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3 High-Yield/High-Quality REITs To Buy After Solid Earnings Reports

Mar. 06, 2018 8:15 AM ETHT, O, SOHO, STOR29 Comments


  • Property REITs have pulled back due to investor fears about interest rate hikes by the U.S. Fed.
  • This is despite the fact that most REITs are reporting stellar earnings and hiking their dividends.
  • The sector is trading now at its lowest valuation in years, creating a great entry point.
  • The weakness in REITs is unlikely to last, as history shows that this sector outperforms during periods of rising rates, especially when rate increases are the result of a booming economy.
  • 3 quality High-Yield REITs to consider after stellar earnings reports.

This research report was jointly produced with High Dividend Opportunities co-author Jussi Askola.

It seems that many retail investors are scared that higher interest rates will impact REITs, but this is a misconception. As we have noted in several previous articles, real estate is integrated into just about every aspect of the US economy; so when GDP is growing, it positively impacts the bottom line of Property REITs.

Let us have a look at what actually happened the last time the Fed raised rates. Starting in June of 2004 and ending in August 2006, short-term rates were hiked 17 times from a starting point of 1% to a peak of 5.25%. Over this 2.3-year period, GDP grew steadily and property values increased. More importantly is that REIT investors were rewarded with more than a 59% return over this time frame, beating the S&P 500 index which rose only 22% during the same period.

Below is a chart that depicts the price movement of the Property REIT ETF VNQ versus the S&P 500 ETF (SPY) during the 2.3 year-period.

What we would like to say is that as far as REITs are concerned, the proof is in the pudding. All we have to do is look at the most recent earnings reports of the majority of REITs which show that profits and FFO are soaring (and in many cases to new record-highs), dividends keep increasing, and the guidance for the year 2018 are solid. A stronger economy, tax reforms, and infrastructure spending should help boost real estate prices and increase rental income for the sector. This sector is very well positioned for growth as the U.S. economy keeps expanding.

Today, we highlight 3 high-yield Property REITs to consider buying, following great earnings reports.

STORE Capital (STOR) Earnings Report: What Consistency Looks

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This article was written by

Rida Morwa profile picture

Rida Morwa is a former investment and commercial Banker, with over 35 years of experience. He has been advising individual and institutional clients on high-yield investment strategies since 1991.

Rida Morwa leads the investing group High Dividend Opportunities where he teams up with some of Seeking Alpha's top income investing analysts. The service focuses on sustainable income through a variety of high yield investments with a targeted safe +9% yield. Features include: model portfolio with buy/sell alerts, preferred and baby bond portfolios for more conservative investors, vibrant and active chat with access to the service’s leaders, dividend and portfolio trackers, and regular market updates. The service philosophy focuses on community, education, and the belief that nobody should invest alone. Lean More.

Analyst’s Disclosure: I am/we are long STOR, O, SKT, SOHO, HT. 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.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (29)

With trade tariffs we could have slower economic growth plus higher inflation = more rapidly increasing interest rates. Not good for stocks or REITS
thorgood4 profile picture
funny no mention of CLDT.
Rida Morwa profile picture
Hi Thorgood, CLDT earnings were among the weakest in the Hotel REIT sector, although we have a lot of respect to their management team. I pretty confident they can turn things around.

All the best,
I love it when the market overreacts on O and STOR.

Simply buy more when their price breaks below the 200MA and correlate with your favorite indicator (Stochastic, MACD, RSI ...etc..) to catch the new upswing.

It's like shooting fish in a barrel.
dginsberg2222 profile picture
the sleeper in the group is AHOTF. All the boxes check.
socalquest profile picture
Just buy a FUND and let it do its magic!
I’m not a big fan of mutual funds but in this sector the management fees are probably worth it. Would you mind sharing your favorites?
socalquest profile picture
I like CEF RQI
CincinnatiRick profile picture
You are singing the praises of HT and SOHO...but what about AHP?
Rida Morwa profile picture
Hi Rick, AHP had also a solid earnings report. We will be providing an update to our members very soon.

All the best, Rida
Is HT growing its AFFO year-over-year (2017-8)? If so, by how much?
Jussi Askola, CFA profile picture
HT is still doing big changes to its portfolio causing short term dilution. No not much growth as of right now, but this will change soon. RevPAR growth is very encouraging and buy backs are massive. Best, Jussi
papaone profile picture
JA, what really is accomplished by selling assets to fund buy backs?
Hi Rida,
Because you prominently mentioned it, would you also consider SOHO a STRONG BUY?
Thanks for your help and advice.
Rida Morwa profile picture
Hi Gerard,

In today’s market environment, we are bullish on hotel investments because historically they have greatly benefited from accelerating GDP growth. With the recent tax cuts and improving economy, we expect business people to engage in more trips and individuals to have more savings for leisure travel.

One of the main beneficiary of this trend will be hotel owners, and we have been advising our investors to overweight the Hotel REIT sector for the potential rewards.

Today, as we look at the recent results of most hotel REITs, we are glad to see our assessment is being reflected in fundamentals. Despite the latest REIT market sell-off, it is fair to note that many of our hotel REIT investments have kept posting solid results. This applies to both HT and SOHO which are strong buys at the current price.

All the best, Rida
Thanks for your well-reasoned response, Rida.
rdbach profile picture
SOHO just bought a hotel in recession proof Arlington, VA, adjacent to a metro station. Good move I think. Also, the dividend was recently increased. Long SOHO, HT and PK.
HT is a good one, but I prefer APLE.
Rida Morwa profile picture
Hi Javelina, HT has one of the best management team in the entire hotel industry, and this is what counts the most in our opinion. The company has a high insider ownership, and management seems to always be doing its best to increase shareholder value.

Having a management that is aligned with shareholders is key for the success of any company, and even more so in the Property REIT space.

All the best, Rida
Sajit Kapurvalapil profile picture
Hersha is ridiculously cheap on all metrics: P/AFFO, P/Book, AFFO payout ratio.

Additionally, there's been significant insider buying recently, and a share buyback program that is retiring over 10% of outstanding shares. Buybacks below book-value are the best kind, they are almost guaranteed of being accretive...

The downside is -- hospitality industry is high beta, and will take a hit if economy sours. I am long both common and preferreds.
papaone profile picture
Rida, is it accurate information that HT management is selling assets--maybe at a capital gain, to use the funds for very large buy-backs? If so, it makes me concerned, not a normal strategy.
walter scott profile picture
Very interesting. Thanks. But what about the Amazon hysteria? It's not all about interest rates.

May increase my position in O, and maybe take a bit of STOR, SKT, SOHO, and HT on board. However, I wonder how much cash should be on the sidelines should a big market pull-back create a huge opportunity.
Rida Morwa profile picture
Hi Walter, what is interesting to note is that the Property REIT has performed well recently when the general markets have pulled back, and have acted as a defensive sector. Most investors who are overweight REITs should have noticed this.

This makes me believe that the downside risk is very limited and the upside potential is enormous given the low valuations in the sector.
Rida Morwa profile picture
Finally, Property REITs are not just retail REITs, they include office space, storage, hotels, industrials, etc, which are not in competition with Amazon.

All the best, Rida
socalquest profile picture
People are working from home more so nowadays. I myself prefer shopping online via AMZN since it saves me time driving to the store! These are real headwinds for REITs, not just the rise in rates.
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Related Stocks

SymbolLast Price% Chg
Hersha Hospitality Trust
Realty Income Corporation
Sotherly Hotels Inc.
STORE Capital Corporation

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