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Capital Markets -- Current Yield: 11 REIT Plays for Income Investors -- Barron's

21 Jan 2017 11:01 am
By Amey Stone 

Real estate investment trusts have been terrific investments for the past five years, returning an average annualized 12%, between price appreciation and dividends.

The past six months have been tougher on the sector, though, as investors took profits and interest rates started to rise. REITs are down an average 7% in the past six months, and now yield about 4% -- though some sport much higher payouts.

But there are other reasons income-oriented investors should consider diversifying into REITs now. Unlike traditional fixed-income investments, the sector has long-term inflation-fighting attributes. With President Donald Trump promising stimulus measures like infrastructure spending and tax reform, economic growth should pick up. That's what matters for REITs long term, not rising rates, says Ken Leon, a REIT analyst at CFRA Research. "Growth so far looks really good for 2017," he notes.

Still, it could be a rocky year for REITs, with the Federal Reserve indicating it will raise interest rates three times. In the short term, REIT prices get hit as rates rise -- but they "often turn out better than most think," says Richard Daskin of RSD Advisors. Longer term, "the improved economic outlook tends to have strong positive correlation to real estate fundamentals," says Timbercreek Asset Management portfolio manager Sam Sahn.

BTIG's REIT equity research team expects REIT returns to be flat in 2017, thanks largely to higher rates, but certain sectors, like industrial, office, and high-end malls, to outperform. Top picks include high-end mall operator Simon Property Group (ticker: SPG), which yields 3.6%, and strip-center operator Retail Opportunity Investment (ROIC).

BTIG also likes medical-office provider Physicians Realty Trust (DOC), which yields 4.8%, and Store Capital (STOR), a so-called net-lease REIT, which buys single-tenant properties. It yields 4.6%. Chris Lucas, a REIT analyst at Capital One Securities, says Store Capital is his top pick for income.

Industrial REITs boast the strongest fundamentals in real estate, as e-commerce creates the need for distribution centers, says CFRA's Leon. He favors market leader Prologis (PLD). He also likes some cell-tower REITS, such as Crown Castle International (CCI), which yields 4.4%.

Timbercreek's Sahn names office REIT SL Green Realty (SLG) as one of his favorite holdings, since it should benefit from an improving market for office space in New York as banks and financial firms prosper due to Trump policies. For yield, he highlights the "overlooked" MGM Growth Properties (MGP), a gaming and lodging REIT, which pays out 6.2%.

INDEX INVESTORS have an obvious choice in the Vanguard REIT exchange-traded fund (VNQ), which has $34 billion in assets, yields 4.8%, and charges annual fees of 0.12%. But active management makes sense when sector performance can vary so much.

Some actively managed closed-end funds have very high yields and solid managers. Plus, discounts are getting wider as the sector falls out of favor. John Scott Cole of CEF Advisors likes Cohen & Steers Total Return Realty (RFI), which has a 7.9% yield and is now selling at an 8.4% discount, and Alpine Global Premier Properties (AWP), which has an 11.4% yield and is selling for a 17% discount.

Both REIT funds and individual REITs can be a lot riskier and more volatile than bonds -- and a rising-rate environment isn't a traditional time to buy them. But with inflation percolating, diversifying makes sense. "Investors need to really think about the role they expect an asset class to play in their portfolio," says Scott Clemons, chief investment strategist at Brown Brothers Harriman. He advises: "They should be more of a long-term strategic allocation than a short-term trade."

Email: amey.stone@barrons.com

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(END) Dow Jones Newswires

January 21, 2017 06:01 ET (11:01 GMT)

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