Right REITs: Realty Income and Omega

12/09/2013 7:00 am EST

Focus: STOCKS

 

Although real estate investment trusts have been among the best performing stocks over the last year, they have been among the worst performers since the Fed started discussing the end of QE3 in late May, observes Brit Ryle, editor of the Wealth Advisory.

For the last couple of years, REITs have also had the opportunity to refinance debt at lower interest rates, which make them more profitable, as they pay less in interest.

Now that rates may be rising, the profitability of these companies may be challenged. Still, we find attractive stocks in the group, and we don't plan to shy away from them.

In its latest quarterly report, Realty Income Corp. (O) reported $0.59 a share, missing expectations by two pennies. Still, analysts have raised 2013 and 2014 annual numbers, so the miss does not seem significant.

Some key notes from the quarter:

  • Rental rates are up 1.3%, occupancy rates rose to 98.1%.

 

  • Property expenses are very low, at just 2.2% of revenue.

 

  • Funds from operations (FFO) were up 15.4% year over year.

 

In July, we upgraded this REIT to a strong buy on the QE weakness. As one of the premier REITs in the space, we continue to rate Realty Income Trust a strong buy, especially for new money.

Meanwhile, Omega Healthcare Investors (OHI) has become one of the cheapest REITs on the market. The weakness has become nearly indiscriminate. Consider the recent reaction to earnings.

Omega reported 3Q earnings on November 1. The company reported $0.63 a share, when analysts were looking for $0.62.

Omega maintained guidance for the full year. Analysts have raised their estimates for 2014, which is a good sign.

Once again, the shares sold off after the earnings report. And once again, this dip is a buying opportunity.

Omega remains our favorite healthcare REIT—and one of our favorite REITs in general. It's a strong buy under $39 a share. Our 12-month price target is $45.

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