Seeking Alpha

Fed Cuts Fueling More REITs

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Includes: IRM, NRZ, SPG
by: Michael A. Gayed, CFA
Summary

The US Federal Reserve’s new round of rate cuts has led to investors once more willing to enter riskier, higher-return assets.

In such an environment, the search for low-risk yield is getting progressively tougher. However, there is a higher-yielding, if slightly riskier, asset class in Real Estate Investment Trusts (REITs).

REITs, by nature, aren't glamorous, growth stocks. The next big thing will not be found in this sector. However, they offer something unique: the ability to generate strong, stable cash.

“I should say: the house shelters day-dreaming, the house protects the dreamer, the house allows one to dream in peace.” - Gaston Bachelard

The US Federal Reserve’s new round of rate cuts has led to investors once more willing to enter riskier, higher-return assets. After the latest set of Federal Reserve rate cuts, the 10-year treasury yield declined from 2% to less than 1.5%, although it has since rebounded to 1.84%.

In such an environment, the search for low-risk yield is getting progressively tougher. However, there is a higher-yielding, if slightly riskier, asset class in Real Estate Investment Trusts (REITs). Unlike most stocks, REITs are required to pay 90% of their earnings as dividends, leading to high yielding, safe assets. Although the sector has been sold off quite strongly relative to the S&P, it is making a recovery. There seems to be a strong inverse correlation between REIT performance and long-term Treasury yields, and with expectations of further monetary stimulus, the longer end of the yield curve could drop even further.

The first REIT is Iron Mountain (IRM), which is the global leader in secure document storage and destruction. One may be concerned that customers will switch to a competitor, thereby decreasing the earning power of the company. However, relative to the cost of staying with Iron Mountain, the cost of switching is prohibitive. As a result, Iron Mountain has a 98% retention rate. It is also expanding globally, which might make it more attractive. There was a recent sell-off as earnings disappointed investors, but the stock has recovered somewhat while still existing in the area where it is an excellent opportunity. It has a 7.58% trailing dividend yield with analysts expecting a 7.57% yield going forward, with 85% of analysts rating it a buy or outperform. It is also apparent that as the long-end of the Treasury yield curve drops, Iron Mountain’s stock price prospers.

The second stock is New Residential Investment Corp. (NRZ). It is a residential REIT that focuses on mortgage and financial services. While this sector might not be attractive as investors got their fingers burnt during the sub-prime crisis, the company has been growing solidly. They were able to spot the gap when the residential mortgage industry underwent structural changes and have been able to leverage this by developing attractive, innovative ways for clients to originate, own, and service loans. It currently has a forward dividend yield of 13.24% and a trailing 12-month dividend yield of 13.32% and is either rated a buy, outperform or hold views from the analysts that cover it.

The final REIT that will be analyzed in this article is Simon Property Group (SPG), a retail REIT. Retail property has struggled as the power of Amazon (NASDAQ:AMZN) has grown, leading to lower foot traffic. However, Simon Property Group has focused on attracting premium retailers to its premises. In their last quarterly results, they reported that they are attracting higher rents than they previously were for the same square-feet. Like the other REITs, it has staged a recent comeback although it has pulled back since, making it a great investment opportunity. It has an attractive trailing dividend yield of 5.32%, with analysts expecting the forward dividend yield to increase to 5.44%. Like New Residential Investment, analysts have a buy, hold, or outperform rating on the stock.

REITs, by nature, aren't glamorous, growth stocks. The next big thing will not be found in this sector. However, they offer something unique: the ability to generate strong, stable cash flows at low risk. In the highly charged political environment, they provide stability at a great entry price.

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

Additional disclosure: This writing is for informational purposes only. It does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction. It also does not offer to provide advisory or other services by Pension Partners, LLC in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Pension Partners, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.