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3 Odd, High-yielding REITs to Play the Real Estate Rebound

‘Specialty’ REITs Blend Attractive Distributions With Targeted Growth Sectors

By Susan J. Aluise, Aviation, Auto & Transportation Writer

After being left for dead in the second half of 2013, real estate investment trusts (REITs) have surged by more than 10% in the first four months of this year — not too shabby considering that the S&P 500 only inched up 1.5%.

reits-dividend-yieldREITs are a great way for the individual investor to add real estate exposure to their portfolio without all the hassles that come along with being a landlord. Because of the specific federal rules under which they are organized, REITs offer big advantages for income investors. REITs are required to pay out 90% of their annual earnings to investors and they are exempt from federal corporate taxes, meaning that dividends are taxed as ordinary income. Steady and predictable rent payments also are an attractive quality because cash flow tends to be more stable than is often the case with other types of investments.

While investors have chased the stellar returns of mortgage REITs (mREITs), which invest in mortgages rather than real property, the near-certainty that short-term interest rates will rise this year will weigh on big mREITs like Annaly Capital Management (NLY). Popular commercial property REITs like Equity Residential (EQR) and AvalonBay Communities (AVB) are trading near five-year highs now, so I’d prefer to wait for a pullback before buying.

Still, investors looking for winners in this year’s REIT rebound might find greater opportunity on the road less traveled: specialty or niche REITs. Fortunately, there are some good REIT opportunities to be found in strange places. Here are 3 odd, high-yielding REITs to play the real estate rebound:

Omega Healthcare Investors (OHI)

reits-dividend-yieldYear to Date Performance: +22%
Current Dividend Yield: 5.5%

Obamacare has lifted healthcare stocks and REITs, and Omega Healthcare Investors (OHI) is no exception. Omega has a core asset portfolio of 547 facilities with approximately 60,000 operating beds, distributed among 49 third-party operators, located within 37 states. OHI’s business strategy focuses on using its existing tenant partners to source deals and deploy capital — a particularly strong strategy in the increasingly competitive market.

After soaring more than 19% year-to-date, some analysts believe OHI is due for a fall. But the stock still has plenty working in its favor. OHI’s beauty starts with that 5.7% current dividend yield and continues on with last month’s dividend increase. In fact, OHI has increased dividends reliably for the past 12 years. Beyond that, healthcare and real estate are both growth sectors, so OHI gives investors a double-whammy. OHI also has a high concentration of properties that focus on seniors — and the greying of America is a demographic shift that will continue to pay off for the foreseeable future.

In short, buy OHI for the promise of growth; hold it for the dividends.

EPR Properties (EPR)

reits-dividend-yieldYear-to-date Performance: +10.5%
Current Dividend Yield: 6.3%

If you’re looking for a REIT that invests in fun, has a white-hot dividend and is experiencing strong earnings growth, EPR Properties (EPR) is not a bad pick.

EPR owns, leases and manages entertainment properties like movie theaters, ski properties and other recreational and specialty properties. The company’s investments in public charter schools operated by Imagine Schools have been challenging over the past couple of years, but EPR was able to sell several schools at a profit in the first quarter. Last month, EPR’s first quarter EPS of $1 on revenue of $89.9 million beat Wall Street’s expected 96-cent EPS and $67.7 million top line.

EPR acquired an 11-theater chain during the quarter that is under a triple-net lease to Regal Cinemas (RGC) — a good move because triple-net leases deliver high dividend yields at lower risk. EPR also is benefiting from a surge in recreation property performance — particularly its golf and skiing segment.

The REIT has made progress strengthening its balance sheet and reducing its debt — both strong positives for shareholders, as is the 6.5% current dividend yield.  EPR’s PEG ratio of 1.88 seems high, but its forward P/E of 12.3 is on the low side of the sector.

Digital Realty Trust (DLR)

reits-dividend-yieldYear-to-date Performance: +20%
Current Dividend Yield: 5.6%

If you’re looking for a REIT that has tapped into tech growth, Digital Realty Trust has got to be near the top of your list. DLR invests in data centers — the IT backbone of large companies that increasingly run on big data and mission-critical enterprise applications.

DLR has had some recent challenges: The stock slipped 28% last year, and CEO Michael Foust abruptly resigned in March — CFO Bill Stein has stepped in while DLR looks for Foust’s replacement. But that leadership change provided a great opportunity or DLR to rethink its business model. Last month, the company hired Scott Peterson as chief investment officer — Peterson is leading an in-depth evaluation of all of the company’s data center assets.

In addition to offloading the worst-performing properties, DLR is transitioning to offer more profitable value-added IT services in those data centers to boost earnings. In the past, DLR has focused on meeting the space and power needs of its global customer base. The REIT currently has a total of about 130 properties in North America, Europe and Asia.

On Tuesday, DLR reported first quarter earnings (referred to as funds from operations) of $1.22 a share on revenue of $391 million — an increase of 5% and 9% respectively from the same quarter last year. This is a growth strategy — particularly given trends toward data center virtualization and cloud-delivered enterprise applications. Although DLR’s PEG ratio of 1.87 is pretty high, its forward P/E of less than 11 is attractive from a valuation standpoint. The 5.6% dividend yield looks even better.

As of this writing, Susan J. Aluise did not hold a position in any of the aforementioned securities.

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