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Three REITs That Could Bounce Back

07/30/2007 12:00 am EST

Focus: REITS

Neil George

Editor, Profitable Investing

Neil George, editor of Personal Finance, finds some bargains amid the recent selloff of real estate investment trusts, especially among those that own hotels.

For the past five years, the US REIT market has generated a total return of around 157%. And even with the recent pullback, the market still managed to hand in a return of 10% during the past 12 months. The Standard & Poor’s 500 is up slightly more than 80% during the same [period]—with a lot more chills than thrills.

Hotel property REITs have been discounted enough recently that their assets are trading just above book value or at discounts to what the assets are worth. This is a prime time to be buying this segment; the US REITs are continuing to generate revenue gains in the solid double-digits with values at industry lows for net assets.

We start with Hospitality Properties (NYSE: HPT), which owns and operates a collection of flag properties, ranging from Marriott to Intercontinental, as well as a variety of mid-level properties. The REIT continued to bolster revenues from its major and secondary market properties by an average of 25% a year. And with that ample cash flow, the REIT has been paying a dividend of more than 7.3%, which has been rising nearly 12% on average for the past five years.

Although the average REIT in the US is still valued near six times net assets, Hospitality Properties is a bargain buy at not much more than current book value. Buy Hospitality Properties up to 49. (It closed Friday at its 52-week low of around $37.50—Editor.)

Not all hotels are always prime, as any traveler knows. Hotels need to be maintained and updated, something that some owners let go until the properties become a problem. This is where MHI Hospitality (NYSE: MDH) comes in. Think of it as private equity on the prowl for rehab deals in the hotel market. Although it’s relatively new to the market, MHI’s results are right on course with turnarounds in its acquired hotels. Revenues are up 22 percent, and dividends are consistently above 6.3 percent. And it’s still cheap at only 1.7 times the properties’ current value. Buy MHI Hospitality up to 14. (It closed just below $11 Friday—Editor.)

Last, in the heavily maligned mortgage REIT market is one of our favorite REITs, Thornburg Mortgage (NYSE: TMA).

There’s been a lot of mischief and mayhem in mortgage REITs, even before the subprime mania. [But] Thornburg has been in the business for a long time and focuses on its well-understood segment of high-credit-score borrowers primarily in adjustable-rate mortgage loans. It’s sustained its business profits during all market conditions whether rates were heading higher, lower, or flat.

While paying us around 10% along the way, the REIT has provided an average annual return—including the down times—of nearly 20% [annually] for each of the past five years. Thornburg Mortgage is a consistent buy on any selloff up to 31.25. (It closed below $27 Friday—Editor.)

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