Three REITs to Consider and Two to Avoid
Reuben is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
I like to examine the portfolios of mutual funds to get new investing ideas. With the recent sell off in dividend paying stocks, I thought I might look at a real estate focused fund. My choice was Lazard U.S. Realty Income Fund (LRIOX). The fund is a top performer over its relatively short history. A few names that stood out for me where high-yielding Whitestone REIT (NYSE: WSR), technology focused Mission West Properties (Nasdaq: MSW) and Digital Realty Trust (NYSE: DLR), student housing specialist Campus Crest Communities (NYSE: CCG), and triple net lease giant Realty Income Fund (NYSE: O), which I happen to own.
Whitestone REIT focuses on what it calls Community Centered Properties, which it defines as “visibly located properties in established or developing culturally diverse neighborhoods.” It focuses its efforts on Arizona and Texas, two states that have done reasonably well despite the recession. It generally buys properties that have been neglected in some way and then strives to re-develop them to increase their value. Management pays particular attention to the local communities in its re-development efforts, often focusing on smaller, service-oriented tenants. It is a very small REIT, but it has a very large dividend yield of around 9%. That dividend, by the way, is paid monthly. For a deeper review of Whitestone, you can read my previous article on this high-yielding REIT.
Technology Real Estate?
Digital Realty Trust stood out because of its $7 billion market cap and unique focus. With a yield around 4.5%, it isn't the most appropriate for income seeking investors. However, with a property portfolio filled with technology related buildings, it might interest more growth minded investors seeking to add a little more diversity to their portfolios.
At the end of 2011, it owned over 100 properties, with most located in the United States, a fair number in Europe, and one in Asia. So in addition to asset class diversification, Digital Realty also offers global diversification. It focuses on internet gateway datacenters, corporate datacenters, technology manufacturing properties, and regional or national offices of technology companies. The company's dividend has been on an upward trajectory, which is nice to see. Moreover, the company looks set to benefit from the shift to so-called cloud computing.
Another digitally focused REIT that I noted in the portfolio was Mission West Properties. This is a much smaller REIT that offers a yield over a full percentage point higher than Digital Realty's. Mission West's focus is on commercial research and development properties located in the Silicon Valley portion of the San Francisco Bay Area. It owns about 100 properties, too. Although the yield is more enticing, the dividend has been on a general decline for several years. Income focused investors would be better off avoiding this one.
With a yield of nearly 6%, Campus Crest Communities focuses on student housing. The company only came public in late 2010, so it doesn't have much history as a public company. However, in 2005, about when it was founded, it had just one property and now it has almost 40 spread across the United States. If management can continue to grow the portfolio like that, it is likely that the dividend will follow.
Considering the number of colleges in this country and the small number of properties that Campus Crest currently owns, it isn't a stretch to think that the REIT has plenty of opportunities to expand. Moreover, with a college diploma becoming ever more important for young workers, it is easy to see where Campus Crest's focus will be supportive of growth for years to come. With a decent yield, income focused investors should take a look.
Triple Net Lease Giant
The last company that caught my eye is one I own, Realty Income Fund. The company owns a massive and diverse portfolio of triple net lease properties. Generally single tenant buildings, they are called triple net lease because the tenant is responsible for taking care of the building. This property class tends to be fairly stable, though rental growth can be slow.
Realty Income Fund is a great company with a generally conservative management team. It pays a monthly dividend that has been increased yearly for an enviably long time. During the 2007 to 2009 recession, the REIT was yielding 10%. Today it's yielding less than half of that. Clearly it has had a nice run. While the company is well worth owning, income investors should wait for a pull back.
ReubenGBrewer has a position in Realty Income Fund. The Motley Fool has no positions in the stocks mentioned above. 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!