Office REITs: Brandywine & Starwood

10/25/2016 9:00 am EST

Focus: REITS

Benjamin Shepherd

Analyst, Breakthrough Tech Profits, Global Income Edge and Personal Finance

With interest rates near all-time lows, investors are looking for replacement income, and REITs continue to offer higher yields than your typical income stock, explains Benjamin Shepherd, editor of Personal Finance.

Not all REITs are created equally, though, and lately, some have performed better than others. Office REITs are the top performers now, with the sector gaining 16% so far this year. Here are two that I like.

Brandywine Realty Trust (BDN) is practically a pure play on the office market. Although technically most Brandywine properties are mixed use, more than 97% are offices.

Brandywine also concentrates on markets in Philadelphia, Washington, D.C., and Austin, Texas, as they tend to be stable even when the economy falters. Brandywine has an occupancy rate of 92.1%.

Brandywine is also attractively valued compared to many of its peers, trading at just 1.5 times its book value versus an average 2.2 times, and 4.9 times its trailing 12-month sales compared to 6.9 times for most of its peers.

You also can play the office REIT market with Starwood Property Trust (STWD), though it is much more diversified and leveraged. Starwood owns $1.2 billion of property; just the office portion of the property, including leases, is worth $485 million.

But the REIT’s primary business is lending money. It currently holds a portfolio of loans valued at $6.6 billion, just over a third of which is office buildings.

Because Starwood is a lender, rising interest rates could hurt Starwood’s bottom line.

While that is a potential risk, interest rates for 89.2% of Starwood’s loan portfolio are indexed to LIBOR, the short-term rate that most banks pay to borrow from one another. So the rates for most Starwood loans will increase automatically when the Fed raises rates.

Like Brandywine, Starwood generates strong funds from operations growth, which shot up more than 160% last year and nearly 49% in 2014.

That growth more than covered the dividend payout, and with shares currently yielding 8.3%, you won’t find a more generous dividend.

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By Benjamin Shepherd, Editor of Personal Finance

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