The Right REITs

06/02/2014 10:00 am EST

Focus: REITS

Carolyn Bigda of Kiplinger's Personal Finance sees upside opportunity in select real estate investment trusts. Here, she explains the attraction of the sector and highlights her favorite ways to invest in this income-generating market.

Steven Halpern: Joining us today is Carolyn Bigda of Kiplinger's Personal Finance. It's always a pleasure talking to you, Carolyn. How are you doing, today?

Carloyn Bigda: I'm fine. Thanks for having me.

Steven Halpern: Today, we're going to discuss real estate investment trusts, the subject of your latest article for Kiplinger's, and before we turn to specific investment ideas, could you first explain to our listeners some of the basics of REITs and what type of investor should consider buying them?

Carloyn Bigda: Sure, so a REIT is, essentially, a company that owns and operates an income producing real estate, and one of the things that people like about them is that they tend to be a good diversifier for a portfolio, so they're not always going to move exactly in tandem with stocks or bonds.

By law, REITs also have to deliver some pretty high income. The companies must pay out at least 90% of a taxable income to shareholders, so, when you combine a big yield with potential appreciation, that can lead to some pretty juicy returns.

Steven Halpern: Now, you point out that the conditions for the overall REIT sector are improving. Indeed, you suggest that moderately rising interest rates shouldn't necessarily be considered a deterrent to investing. Could you expand on that?

Carloyn Bigda: Sure, yeah, I mean, typically, when interest rates are rising, investments that pay out income like bonds, and you might think REITs don't do as well.

But, when interest rates are rising, just sort of slowly, that can be a good thing for REITs, because they can actually raise rents and benefit from improving property values if, you know, rates are rising because of a stronger economy.

And studies have shown that there have been stretches in the past where rates had been rising gradually and REITs had actually performed very well.

Steven Halpern: Now, in your new article in Kiplinger's, you highlight a number of, what you call, attractive candidates within the REIT sector. First, you look at an upscale play in the hotel market. Can you tell us about that?

Carloyn Bigda: Sure, you know, the hotel market actually did pretty well last year, and the demand going forward is expected to be even stronger, because there are fewer new hotels that are being built, so that kind of thing would benefit a company like Chesapeake Lodging Trust (CHSP).

The REIT owns 20 upscale hotels in major US cities, and that's a good thing. As always with real estate, location is important, and so, if you have a prime location and a good property, you are going to be attracting travelers.

And the company is expected to be able to raise the revenue it earns per room by more than 5% going forward, which is about on average.

So, the company itself has pretty good prospects and, in addition to that, it's also trading at a very reasonable price today, so it could be a good time to, sort of, get in on this hotel operator.

Steven Halpern: Now, you also look at a real estate investment trust that's involved in high-end shopping centers. Could you tell us a little about Simon Property Group (SPG)?


Carolyn Bigda: Sure, yeah, malls have been actually getting a bad rap lately, because of the popularity of online shopping, but a lot of analysts argue that high-end malls still have a bright future and a lot of people like to go there to browse and to also, sort of, experience a nice high-end shopping environment.

And Simon Property Group is well positioned to benefit from that. It owns high-end malls throughout the country. It also operates the premium outlet shopping centers—which I'm probably a little too familiar with—and so, it's in a really good position to, kind of, benefit from any sort of uptrend in the high-end shopping area.

Last year, occupancy at its stores grew from just over 95% to a little more than 96% and the firm is expecting to be able to increase rent as well, so that all bodes very well for the company.

Steven Halpern: Now, not as many people will spend time at storage facilities as they will at hotels or malls, but you also see an opportunity in the storage sector. Could you tell us about that?

Carolyn Bigda: Sure, yeah, not too long ago, the storage business was mostly made up of individual mom and pop shops, but since then, the industry has been consolidating and a company like Public Storage (PSA)—which is now, sort of, the largest public company in this area—it really stands to benefit.

It's increasing locations and it has a very strong brand that's attracting customers, and so, last year its occupancy rates were climbing, and the company has been able to boost rents, and not a lot of new development is occurring in the public storage area.

It's not a very popular thing to introduce into a community and it can take a while to attract a solid customer base, so public storage is in a fairly strong position.

Steven Halpern: Now, finally, for investors that are a little more concerned about diversification rather than picking an individual stock, you point to funds that cover the REIT market. Could you tell us of some of those to consider?

Carolyn Bigda: Sure, there are several REIT funds out there. Ones that we looked at had no loads, meaning there was no sales charge to invest in them and they also had, typically, low annual fees.

One that we like is a Fidelity Real Estate Investment (FRESX:US). The fund's manager has been around and running the fund for a very long time and he looks for stocks based on property values and potential rent growth, and over the past 15 years, the fund has returned 11.5% annually, so that's pretty good.

Another possibility that we like is the T. Rowe Price Real Estate (TRREX:US). Again, this fund has a long-term manager. He's been around since—he's been in charge, actually, since 1997—and he looks for REITs that are trading at a discount to the value of the property, and that has helped boost longer-term returns as well for the fund.

And just as one last option, if you're looking for really low-cost, we like the ETF, the Vanguard REIT Index (VNQ:US). It launched in 2004 and it only charges 0.10% in fees annually, which is very low.

Steven Halpern: Well, I'd remind our listeners that the latest issue of Kiplinger's Personal Finance—where you've written this article—is just out on the newsstands and it includes a lot more information on real estate investment trusts. In the meantime, I want to thank you for joining us and sharing some of your ideas.

Carolyn Bigda: Oh, it's been my pleasure.

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