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REITs are a great way to collect dividends and income, but I have decided to look at some of the niche REITs. The idea of specialty REITs, or 'niche' REITs as I have dubbed them, is quite intriguing; specialty REITs have all the benefits of a REIT, but with select exposure to unique industries. These REITs generally cover a variety of industries, including healthcare, storage, timber and hotel.

I touched on some of the top growth REITs in Part 1 (check them out here); now it's time to check out some of the REITs in the more niche markets, including self-storage, data centers, gas stations and movie theaters. One overbearing trend that will help lift these REITs and others is a loosening of the credit markets, which should help promote more acquisitions and new property developments. The rebounding economy and job growth will also help strengthening many of the specialty industries that the REITs below operate in, thereby helping push the REITs higher (price appreciation) while also providing investors with income (dividends).

Digital Realty Trust (DLR) is a California-based REIT that owns and manages technology-related real estate, specifically data centers, and pays a 4.1% dividend yield. This REIT is an impressive play, namely due to the rising demand for cloud computing and virtualization services. Digital Realty operates nearly 100 data centers and is a top data center provider. The key industry driver for the company remains the fact that building and maintaining data centers can be expensive, eating up large amounts of capital expenditures and operating budgets. As a result, many companies are expected to embrace the leasing of data centers and data center space, which bodes well for Digital Realty. This is all part of the cloud computing move that is taking place in the technological world.

Gartner predicts that by 2015, 10% of overall IT security enterprise capabilities will be delivered in the cloud, with the focus today clearly on web security and remote vulnerability assessment. However, there's also the expectation that there will be more cloud computing tools on the way, such as data-loss prevention, encryption and authentication (read more about data center outlook).

Digital continues to impress investors with its ability to grow FFO:

Digital Realty

2009

2010

2011

TTM

FFO Per Share

$ 3.27

$ 3.81

$ 4.53

$ 4.72

Another niche REIT is EPR Properties (EPR), which owns movie theaters and entertainment retail centers, while paying a 6.4% dividend yield. The weak consumer spending trend appears to be in reverse with declining unemployment, and so leisurely spending on entertainment, namely "going to the movies," should see a rebound. This will help boost movie theatre performance and increase occupancy -- thus helping out REITs such as EPR.

Also helping boost occupancy will be growth in the average ticket prices, thanks in part to higher mixes of premium priced IMAX and 3D tickets. EPR calls its top hedge fund owner the real estate focused AEW Capital, which is also a top owner of Public Storage (check out AEW's portfolio).

Getty Realty (GTY) is a REIT focused on ownership and leasing of retail motor fuel and convenience store properties in the U.S., and pays a 2.6% dividend yield. The oil and gas industry should perform well over the interim. The Energy Information Administration (EIA) expects oil production from shale plays to increase at an annual growth rate of 1.8% from 2011 to 2040. Fundamental drivers for the fuel industry include rising employment, which will promote greater travel, both work-related and leisurely. Getty Realty, and EPR Properties, are both loved by distressed debt and high-yield investor Howard Marks of Oaktree Capital (check out Oaktree's profile).

Public Storage (PSA) invests in self-service storage facilities in 38 states and also owns a minority interest in self-storage operations in seven European countries, and the REIT pays a 2.8% dividend yield. The self-storage market is tied to the housing market and moving, and so as the housing market begins to turnaround the storage market occupancy and pricing should be lifted. Despite a slight hiccup in 2010, with respect to its down year for FFO per share, the stock has continued its upward and to-the-right trend, steadily rising from a stock price low of $48 in 2009 to now trading over $150.

Public Storage

2008

2009

2010

2011

TTM

FFO Per Share

$ 5.07

$ 5.61

$ 4.72

$ 5.67

$ 5.96

Recent performance and metrics suggest Public could go even higher. FFO per share is expected to come in at $6.85 for 2013, and domestic occupancy was upwards of 92.0% at the end of 2012. Public Storage continues to be the largest owner/operator of storage facilities in the U.S. Its size and market positioning (operating across 38 states) gives the REIT competitive advantages in pricing power.

In closing, the price to FFO for the niche REITs stack up as follows:

Price to FFO
EPR Properties13.9
Getty Realty16.3
Public Storage25.8
Digital Realty14.9

It appears that EPR, Getty Realty and Digital Realty are three of the cheaper REITs when compared with the market, where the U.S. REIT universe trades at a P/FFO of 17 (according to Credit Suisse). What's more is that not only are Getty and Digital cheap, but according to their FFO payout ratios, both REITs have room to up their dividend payments:

FFO Dividend Payout
EPR Properties90%
Getty Realty45%
Public Storage74%
Digital Realty62%

I would be interested in taking a closer look at either Getty, which has exposure to the gas station industry, or Digital, which is an interesting play on data centers, visualization and the cloud computing markets. However, do not discount EPR too much; although the movie theatre industry is less "sexy," its 6.4% dividend yield and cheap valuation is rather "sexy" in my opinion. Public Storage is my least favorite of the four, despite its leading market share in self-storage, its relatively low dividend yield and expensive valuation leaves me cautious.

Source: Collecting Riches From REIT Niches, Part II