4 Small-Cap Low-Volatility REITs With High Yields

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Generally speaking, Real Estate Investment Trusts (REITs) have paid attractive yields, comparable to the recent returns of this strategy. After all, they are legally required to distribute at least 90% of their taxable income to unit-holders. Especially appealing to prudent income investors seeking high yields could be REITs that offer low volatility and consistent returns over time. Here, volatility is measured as the standard deviation (or variability) of the REITs’ daily price returns over a particular period. On several occasions we have noted that low-volatility strategies have outperformed the broad market over the long run. The pattern of outperformance has also been observed year-to-date.

With a particular focus on the small-cap universe, here is a closer look at four high-yielding REITs with low-volatility returns over the past 12 months.

The fab four

Government Properties Income Trust (NYSE: GOV) owns commercial properties majority leased to government tenants. It pays a dividend/distribution yield of 6.5% on a payout ratio of 81% of its 2012 normalized FFO. The REIT owns 84 properties in 32 states and Washington D.C.

Some 94% of its annualized rental income comes from the U.S. Government, 10 state governments, and the United Nations. Strong attributes of this REIT are its stable income streams and secure dividend, supported by high occupancy rates and the longevity of its lease terms. The company’s FFO has been growing through accretive acquisitions, including 13 acquisitions in 2012 worth more than $214 million.

Last year, Government Properties’s normalized FFO increased 2.4% to $2.12 per unit. Despite the fiscal austerity in the United States, the company has been able to sustain its rental income, as government tenants tend to occupy leased space for long periods of time. (Over the past 10 years, government tenants have occupied leased space for an average term of 26 years, according to the company.) Recently, this REIT was named one of “America’s 100 Most Trustworthy Companies” by Forbes. Government Properties is trading at a 2012 normalized FFO multiple of 12.1. Last quarter, billionaire Israel Englander initiated a small position in this REIT.

LTC Properties (NYSE: LTC) is a healthcare REIT that invests in senior housing and long-term healthcare properties through the origination of first mortgage loans and the acquisition of properties leased to numerous long-term care providers. The REIT pays a dividend/distribution yield of 4.3% on a payout ratio of 82% of its 2012 adjusted FFO. The REIT’s monthly cash distributions have grown at an average annualized rate of 3.8% over the past five years. LTC Properties operates in a traditionally defensive industry and boasts solid fundamentals.

It has conservative balance sheet and strong liquidity. Its prospects are optimistic based on a rapidly growing target population of those aged over 75 years and projected healthcare spending increases averaging 5.8% annually through the end of this decade. In terms of investment strategy, this REIT targets properties with strong expected cash flows, with a targeted yield of between 8% and 10%. LTC is trading at a 2013 normalized FFO multiple of 17.1, based on the guidance midpoint, compared with 17.4 and 18.8 for HCP Inc. (HCP) and Health Care REIT, Inc. (HCN), respectively. Last quarter, AQR Capital’s Cliff Asness reduced his LTC Properties share position by 5% to 305,000 shares.

Universal Health Realty Income Trust (NYSE: UHT) specializes in healthcare and human service related facilities. Its 55 investments include acute and sub-acute care hospitals, medical office buildings, rehabilitation hospitals, and childcare centers. The company pays a dividend/distribution yield of 4.2% on a payout ratio of 90% of its 2012 adjusted FFO. Its five-year revenue and dividend CAGR are 14.1% and 1.4%, respectively. Given the high payout ratio, at best, investors should expect only modest dividend growth from this REIT going forward.

Last year, Universal Health’s adjusted FFO increased 6% from the year earlier. The company operates in a stable industry, focused on medical office buildings that have historically represented stable investments and a safe haven for real estate investors during the turbulent times. This resilient industry, with a low delinquency rate of only 3.3% in 2012, has optimistic prospects on a projected increase in the number of insured Americans under the Affordable Care Act and a patient care shift to cost-efficient medical office buildings. Universal Health is trading at 20.5 times 2012 adjusted FFO. Last quarter, Jim Simons held a small $2 million stake in Universal Health.

Inland Real Estate (NYSE: IRC) is a retail REIT owning shopping centers, including interests in 157 properties, with some 79% of its portfolio retail square footage in centers with a grocer, drug or discount component. Its shopping centers are largely value and necessity-based. The REIT pays a dividend/distribution yield of 5.1% on a payout ratio of 65% of its 2012 adjusted FFO. The company’s cash distribution was slashed by 41% in May 2009, and has since been kept constant at a quarterly level of 4.8 cents.

The company reported adjusted FFO of $0.88 for 2012, an increase of 7.3% from the year earlier. Its consolidated same-store net operating income (NOI) was up 3.2%. The company also reported record leasing, increased occupancy, and an improved balance sheet. In the fourth quarter, its average base rents for new leases were up 11% year-over-year. In terms of valuation, Inland Real Estate is trading at 12.6 times 2012 adjusted FFO versus 10.8 times for CBL & Associates Properties and 21.3 times for Equity One. Last quarter, Cliff Asness held an $11.3 million position in Inland Real Estate.

Final thoughts

All the selected REITs also have individual betas below that of the broader market. These characteristics suggest that total returns of the four featured REITs do not fluctuate wildly but rather change at a steady pace over the observed period of time. This makes the selected REITs suitable investments for income investors pursuing high-yield equities boasting a degree of stability of returns over time. 


This article is written by Serkan Unal and edited by Jake Mann. Insider Monkey's Editor-in-Chief is Meena Krishnamsetty. They don't own shares in any of the stocks mentioned in this article. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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