This year has been a stellar one for stocks, with the S&P 500 Index up more than 22% and with the Dow Jones Industrial Average up more than 18% in 2013. The real estate investment trust sector (REIT) has not participated in the strong market as investors were overly concerned that the Federal Reserve would end its bond buying, and also due to fears that the rise in rates would get even worse than what was seen. The Dow Jones Equity REIT Index (DJR) has risen only by about 7% so far in 2013. The main REIT exchange-traded fund we track is the Vanguard REIT Index ETF (VNQ), and it is up only 9.5%, even if you adjust share prices for its 3.6% dividend yield.
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24/7 Wall St. has compiled a list of REITS that it has followed for some time that investors can start looking at again for long-term income and potential appreciation. These all have high dividend yields, but they are all manageable dividends. We even think that most of these dividends can be raised in the year ahead.
Investors are planning their finances for 2014 and beyond, now that the first debt ceiling debate and the government shutdown have been temporarily abated. We have listed the following in alphabetical order to avoid any ranking or preferential views of yield, size or valuations.
You will notice that no mortgage REITs have been included. That is simply because the risk that comes with those double-digit yields is simply too high for most conservative investors. Our average yield here is right at 6%, so we see little reason to take on excessive risk tied too closely to trading mortgage paper when the Federal Reserve has absorbed all the conventional mortgage market.
American Realty Capital Properties Inc. (ARCP) is about to become the largest net lease REIT in the country after its merger with Cole Real Estate Investments Inc. (COLE). Its enterprise value is shooting up close to $21.5 billion or so, and American Realty also is raising its dividend to $1.00 per share annually upon completion of the merger. The merged company's portfolio will include 3,732 properties leased to more than 600 tenants occupying more than 100 million square feet of space in 49 states and Puerto Rico. American Realty shares initially traded down on the recent merger news, but they have recovered now that investors have had time to analyze the prospects here. At $13.36, it has a 52-week range of $11.64 to $18.05, and its consensus price target is up at $16.25. American Realty will soon have an astronomical yield of almost 7.5%.
BioMed Realty Trust Inc. (BMR) is in a sweet spot as the landlord to biotech, pharmaceutical, scientific research groups and even nonprofits or government agencies overseeing life sciences. Even with the restructurings in major pharmaceutical giants and with health care reform being an uncertainty in the long term, the company's earnings have normalized. This REIT recently increased its credit facility to $1.25 billion, which may allow it to make select acquisitions to rekindle earnings growth, and that ultimately will lead to higher dividends as well. At $20.02, it has a 52-week trading range of $17.90 to $23.13. The consensus price target is up at $22.59. BioMed Realty currently has a dividend yield right at 4.7%, and if a dividend hike is coming, it is likely in the next couple of months or so.
Government Properties Income Trust (GOV) is quite simply what we refer to as the landlord to your federal, state and local government. This REIT survived the government shutdown and recently maintained its dividend at $0.43 per share. Earnings growth has been slow here due to stable and very long-term leases, but it already raised capital to make selective acquisitions, and it recently entered into a more shareholder-friendly management relationship with incentives tied to performance. Trading at $25.02, it has a 52-week range of $21.95 to $27.34. The consensus analyst price target is lower at $22.50, but GovProp may still be misunderstood by many analysts, with its small size of $1.37 billion. You can buy a 10-year Treasury to earn a paltry 2.5% annual yield from your federal government or you can earn almost a 6.9% dividend yield here playing your government's landlord.
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Home Properties Inc. (HME) is an apartment REIT with locations in the Northeast and Mid-Atlantic markets, coming to 118 communities with roughly 42,000 apartment units. The REIT recently raised almost $250 million in an equity offering and secured a new credit facility. Its apartment communities generally are considered market-rate apartment communities, implying that they are not slums nor are they at the highest rent brackets. Growth has been manageable and the team here has a long track record. This is among the highest yields for apartment REITs, and with housing normalizing there should be fewer fluctuations from people abandoning home ownership or jumping haphazardly back into home ownership. At $60.31, it has a market cap of $3.4 billion, its 52-week trading range is $56.24 to $67.79 and the consensus analyst price target is $66.28. Home Properties currently yields about 4.65%.
Senior Housing Properties Trust (SNH) is in the perfect spot, owning and managing hospitals, nursing homes, senior apartments, independent living properties and assisted living centers. Each challenge that has come up in the past with tenants has been overcome by management. Earnings growth and revenue growth have slowed because the company now has its portfolio where it wants it. The REIT also recently entered into a more shareholder-friendly management agreement as well. At $24.93, its 52-week trading range is $21.50 to $29.99. Analysts have a consensus price target of $24.00, and the market cap is about $4.7 billion. Senior Housing currently pays a dividend yield of 6.25%.
Now tally up these five yields into a group and the average yield here is 6%. With discounts either to the consensus analyst price targets or to the 52-week highs, there is also a good possibility for these to be viewed favorably again by new investors who want both income and potential appreciation.
For those of you who insist on chasing mortgage REITs with double-digit yields, the one we follow from time to time as the sector bogey is Annaly Capital Management Inc. (NLY). The price drop here seems to have stabilized, and it even recovered to $12.15, versus a 52-week range of $10.63 to $16.20. Just be advised that the dividend payments of this sector leader have declined for two years already, and we think those yields could keep dropping if interest rates decide to rise again in 2014. Either way, you are on your own in mortgage REITs.
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