7% Yielders To Buy In The New Year

Includes: HPT, SNH
by: Bret Jensen

High-yield sectors within the market have been under pressure and have underperformed the overall market since the Federal Reserve started to seriously talk about withdrawing liquidity from the market in the last part of May.

However, since the Federal Reserve actually announced it would begin the "taper" in January, the 10-year treasury yield has stubbornly refused to go much over the 3% level. This leads me to believe that most of the beginning of the "taper" was already priced into the credit markets.

I think these same high yield sectors could start to recover if rates have indeed plateaued and could perform very well if the recent economic "recovery" turns out to be yet another "false dawn" like so many other "green shoots" over the last five years.

In addition, after the best returns in the market in the last 15 years in 2013, the market in the New Year should be a much more subdued affair with much lower returns as the Fed starts to withdraw its immense effort. Here are two attractive 7% yielders from the Real Estate Investment Trust (REIT) area that should provide solid returns in the New Year in that sort of environment.

Senior Housing Properties Trust (NYSE:SNH) is a real estate investment trust that invests in properties focused on senior-oriented care. The company owns and operates some ~400 properties in 40 states and Washington, DC.

Senior Housing Properties yields a robust 7.1% yield and it has slowly and incrementally raised its payouts over the past decade. The company has seen solid and consistent growth in operating cash flow over the prior three years. SNH sells for less than 13x FFO (Funds From Operations), a discount to its five year average (21.7).

Although there has been some concern in the senior housing space that new concerns are overpaying for facilities, this REIT is well positioned longer term to prosper due to the continued aging of the population in this country. The company is tracking to almost a 20% revenue gain this fiscal year on some acquisitions and organic growth. A more normalized sales increase of 3% to 5% sans acquisitions is expected in FY2014.

Hospitality Properties Trust (NYSE:HPT) owns and operates hotels under brands such as Courtyard by Marriott, Residence Inn by Marriott, Staybridge Suites by Holiday Inn, Candlewood Suites, AmeriSuites, Prime Hotels and Resorts, Homestead Studio Suites, TownePlace Suites by Marriott, SpringHill Suites by Marriott and Marriott Hotels and Resorts. HPT has approximately 300 properties in 38 states.

The REIT yields over seven percent (7.1%). The hotel industry is quite strong right now and experiencing rising occupancy rates and higher RevPAR (Revenue per average room). This is likely to continue in the near term as the economy continues to improve and because of the little new hotel construction during and after the financial crisis.

HPT also sells for less than 9x FFO, a deep discount to its five-year average (19.7). Insiders have made frequent small purchases over the past couple of years at higher prices than the current stock level.

Neither one of these selections is likely to set the world on fire in 2014. However they do provide a solid 7% yield with some slight capital appreciation potential which increases if the economy decelerates again and interest rates go down. They are good solid singles in what is likely to be a much more tepid year in the market during 2014.

Disclosure: I am long HPT. 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.