Although interest rate increases may take real estate investment trusts (REITs) down a notch, REITs are also a long-term inflation hedge. That means it could be time to start considering names like Stag Industrial Inc (NYSE:STAG), Whitestone REIT (NYSE:WSR), and Omega Healthcare Investors Inc (NYSE:OHI).
Interest Rate Sensitivity
There’s no question that REITs are interest rate sensitive. When rates head higher REIT shares will head lower. However, interest rates tend to go up because of inflation. And that’s where REITs shine.
Property REITs own hard assets. Since they aren’t making any more property, it tends to increase in value over time. That’s one reason to consider them when inflation is heading higher. However, a better reason is the way that leases are written.
Interest rates have been moving up, so investors should be preparing for that initial shock by making a list of REITs they might like to own. Some names to consider are:
Industrial Player
Stag Industrial Inc (NYSE:STAG), which yields around 6%, is a solid, higher yielding option in the industrial space. Relatively small, it focuses on second tier markets and owns just over 180 properties. While buying in second tier anything may sound risky, STAG is a well financed and disciplined competitor in a highly fragmented market. Its main competitors are mostly small private owners with just one to ten properties. This gives the company a notable edge.
In addition, Stag Industrial Inc (NYSE:STAG)’s investment team examines properties to ensure that they are essential to a lessee’s operations. This helps reduce the risk of broken leases.
The company’s shares yield well above the average industrial REIT because of its relatively short trading history and second tier market focus. While the yield is compelling now, it would be an even better deal with a 7% to 8% yield.
Renovations
Whitestone REIT (NYSE:WSR) also focuses on secondary markets, buying strip malls and office buildings that it calls “community centered properties” that are in need of tender loving care. It then redevelops the buildings and re-leases them. Although it has a small presence in Illinois, its portfolio is mainly in Arizona and fast growing Texas.
Redevelopment can be risky, particularly for a company with only about 50 properties. However, over the last three years, Whitestone REIT (NYSE:WSR) has been able to increase rent rolls, and acquisition activity has been reasonably brisk. And, with such a small portfolio, even modest acquisitions are meaningful to the top and bottom lines.
The yield was recently around 7%, well above larger players like Kimco Realty Corp (NYSE:KIM), which yields around 3.8%. Adding to the allure for income seekers, Whitestone REIT (NYSE:WSR) pays monthly dividends.
Health Care
Health care REITs are far from cheap, having run up in price over the last few years. However, a small collection have solid histories of increasing their dividends annually. Omega Healthcare Investors Inc (NYSE:OHI) is one such company.
The REIT owns or holds mortgages on over 450 skilled nursing facilities and assisted living facilities in about 30 states. As the baby boomers age, demand is going to increase. That said, Omega Healthcare Investors Inc (NYSE:OHI) has more exposure to third party payment issues than many of its peers. That increases the risk from changes being made to health care laws. While that’s a negative, it’s unlikely that payment changes will be draconian in the near term.
With a yield of around 5.9%, the shares yield more than a full percentage point more than industry giant HCP, Inc. (NYSE:HCP). At around half the size of HCP, however, Omega Healthcare Investors Inc (NYSE:OHI)’s growth prospects are better. Although the top-line probably won’t quadruple over the next decade, as it did over the last one, and the dividend probably won’t double again in ten years, continued growth seems fairly certain. The shares would be a great buy with an 8% or so yield.
At Least Watch These Names
Income investors should at least be watching the three REITs above. The yields are compelling now, particularly relative to competitors, and the shares have already seen a sell-off. That said, if rates really start to head higher, there could be some more near-term pain to deal with. Longer term, however, all three are likely to provide both upside potential and rental growth that keeps up with or surpasses inflation.
The article REITs as an Inflation hedge: Three to Watch originally appeared on Fool.com.
Reuben Brewer has a position in HCP. The Motley Fool has no position in any of the stocks mentioned. Reuben is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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