Picking Up High Yield In Real Estate

Includes: EPR, SRC
by: Bret Jensen

"Investing right now is like taking a shower knowing Norman Bates is in your house" - Political columnist Jim McTague

I continue to try to ignore the dysfunction in Washington and pick up some additional yield each time the market sells off on the latest sound bite/diatribe emanating from DC. I think the Federal Reserve is far from "tapering" which means interest rates which have risen sharply since May have probably plateaued for the near term. This should be supportive of some of the high yield sectors that sold off as interest rates were on the move.

One sector I find attractive right now is real estate investment trusts (REIT) as easy money should continue to prop up the value of hard assets and valuations are more reasonable after the recent pullback. Here are two high yield REITs I like here.

Spirit Realty Capital (NYSE:SRC) is a real estate investment trust (REIT) that focuses on single tenant, triple net REIT real estate with a portfolio consisting of more than 2,000 properties. The shares yield over 6% and the company recently came public again in 2012. It recently announced a merger with Cole Credit Property Trust II.

The company's properties are 99% leased and the average lease life left is over a decade. SRC sells at around 12.5 forward AFFO (Adjusted Funds from Operations). This is a ~30% discount to competitors in this space like Realty Income Corporation (NYSE:O) and National Retail Properties (NYSE:NNN).

The company was recently positively profiled in Barron's which postulated the REIT has substantial upside as it narrows the valuation discount to its competitors. Insiders have a significant stake in the REIT and they have held on to their shares right through the expiration of the post IPO lockup. SRC sells for less than book value.

EPR Properties (NYSE:EPR) is a geographically diversified, specialty real estate investment trust (REIT) that invests in properties in select categories which require unique industry knowledge. These properties include Cineplexes, Charter Schools & Ski Areas. 85% of its investment portfolio consists of property; the rest is made up of mortgages/note receivable.

EPR pays a monthly dividend payout and yields a robust 6.5%. The company specializes in niche property markets like cineplexes. This gives the company deep knowledge within these industries and it also means it faces less competition in bidding for properties. Revenues are tracking to better than a three percent gain this fiscal year and analysts expect sales to accelerate in FY2014 and believe the company will post just under a 10% sales gain.

The REIT is offering an attractive entry point after falling nearly 20% from its highs earlier in the year on the back of rising interest rates. It is nicely below the $56.50 a share median price target held by the 8 analysts that covers the REIT. EPR sells for under 12x forward AFFO, which is a significant discount to its five year average (16.3).

Disclosure: I am long EPR. 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.