Weeks and months after the changes began to show up in Portfolio Grader, Wall Street is becoming more bearish on the larger real estate investment trusts. These REITs had recovered nicely from the bottom of the real estate and credit crisis, but some of them are so large that they simply cannot grow revenues and earnings fast enough to receive a high ranking. As institutional money flowed into larger projects, it became difficult for these companies to invest their cash in deals that could produce sparkling fundamentals.
But in yet another case of Wall Street groupthink, many investors have turned negative on the whole sector. This is exactly the wrong move — smaller and specialty REITs are still demonstrating the type of powerful fundamentals that lead to high grades in Portfolio Grader.
A prime example of a specialty REIT with outstanding fundamentals is Geo Group (GEO). The company provides prison management services in the U.S., Australia, Canada and the United Kingdom. As governments at all levels look to lower costs, they have increasingly turned to outsourcing for many services — Geo Group is a beneficiary of this trend. Analysts have been raising their estimates for the REIT as the strong fundamentals of this business become more apparent. The strong earnings growth and momentum is the type we expect to see in the very best stocks, and GEO gets a “buy” rating from Portfolio Grader. In addition to the appreciation potential powered by superior fundamentals, the REIT yields over 5%.
Chatham Lodging (CLDT) invests in upscale extended-stay hotels around the United States. It owns 20 hotels outright and has a minority interest in a joint venture that owns 52 more. The REIT recently reported an outstanding first quarter, with solid increases in EBITDA as well as funds from operations. Results beat estimates across the board. Chatham refinanced some of its debt on very favorable terms and completed an equity offering, with the proceeds going toward the acquisition of two hotels. The stock was upgraded by Portfolio Grader back in January and is a “strong buy” with an “A” rating.
iStar Financial (SFI) is involved in commercial real estate and provides capital to both corporate and private users of high-end commercial property. The company lends money for commercial projects, owns properties that are triple net leased and also operates a portfolio of commercial properties. As the commercial real estate market has improved, so have the fundamentals of iStar. The stock is currently rated “B” by Portfolio Grader — shares of the REIT are a “buy.”
Wall Street was late to recognize the deteriorating fundamentals of the larger REITs and has made the mistake of lumping all REITs together. Many of the specialty and smaller REITs still have best of the best fundamentals and remain on the Portfolio Grader buy list.
Louis Navellier is the editor of Blue Chip Growth.