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Finding Values in a REIT Bubble

Look for high yields to find attractively valued REIT plays

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I liked the fact that American Realty Capital Properties is a REIT that is trying to make strategic accretive acquisitions in order to expand and increase FFO per share. I view ARCP as a company that could potentially become the next Realty Income. Since this REIT has only been publicly traded for less than 2 years, it trades at a premium to more established REITs such as Realty Income and National Retail Properties.

I also put Realty Income on my watchlist for potential trimming of my position there. I believe that Realty Income is a fine buy at 43 cents per share, which translates to a 5% yield. However, if it trades above 54 cents per share  it is richly valued. At current valuations, I will consider selling some at the $62-$72 per share zone. This is equivalent to a yield of 3% to 3.50%. In the meantime, I will be sitting tight and reinvesting my dividends in other stocks.

I do like the fact that the REIT has managed to maintain and grow distributions. I also like the diversified nature of the tenant base, and stability and quality of cash flows. I believe that Realty Income is the Coca-Cola (KO) of REITs, but at yields below 4% it looks overvalued. At yields below 3.50% I am going to start trimming my position in it.

My last purchase was in 2011, when my entry yield of 5% made me afraid that I am purchasing at the top. The REIT has managed to boost FFO substantially since then, which is why a valuation in the low 40s is fair.

Full Disclosure: Long O, DLR, ARCP, OHI

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