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The Right REITs for Rising Rates

12/29/2016 8:00 am EST

Focus: REITS

Keith Fitz-Gerald

Chief Investment Strategist, The Money Map Report

Conventional wisdom suggests rising rates are bad for real estate investment trusts. In fact, that’s not always true. REITs have historically done well when the cost of money is increasing, asserts Keith Fitz-Gerald, editor of Total Wealth.

Between 1994 and 2013, for example, there were nine time periods when interest rates rose by more than 1% (or 100 basis points in trader speak) as measured by the 10-Year U.S. Treasury note.

Six out of nine of those times, REITs provided positive returns -- despite the fact that those rate chances were roughly four times larger than the measly 0.25% hike Yellen just made and the three hikes she says she’s going to make in 2017.

Well-managed REITs that have a good handle on their debt won’t necessarily face higher interest costs like many people believe.

Moreover, they may also be able to grow their revenues faster because of their ability to increase rent for the right tenants even in a rising rate environment.

Take Alexandria Real Estate Equities (ARE), for example. The company deals heavily in tech real estate in New York and San Francisco among other places.

It uses a very innovative “cluster model” that groups investments immediately adjacent to world class academic, medical, and technology institutions.

The model exploits the logical strength associated with the world’s most sophisticated biotech companies, medical researchers, product development and even biofuels.

All of these are highly secure lessees, not the fly-by-night, perennially unprofitable tenants associated with lesser quality REITs.

Or, consider Omega Healthcare Investors (OHI). The Maryland-based company invests heavily in hospital properties and health care facilities, with a special emphasis on nursing facilities.

This concentration dovetails nicely with two unstoppable trends — medicine and demographics — at a time when an estimated 10,000 baby boomers retire each day in America.

Like ARE, OHI has high-quality tenants representing a fraction of the risk associated with traditional office or residential tenants. And like ARE, OHI recently raised its dividend, resulting in a mouth-watering current yield of 8%.

OHI is cheap after the haircut so many REITs have seen in 2016, and it currently trades at a PE ratio of just 19.9, which strikes me as great value for a company that’s expanding its holdings and growing earnings by 11% year-over year.

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