Finding High Yield In Real Estate

Includes: BMR, OLP
by: Bret Jensen

Real Estate Investment Trusts (REITs) have been under pressure over the last three months as interest rates have shot up. Talk of "tapering" by the Federal Reserve has driven the 10-Year Treasury yield from ~1.6% to just under 3% in short order.

I am using this opportunity to add to my income portfolio by picking up some of these high yield REITs. I don't believe the economy can support 3% plus yields here due to tepid economic and job growth so the rapid rise in rates should plateau soon. In addition, I think real estate values in both the residential and commercial space will continue to slowly rebound from their post crisis lows.

Here are two high yielding plays I'm considering adding on the next dip.

One Liberty Properties (NYSE:OLP) is a REIT that owns and manages a geographically diversified portfolio of retail, industrial and other properties under long-term leases. The company has more than 100 properties in 28 states. The vast majority of the company's properties are east of the Mississippi River and are primarily single tenant.

The most appealing attribute to OLP is its almost seven percent yield (6.7%) and the REIT raised its payout some 60% since emerging from the financial crisis. With earnings tracking to 5% gains this year and projected to increase around the same amount in FY2014, further incremental increases should occur over the medium term.

Insiders bought some $80K in new shares in May and August at higher prices. Given its high yield, OLP is not expensive at ~12x forward earnings.

BioMed Realty Trust (NYSE:BMR) operates as a real estate investment trust that focuses on providing real estate to the biotech and life science industry in the United States. The company is down with most REITs over the last three months and since I profiled it in July. I will be adding additional shares in the next market sell-off.

With the recent decline the shares now yield north of 5 percent (5.1%) and BioMed has more than doubled its payouts since emerging from the financial crisis. Revenues are tracking to more than a 15% gain this fiscal year on organic growth and some new acquisitions. Operating cash flow is up more than 50% since the end of FY2010 and the stock sells for just 16% over book value.

The median price target on BMR by the ten analysts that cover the REIT is $22.75, more than 20% over its current stock price. In addition, Morgan Stanley just upgraded the shares to "Overweight" from "Equal Weight." BMR is priced at less than 13x forward earnings despite its 5 percent plus yield.

Disclosure: I am long BMR. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.