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Three Reasons to Invest in These REITs

In this month’s Dividend Digest, our contributors have recommended two commercial REITs.

By Nancy Zambell

Editor of Investment Digest and Dividend Digest

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Buy for the Generous Dividend

Stay for the Capital Gains

Significant Upside for this Commercial REIT

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In February, I wrote a Cabot Wealth Advisory article about Real Estate Investment Trusts, citing their diversification, liquidity, high income, and portfolio protection advantages (click here to read the article). With interest rates still historically low, and the economy and real estate market improving, I recommended that you purchase a mortgage REIT, Invesco Mortgage Capital (IVR).

That turned out to be a good recommendation, as at that time, IVR was trading at 15.85 per share. Since then, the REIT has paid a dividend of $0.50 per share and seen its price rise to 16.82. Combined with the dividend, that gives you a return of 9.3% in three short months!

Investors like to buy REITs when they are concerned about the market and the economy. You only have to look at the volatility of the markets so far in 2014 to determine that many investors remain concerned about the economy, and are wondering if 2014’s excellent market returns can be sustained.

Yes, we are still in a period of economic recovery, and that should bode well for all stocks. But the potential for REITs continues to be excellent.

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In this month’s Dividend Digest, our contributors have recommended two commercial REITs. John Dobosz from Forbes Dividend Investor recommended Realty Income Corp. (O), based on its discounted valuation. And Ross L. Smotrich of Barclay’s Capital advised buying shares in Alexandria Real Estate Equities (ARE), due to strong industry trends, rising occupancy rates and undervaluation.

I agree with their assessments and think commercial REITs continue to be attractive for the following reasons:

Interest rates are still very low. The Fed Funds Rate (the rate at which banks borrow from each other) remains at 0.25%. The average 30-year mortgage rate stands at 4.29%, still incredibly cheap. That means that businesses, REITs and homebuyers can still borrow very cheaply.

Delinquencies are declining. Commercial and industrial loans losses have declined to 0.30%, their lowest level since 1984, and considerably smaller than the post-recession high of 2.72%, according to the FDIC. And commercial lending is rising, with Wells Fargo and Bank of America adding to their portfolios by 1.1% and 0.1%, respectively. The Federal Reserve says that total commercial and industrial loans outstanding rose to a record $1.69 trillion for the week ended April 16, and loan growth was 12.4% in the first quarter, up from 7.2% in the last quarter of 2013—some 9% above the average since the financial meltdown.

Commercial real estate transactions are rising. According to a new forecast by the Urban Land Institute and Ernst & Young, leading real estate economists are forecasting that commercial property transactions will increase to $430 billion by 2016, which will be the highest level since pre-recession 2006.

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I found another commercial REIT that looks very attractive: National Retail Properties (NNN), a real estate investment trust that invests primarily in single-tenant retail properties with long-term leases. Its top five tenants are Susser Holdings (owner of Stripe’s convenience stores; 5% of annualized base rate), Mister Car Wash (4.9%), Pantry (Kangaroo Express convenience stores; 4.4%), 7-Eleven (4.2%) and L.A. Fitness (4.2%).

This REIT was created in 1984 and has a long history of success. I’ve known and followed this company for many years and have bought and sold it several times, with great returns. I think the time is right to buy it again.

Headquartered in Orlando, Florida, National is a net lease company, which means its tenants pay for improvements and any repairs. The REIT has 1,903 properties in 47 states.

For the first quarter, National saw its revenues rise by 12.5%, to $104.07 million and funds from operations increase to $0.51 per share, up from $0.49 per share in the previous year’s first quarter. Occupancy is a steady 98.2%.

The company has rewarded shareholders with 24 years of consecutive dividend increases. It currently pays a $0.405 quarterly dividend per share, which adds up to a 4.7% yield. The shares were just initiated with an “Outperform” rating at Oppenheimer.

The company has a strong balance sheet, with plenty of cash, and is on the lookout for more acquisitions to add to its portfolio. I think its shares are undervalued, and could easily rise to 45. Combined with the dividend, that means significant upside from NNN’s current price of around 35.

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Sincerely,

Nancy Zambell
Editor of Investment Digest and Dividend Digest

Cabot Editor