Can a single metric point you toward the best stock buy out there? Alas, probably not. However, by using the right ones that are important to a particular industry, we can negotiate our way through the hundreds — if not thousands — of options.
In the case of REITs, investors often don’t get very far beyond the yield, especially when considering double-digit yielders such as Annaly Capital Management, Inc. (NYSE:NLY) and American Capital Agency Corp. (NASDAQ:AGNC). In general, there is nothing wrong with these REITs or others like them that focus on generating their income from the interest rate spread of the mortgage-backed securities that they invest in. However, there is a large crop of REITs that generate income by using the same interest rate spreads to invest in property and generate income off of the corresponding rents. This is where I’ll be looking to find some hidden gems.
Most REITs, regardless of type, will use debt in order to magnify their returns. If they didn’t do this, their ability to purchase any asset would be severely restricted by the amount of capital they have available, which would ultimately reduce the return on investment for investors. As we learned during the financial crisis, too much of the wrong type of debt can have catastrophic consequences, so we need to take a look at the debt-to-equity ratio to make sure that the REITs aren’t over-levered to an extreme amount.
I managed to find five high-yielding REITs with a debt-to-equity ratio below 1.0, meaning that they currently have more equity than debt on their balance sheets. I’m going to take a quick look behind the numbers at the five on the list and present you with my favorite of the group at the end of this article. Here’s the list:
| Company | REIT Industry | Market Cap | D/E Ratio | Dividend Yield |
|---|---|---|---|---|
| Government Properties Income Trust | Office Buildings | $1.35B | 0.70 | 6.9% |
| Senior Housing Properties Trust | Residential | $4.31B | 0.70 | 6.4% |
| LTC Properties (NYSE:LTC) | Healthcare Facilities | $1.14B | 0.48 | 5% |
| Entertainment Properties Trust | Retail | $2.22B | 0.91 | 6.3% |
| Hospitality Properties Trust | Hotels/Motels | $3.18B | 0.87 | 7.3% |
Source: FinViz.com.
Rent check from the government
As its name suggests, Government Properties Income Trust is in the business of renting office buildings to various government agencies at the state and national level, with 73% of current properties leased to the U.S. government. Having the federal government as its primary customer will help ensure that rents will continue to be paid, and an average remaining lease term of over five years will hopefully preclude investors from seeing any surprise vacancies over the next few years, preventing massive fluctuations with earnings.
Options because of an aging populace
Two other REITs on this list, Senior Housing Properties Trust and LTC Properties, could be strong options going forward, especially as the baby boomers continue to age and move onto the next phase of their lives. Senior Housing owns and operates a variety of property types that cater specifically to older Americans. Its portfolio of 384 properties in 40 states consists of independent living and assisted living communities, retirement communities, nursing homes, wellness centers, and other medical facilities.
