Real estate investment trusts, or REITs, have long been a cornerstone of the dividend investor. And while REITs are known more for their dividends than anything else, the truth is you can earn some very substantial capital gains if you invest in the right ones.
There tends to be too much focus on the dividend as a result. While I’m not going to complain about a high-yielding REIT, if I can get one that throws off less of a dividend but will have a combined total return higher than the higher-paying one, I’m going to go with the one that yields less.
REITs do go through cycles, and those cycles tend to be very pronounced. REITs will do very well for a while, then all of a sudden, there will be some piece of bad news in real estate, and all REITs struggle and correct by 10% or 20%. That’s healthy for the market. You should definitely have some representation of REITs in your long-term diversified portfolio.
Here are three REITs that I think are still undervalued, despite having some pretty good returns over the past two years.
REIT 1: STAG Indl Inc/SH (STAG)
STAG Indl Inc/SH (NYSE:STAG) stands for Single Tenant Acquisition Group. This REIT has a very interesting approach, which is to acquire single-tenant industrial properties.
Normally, you might expect REITs to go after properties that have multiple industrial tenants, permitting diversification in the cash flow stream. However, like any sector, if a company is able to pick out true quality tenants that have great payment histories, the single-tenant approach can be very lucrative.
In addition, the company doesn’t just go after single tenants willy-nilly. It focuses on secondary markets because those markets require less money to improve and maintain the properties. The further one goes out from major urban centers, the less the maintenance and upkeep cost.
STAG presently owns 360 buildings in 37 states. Its stock has returned almost 18% annually over the past eight years, and it has a dividend yield of 5.6%. I think that, based on this growth trajectory, the REIT is undervalued.
REIT 2: Braemar Hotel & Resorts Inc (BHR)
Braemar Hotel & Resorts Inc (NYSE:BHR) is a new name for Ashford Hospitality Prime, the owner of upscale and luxury resorts around the country. These include the Ritz-Carltons in St. Thomas and Sarasota, the Bardessono Hotel and Spa in California, and The Sofitel Chicago magnificent mile, just to name a few.
There have been numerous changes over at Braemar, following a nasty proxy fight a couple of years ago. Management made peace with the opposing party and added some directors to the board. The CEO resigned and moved into the position as chairman. Some assets were sold, shares were repurchased, and the dividend was bumped up.
I don’t believe that the earnings power of these resorts are reflected in the stock price. One of the things that Braemar does when it purchases a property is to enhance the property, using the expertise that Braemar has in its management staff.
REIT 3: Hersha Hospitality Trust (HT)
Speaking of hotels, you might want have a look at Hersha Hospitality Trust (NYSE:HT). This is a small hotel REIT with 49 properties in gateway cities around the country including Boston, Philadelphia, New York, Washington DC, Miami and others.
One of the most important metrics investors should look at with hotels is revenue per available room (RevPAR). Hersha has seen gangbusters numbers in some of its markets, with RevPAR increases of 20% in Florida, 10% New York City, 6% in Boston and 5.5% on its West Coast portfolio.
From the perspective of debt, the company has a weighted average interest rate of only about 4%, and averages about four years before maturity.
It has a dividend yield of 6% and a price-to-AFFO valuation of only 8.8. That’s way toward the lower end of the valuation scale. Insiders have been buying up shares.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance, and is the Manager of The Liberty Portfolio at www.thelibertyportfolio.com. He does not own any stock mentioned. He has 23 years’ experience in the stock market and has written more than 2,000 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.