Earlier this morning JPMorgan went positive on a variety of real estate investment trusts (REITs). These instruments have significantly underperformed the market since the Federal Reserve started to talk about the "Taper" in Mid-May on the back of rising interest rates.
Now that interest rates look like they have plateaued after Friday's dismal Jobs Report, it looks like time for income investors to add some allocation to this high yielding sector. Here are two of JPMorgan's recommendations that I also hold in my own income portfolio.
RAIT Financial Trust (NYSE:RAS) is a multi-strategy commercial real estate company incorporated as a real estate investment trust. The company operates in three core areas. It originates commercial real estate loans, purchases commercial real estate properties and invests in commercial mortgage backed securities. It is different than most mortgage REITs as it owns and operates properties. This provides it with management fees as well as greater earnings stability and less volatility.
The REIT yields just over seven percent (7.2%) after recently announcing another 6.7% increase in its payout. FFO (Funds from Operations) are on a nice roll. RAIT Financial Trust posted $1.10 a share in FFO in FY2012 but is tracking to $1.25 a share this year and analysts expect over $1.50 a share in FY2014.
The REIT has sparse analyst coverage. Only two analysts cover the shares and they both have $10 a share price target on RAS, ~20% above its current levels. RAS sells at just 5.5x forward FFO, a deep discount to its five year average (13.7).
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. It is one of the more unique yield plays in my income portfolio.
The shares yield north of six percent (6.4%). EPR Properties has consistently and incrementally lifted its payout after emerging from the financial crisis. The company moved to a monthly payout in the second quarter of 2013. Revenue growth should accelerate to 15% in FY2014 off this year's ~5% gain on the back of some recent strategic acquisitions.
EPR Properties is showing consistent FFO growth. It posted FFO of $3.59 in FY2012, should achieve FFO of ~$3.90 a share at close of FY2013 and analysts project $4.20 a share in FFO in FY2014. The shares sell for a reasonable 12x FFO. The company easily beat on the top and the bottom line when it last reported earnings in November. It reports its next quarter in late February.
Disclosure: I am long EPR, RAS. 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.