal terms of up to 20 years. The company's current weighted average remaining lease term, excluding renewals, is approximately 11 years and 50% of current leases mature after 2028. Additionally, 89% of Getty Realty's net lease portfolio is under unitary or master leases, which reduce credit exposure from individual sites.
The company's current $0.32 quarterly payout is 14.3% higher than it was in the same quarter last year. This current quarterly payout converts to a $1.28 annualized distribution and a 5.2% yield, which is 13.6% higher than Getty's own 4.6% average yield over the past five years.
Over the past two decades, the REIT cut its dividend only once, in 2012. Since resuming consecutive annual dividend boosts in 2013, the company has enhanced its annual payout more than five-fold by hiking its annual distribution at an average rate of more than 31% per year.
In addition to the steadily growing regular dividend, the company also paid special dividends ranging from $0.05 to $0.22 in three out of the last four years.
After a brief dip to $23 in early July 2017, the share price ascended 30% and reached its 52-week high of nearly $30 by October 17, 2017. However, the REIT lost all those gains before bottoming out in early February.
Barring any unforeseen developments, the current share-price pullback might be a good opportunity to take a long position at discounted prices in a stock with a good record of rising dividend income. Such a purchase also may coincide with asset appreciation in the coming year.
John Dobosz, Forbes Dividend Investor
Each day I scour the market for opportunities in stocks; I focus on stocks that have safe and generous yields, usually averaging 4.5%. Here's a look at two of the holdings in our Top 25 model portfolio, both real estate investment trusts.
West Palm Beach, Florida-based Chatham Lodging Trust (CLDT) is a real estate investment trust that invests in upscale and premium-branded hotels.
Chatham owns interests in 135 hotels with 18,516 rooms, including 40 wholly owned properties with 6,018 rooms, in 15 states and the District of Columbia. It also owns a minority interest in two joint ventures with 95 hotels and 12,498 rooms.
Revenue this year is expected to climb 5% to $313.9 million. Chatham is a monthly dividend-payer.
Chatham produced a 10.7% total return for us in the Top 25 from April 21, 2017, through February 9, 2018, when we got rid of Chatham Lodging because it violated a 10% trailing stop. The stock was at $20.88 in February, and it went on to drop to lows near $18.
In addition to the monthly dividend and discounted valuations relative to history, what's also encouraging about Chatham Lodging is a rash of buying in the past two weeks by company insiders, including the chief executive officer, chief operating officer and chief investment officer.
Before the downdraft in the overall REIT sector this year, Omega Healthcare Investors (OHI) had already taken its lumps last fall when the Hunt Valley, Md.-based nursing home and assisted living facility REIT took a big charge for the impact of its biggest tenant's failure to pay rent.
Following Orianna Health Systems' bankruptcy filing the week of March 9, Omega has new tenants at 23 facilities, and it will be selling 19 of its properties.
The shares trade at substantial discounts to five-year valuations, and insider buying, including a $2.8 million purchase by a director at prices above $28, reinforces the idea that shares are cheap and reflect the reality of market conditions.
Mark Skousen, High-Income Alert
American Assets Trust (AAT) is a real estate investment trust headquartered in San Diego. The trust formed in 2011 as a successor to American Assets Inc. -- a privately held real estate business with decades of experience and knowledge of its core real estate markets.
The company has been in operation for more than 50 years and has significant investments in some of our nation's most dynamic and high-barrier-to-entry real estate markets in Northern and Southern California, Oregon, Washington and even Hawaii.
It now boasts a real estate portfolio of 3.2 million rentable square feet of retail space and approximately 2.7 million square feet of office space.
Ernest Rady has been the company's president, CEO and chairman since 2015. And, in addition to running the company, he has been making a huge personal bet on the company's future success.
In recent weeks, he purchased 369,691 shares, an investment of more than $11.8 million. These are only his latest buys. He owns a total of more than 8.2 million shares.
This may seem surprising given that earnings declined 20% in the most recent quarter. But look forward, not back. Earnings are likely to hit $0.73 a share this fiscal year and then climb 33% in the year ahead.
In a conference call following the release of recent quarterly results, Rady said, "Great real estate can be priced cheaper on Wall Street [than] on Main Street."
He said he continues to be a regular buyer of the stock because he knows and understands the intrinsic value of the trust's portfolio. He's not the only one. There has been significant cluster buying here -- multiple buys from several insiders.
In addition to excellent trading potential with this trust, you'll also collect a 3.36% yield that is virtually certain to rise in the weeks ahead. So, pick up American Assets Trust at market. And place a sell stop at $26 for protection.
-- This commentary was originally published on April 20.