Dear Mr. Berko: I have $20,000 to invest in one or two REITs and need your recommendations for a long-term (three to five years) time frame.
I want to earn 6 percent in dividends and will reinvest those dividends into additional shares. I want to avoid highly leveraged REITs because I’m certain interest rates will be much higher in a few years, and REITs with large debts will have high capital costs, reducing their incomes and dividend payouts. — A.M., Fort Walton Beach, Fla.
Dear A.M.: REITs have been soaring since January. The iShares Dow Jones Real Estate Exchange Traded Fund (IYR, 52-week high of $57.97 as of Nov. 5) are up nearly 50 percent from their $40 low price earlier this year. That’s an impressive move, compared with the S&P Financial Sector, which is up 8 percent for the same period.
I don’t follow REITs, but I do follow recommendations made by a Russian hedge fund manager who lives in Kiev, recently retired from the KGB and is a consultant to Goldman Sachs. This fellow, whom I shall call Bruce, selected five REITs he believes have low downside risk and a good chance for appreciation because each has a low debt-to-capital ratio. Bruce believes their low debt will increase their earning potential (more than REITs with higher debt) when the economy turns the corner.
While most REITs have debt-to-capital ratios between 50 percent and 70 percent, the following REITs have debt-to-capital ratios of less than 20 percent. Bruce, bald as a bullet, is one of the sharpest knives in the drawer, and the following five REITs may prove his worth.
Entertainment Properties (EPR, 52-week high of $49.73 as of Nov. 5) owns megaplex theatres, entertainment retail centers and destination recreational and specialty properties in 26 states. EPR has a $37 book value, its $2.60 dividend yields 5.7 percent and debt is 7 percent of capital. Seven analysts cover EPR, and six have a “buy” recommendation.
Getty Reality (GTY, 52-week high of $31.46 as of Nov. 8) owns and leases convenience stores that also sell oil and gas plus several petroleum distributions centers. GTY’s 1,054 properties have an $11.47 book value, its $1.92 dividend yields 6.4 percent and debt is 16 percent of capital. There are no “top-ranked” analysts who follow GTY, but Bruce thinks GTY could be a $37 stock in two years.
Medical Properties Trust (MPW, 52-week high of $11.65 as of Nov. 4) owns 21 acute care hospitals, 13 long-term acute care hospitals, six inpatient rehab hospitals, six wellness centers and two medical office buildings. MPW has a $9.13 book value, the 80-cent dividend yields 7.6 percent and debt is 20 percent of capital. Jeffries and JMP Securities have a “buy” rating on MPW.
Government Properties Income Trust (GOV, 52-week high of $28.53 as of July 27) owns 33 properties that are leased to government tenants. GOV has a $19.42 book value, its $1.64 dividend yields 6.2 percent and debt is 16 percent of capital. Four analysts follow GOV; two have a “buy,” and two have a “hold” recommendation.
And LTC Properties (LTC, 52-week high of $28.76 as of April 22) owns 61 skilled nursing properties with 7,200 beds and 84 assisted-living properties with 3,774 units. LTC has a $13.21 book value, its $1.68 dividend yields 6.3 percent and debt is only 8 percent of capital. JMP Securities and Hilliard Lyons rates it as a “buy.”
Meanwhile, don’t cherry-pick one or two of these issues; rather, divide your $20,000 evenly between all five. Of course, you know that a good portion of the dividends are not taxable, but reduce your cost basis by the nontaxable amount.
Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775 or e-mail him at email@example.com.