REITs have always been on my radar, as part of holding real estate in a long-term diversified portfolio.
There are so many REITs, though, that it can be a challenge to find ones that not only offer great dividends, but offer the chance for outsized capital gains.
Like the overall economy and the stock market, REITs can be broken into sectors. You can invest in industrial, mortgage, office, retail, residential, hotel or specialized REITs. Some approaches involve having a solid understanding of each sector and rotating investments among them.
I find that to be too complicated. I just don’t have the time. Generally, I stick with areas that I either understand, or can learn about fairly quickly.
I’ve found three interesting REITs that are worth taking a close look at, because I think they offer a shot at strong yields and big capital gains.
REITs that Are Dividend Machines: Whitestone REIT (WSR)
Shopping centers can be a boom or a bust, depending on multiple factors, but Whitestone REIT (WSR) seems to have cracked the code.
WSR owns 69 retail properties, most of which are in Texas and in Phoenix. It chose these areas because they all have booming population growth. Then it drilled down and sought properties that were distressed, since it has an expertise in turning around those kinds of properties.
Specifically, though, it plays in a niche that caters to community and neighborhood shopping centers. The idea is that these aren’t big, centrally located regional malls. They are the local malls that have grocery stores and other convenience-related stores that people need to use on a daily basis. Therefore, they are not as likely to get burned in an economic downturn.
WSR is paying a lovely 7.62% dividend, and has a solid debt structure, with weighted average debt of 4%, with spread-out maturities.
REITs that Are Dividend Machines: Omega Healthcare Investors Inc (OHI)
With our population continuing to age, the right skilled nursing REIT could make a big difference in your portfolio.
Omega Healthcare Investors Inc (OHI) owns over 900 skilled nursing facilities over 42 states and the United Kingdom. One of the things I like about OHI is that almost 90% of its revenues are coming from Medicaid and Medicare. That’s guaranteed payment from the government, folks. It doesn’t get better than that.
Well, it gets better in that there will be no shortage of baby boomers moving into old age, so there should be plenty of business for OHI. In the meantime, it continues to purchase facilities.
Its ability to fund its dividend is not in question, as adjusted funds from operations continues to increase from quarter to quarter and is now at $0.75 per share.
It has also been increasing that dividend over the past 15 quarters, and the 6.82% dividend is only 70% of AFFO. So there’s room for it to go higher.
REITs That Are Dividend Machines: Ashford Hospitality Prime Inc (AHP)
Finally we come to Ashford Hospitality Prime Inc (AHP). This hotel REIT, which owns 11 upper-upscale and luxury properties, beat back an ill-advised proxy fight by a hedge fund for control of the company. It was apparent from numerous pieces of evidence that this hedge fund just wanted to sell AHP and make a quick few bucks on its investment.
I’ve argued that this would be foolish since the assets were worth $22-$27 per share.
After the proxy fight ended, a 5% stockholder made a $20 buyout offer for AHP. Management has considered the offer and believes it is too low, a statement I agree with. Of course, you have to figure that given all the drama that a hedge fund would lowball AHP.
The stock trades at $14, which is ridiculous considering a third party clearly believes it is worth $20. Earn a 3.31% dividend while waiting for the inevitable buyout.
As of this writing, Lawrence Meyers owned shares of WSR, OHI and AHP.