Under-Followed REITs Offer Better Potential Than High-Yield Mortgage REITs

by: Tim Plaehn

My interest in the juxtaposition of Seeking Alpha email notification numbers and investor sentiment combined actual investment returns continues to grow. My first article on the SA email subscriber indicator can be found here. I also have a database of the SA subscriber numbers for real estate investment trust - REIT - stocks, and find some of the data very interesting. There is a very large amount of interest in a handful of high-yield mortgage REITs and little interest in the other 120-plus REIT companies, some of which have provided tremendous returns to investors.

Here is some data on the REIT stocks in my database:

  • Number of stocks: 142 in 10 real estate categories
  • Average dividend yield: 5.67%
  • Mean dividend yield: 4.68%
  • Average number of SA email subscribers: 330
  • Median number of email subscribers: 75

The median email subscribers means the majority of REIT companies have fewer than 100 subscribers from the one million-plus Seeking Alpha registered members. In the list of corporate stocks, almost 200 companies have over 1,000 email subscribers.

In the sub-sector of high-yield mortgage REITs the numbers are very, very different. Eight of the mortgage investment companies have over 1,000 subscribers, with Annaly Capital (NLY) and American Capital Agency (AGNC) at the top of the list with 11,000 and 6,000 subscribers, respectively. The average dividend yield of the eight high-interest REIT stocks is 14.5%. Another way to gauge the amount of interest in these stocks is that the high yield stocks have almost 70% of the investor interest as measured by the total email subscriptions for all REIT companies.

This data leads to two major points. The first is that investors focused on high dividend yields are missing out on a lot of great real estate investment opportunities. Simon Property Group (SPG) is the largest publicly traded REIT with a market cap of $45 billion and fewer than 300 SA subscribers. Simon's share price is up 170% since the bottom of the bear market, more than four times the gain of the S&P 500.

Several real estate sectors have very interesting fundamentals and potential, such as apartment/housing stocks, which benefit from the U.S. housing problems; industrial space companies, serving the exploding need for server capacity; or healthcare companies like HCP (HCP), Healthcare REIT (HCN) and Ventas (VTR), setting themselves up to profit from the aging of the American population.

The second point is the scary (to me) widespread belief that any investment paying a 14 to 16% yield is not inherently dangerous to an investor's invested capital. I have watched and participated in the stock market for over thirty years and do not remember a time when the results from a group of very high yield investments did not end badly.

The mortgage REIT operations have a lot of moving parts, none of which are easy to analyze or predict. Throw in the current, never-seen-before interest rates in the U.S. and it will be interesting to see how the mortgage REITs handle a change in rates. Few of the current crop of mortgage REITs have been around for more than a few years. The elder statesman of the group, Annaly, experienced a 40% share price decline over a couple of months back in 2005 when the company was forced to reduce the dividend by two-thirds due to changing interest rates.

Investors who think commercial real estate is a desirable portfolio component, who like growing dividends, and who understand total return will generate more wealth than a 15% fully taxable dividend should add a few more REIT stocks to their portfolios or watch lists. The articles and stocks listed above are some good places to start.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.