After rising quickly over the last couple of months on the back of talk that the Federal Reserve would soon taper its quantitative easing (QE) program, the 10-year Treasury yield seems to be encountering some significant resistance at the 3% level. I think interest rates are at or near their highs for the year. I don't believe job and economic growth are strong enough to be able to support yields much higher than this. The recent rise in rates has already curtailed mortgage refinancing activity substantially and will have other negative economic impacts if they rise further.
In addition, when the Federal Reserve does take action, it will likely be through several small steps of reducing mortgage and government debt purchases. Armed with this outlook, I continue to allocate more funds into some of the high yield sectors of the market that have underperformed recently as interest rates have risen.
I particularly like some opportunities in real estate investment trusts (REITs). After recent declines, the sector is offering much better entry points and higher yields. Here are two REITs that offer significant yield and are attractive at these levels. Insiders have been buyers of both stocks at this year as well.
Agree Realty (ADC) owns a portfolio of 124 properties, mainly single tenant facilities that are located in 33 states. The stock traded at $34 a share a few months ago but has fallen back to the $28 level as interest rates have moved up. The decline has brought ADC down to the same level at which myriad insiders bought more than $2 million in shares earlier in the year.
The stock provides a healthy yield of 6.1%. Revenues are tracking to better than a 20% gain this year as the company has made several acquisitions of single tenant buildings. The company has a stable tenant base with clients that include Wal-Mart (WMT), PetSmart (PETM) and Starbucks (SBUX). The stock provide a reasonable valuation given its yield of just over 12x forward FFO (funds from operations), a discount to its five year average (18.0).
Healthcare Trust of America (HTA) focuses on medical office buildings and healthcare-related facilities. The company has a well-diversified collection of healthcare properties in 27 states with just under 13 million square feet of leasable space. About two-thirds of the company's overall property portfolio was acquired from 2008-10 when real estate values were lower as a result of the financial crisis.
The company is well positioned to benefit from the impacts of the Affordable Care Act. This set of policies should drive more office visits from individuals that were previously uninsured as well as to accelerate a long-term trend toward more outpatient services. This should increase demand for the very medical professionals and organizations that lease the company's properties.
HTA provides a healthy yield of 5.5% after the stock's recent 20% drop. Insiders have been frequent buyers of stock over the last six weeks at this price level and they own approximately 10% of the company. Healthcare Trust has a strong balance sheet with a low average weighted interest rate and staggered debt maturities. The company also has more than doubled its operating cash flow since the end of fiscal 2010.