- The high-yield real estate investment trust space is not as attractive as it was to begin the year.
- The entire sector has been bolstered as interest rates have declined so far in 2014. This trend is unlikely to continue.
- However, there are still attractive yield opportunities in the space. Two of these are profiled below.
I began the year heavily overweight in the high-yield sectors of the market within my own portfolio. I believed the overall market had gotten ahead of itself after posting over 30% gains in 2013. I also thought the economy moving along at the 3% GDP growth level it achieved in the back half of the year was unlikely to continue in the first half of 2014.
One of the high-yield sectors I allocated substantial capital to at the end of 2013 was real estate investment trusts (REITs). This has proved to be a prudent move, as this sector has easily outperformed the overall market since the first of the year.
That being said, I am lightening up a bit here as the space has been bolstered substantially by the decline in 10-year treasuries falling to under 2.6% from the over 3% level they began the year. This trend is unlikely to continue in my opinion.
I have taken some profits recently in this sector. However, I am still holding my REITs in the lodging space such as Summit Hotel Properties (NYSE:INN) as the fundamentals (RevPAR growth, rising occupancy rates, higher earnings growth, little new supply… etc…) continue to be supportive.
I also continue to hold several REITs that are still attractively valued and have seen some positive catalysts recently. Two of these are profiled below.
Spirit Realty Capital (NYSE:SRC) is a real estate investment trust that focuses on single tenant, triple net REIT real estate with a portfolio consisting of more than 2,000 properties. The company came public again in 2012 and announced a merger with Cole Credit Property Trust II last year. Its properties are currently approximately 99% leased.
The REIT should be on the move in trading today, as Spirit reported solid quarterly results this morning. AFFO (Adjusted Funds from Operations) came in at 20 cents a share, in line with expectations. Revenues more than doubled year-over-year primarily due to the merger with Cole, as well as other property acquisitions. Quarterly sales were about 4% above the consensus. The REIT has surpassed revenue expectations for several straight quarters now.
The stock has a very healthy dividend yield north of six percent (6.1%). The merger with Cole substantially bolstered the overall credit rating of its tenant portfolio. It also lessened Spirit's exposure to any one tenant significantly. The shares go for just over 13x forward AFFO. This is a significant discount to other major competitors in the space such as Realty Income (NYSE:O) and National Retail Properties (NYSE:NNN). It also pays a significantly higher dividend yield.
Independence Realty Trust (NYSEMKT:IRT) is a real estate investment trust that seeks to own well-located apartment properties in geographic submarkets that it believes support strong occupancy and the potential for growth in rental rates.
The REIT is starting to see favorable analyst coverage over the past two months. Wunderlich initiated the shares as a "BUY" in late March. Deutsche Bank's Greg Poole, a five star analyst according to TipRanks, reiterated his "Buy" rating and raised his price target to $11 a share from $10 previously on Monday. Mr. Poole noted IRT has "done a commendable job sourcing acquisitions and quickly deploying raised capital."
A lot of investors are missing this REIT as it does not show up as having a dividend on financial sites like Yahoo Finance as it has only been public since August. It should start to show up by the end of summer after it has one year as a public entity.
This oversight is unfortunate as Independence Realty pays a monthly dividend payout of 6 cents a share. On an annual basis, this equates to an eight percent yield. Revenues will more than double this year thanks to recent acquisitions, and the shares trade at a cheap 11x trailing AFFO.