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 – $57.37) 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 – $46.04) 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 – $29.60) 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 – $10.48) 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 – $25.68) 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 l6 percent of capital. Four analysts follow GOV; two have a “buy,” and two have a “hold” recommendation.
And LTC Properties (LTC – $26.62) 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 non-taxable amount.
Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775 or e-mail him at mjberko@yahoo.com. Visit Creators Syndicate website at www.creators.com.
© 2010 Creators Syndicate Inc.
