3 High-Yielding Stocks a Leading REIT Expert Likes Right Now

You likely don't know Ralph Block, but trust me: When Block is talking real estate investment trusts (REITs), you'll want to pull up a chair and listen. A former lawyer, Block is an expert on REITs and has literally written the book on investing in them. The fourth edition of his Investing in REITs is in the works right now.

He's also a former co-manager of the Undiscovered Managers REIT fund, and has been personally investing in REITs for more than 40 years. I interviewed Block at the end of January on a variety of REIT-related topics, including his favorite stocks in the space right now. What follows is an edited portion of our conversation.

Brian Richards: What are some of your favorite ideas in the REIT space?

Ralph Block: One is a company I absolutely love; I have more of my personal funds in it than anything else. It's a company called Nationwide Health Properties (NYSE: NHP  ) . They have a very, very conservative balance sheet. They're in the health-care sector, which I like ... and which I think is a pretty conservative sector to be in. And the management is experienced; they're smart but they're also conservative, and they don't like to take a lot of risks.

And the stock now is trading at one of the lowest-priced AFFO multiples of the major REITs -- it's about 16 times earnings. And the growth rate is going to be pretty respectable, 5% or 6% a year. They're making some good acquisitions, and the dividend yield is over 5% -- I think it's 5.2% today.

For a mix of value and conservative management, conservative balance sheet, in what I still think is a pretty good sector, I really like that one.

And then one that a lot of Motley Fool people like, I also like. It's a small one that is still pretty much undiscovered: Retail Opportunity Investments (Nasdaq: ROIC  ) . It's an interesting one because they just became a REIT about a year ago. They started off as a SPAC (special purpose acquisition company) and decided not to liquidate.

They wanted to become a REIT, and they went out and found a guy named Stuart Tanz who was the CEO of Pan Pacific, which did very well. They sold out at near the top of the market to Kimco Realty and I guess Tanz was just looking around for something to do. So they brought him on board, he invested a lot of his own money in the stock and they've been going out and acquiring retail shopping centers for all of 2010. And I think they're getting some very attractive values.

They're not stealing properties -- nobody is these days -- but they're getting some very good values and they're cranking up their cash flow. I think the dividend will be increased significantly next year and it's a stock that's just very much underfollowed. The big sell-side firms don't follow it and I think it's got a lot of potential.

Richards: Do you think the sell-side firms don't follow it because of its new REIT status or is it that it's just too small?

Block: I think that's part of it. It's also fairly small, but I think the main thing is because it's just too new. BMO Capital Markets came out with a report on it [recently]. Their initial rating was overweight, I think they said. And if you listen to the conference calls, the management's on top of things but there's only roughly two or three questions on each conference call. So --

Richards: It makes it pretty easy on them.

Block: Oh, it's great. I remember the last time that happened there was an outlet center REIT called Chelsea that was just doing well, but there wasn't anybody on the call. Finally Simon bought them out and I was sorry to see them go.

And then the third one is my growth REIT here, Avalon Bay (NYSE: AVB  ) .

I like the apartment sector ... but I've always liked this company. They've always been conservative with their balance sheet but they've been excellent developers. I think they're the best development team in the apartment sector. They have a balance sheet which is still very strong, and I think the apartment sector has clearly turned.

We're going to see some double-digit growth for a lot of the apartment REITs in the next two years, but what I think makes Avalon Bay particularly good is that they're already starting the development process. And I think as these developments get completed there's going to be a really nice sweet spot for them because there are still not a lot of new apartments being developed, and if they can get some job growth -- they're already doing pretty well without job growth. If they can get that I think they'll do real well.

Richards: Where's their heavy exposure nationally? Are they in the good cities to be in for job growth? Are they in the D.C. area, for example?

Block: Yeah, they really have kind of two major areas. One is along the West Coast -- the Bay area is doing better than southern California but southern California's starting to firm up now -- and then they have a lot of stuff in the mid-Atlantic and up in the Northeast. So you know, those markets are coming along pretty good. They're really recovering faster than most people had thought they would.

Read up for more of Block's thoughts on REITs:

Fool.com managing editor Brian Richards does not own shares of any companies mentioned, but he just added these three stocks to his Watchlist. You can too -- just go to www.MyWatchlist.com. Retail Opportunity Investments is a Motley Fool Inside Value recommendation. The Fool owns shares of Retail Opportunity Investments and has a disclosure policy.


Read/Post Comments (5) | Recommend This Article (13)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 15, 2011, at 8:45 PM, HectorLemans wrote:

    Can someone explain to me why the PE ratio of REITs is all over the map? I understand that REITs have to pay out most of their earnings through dividends so the ratio is going to be higher than stocks but even when I add the dividends back in, most REITs I look at have a PE of 60+. Should I not even be looking at that? I've just started checking out REITs...I should probably buy a good book and read up on how to evaluate them.

  • Report this Comment On February 15, 2011, at 10:42 PM, TMFBrich wrote:

    @HectorLemans,

    Here's a good intro to valuing REITs: http://www.investopedia.com/articles/04/112204.asp. And I recommend Ralph's book, "Investing in REITs," linked in the above story.

    Best regards,

    Brian Richards

  • Report this Comment On February 16, 2011, at 1:17 PM, HectorLemans wrote:

    @Brian

    Thanks for the link! Very helpful. Right now I'm trying to figure out if Digital Realty Trust (DLR) is fairly valued. They've held up extremely well during the recession and have fallen in price the last month or so. I also think the industry they're in (data centers) has plenty of room to grow

  • Report this Comment On February 16, 2011, at 6:44 PM, Cuprock wrote:

    Nice article. Am trying to move into REIT as I get closer to retiring. I like Nationwide Health Properties listed above and I like the 5% return even better but when I check it out further I found this. "Regular Dividend of $0.48 went Ex: NHP began trading ex-dividend today, payable to shareholders of record as of 02/18/2011." Tell me again why I'd buy this? Doesn't seem like such a good buy after all. Thanks.

  • Report this Comment On February 20, 2011, at 10:10 PM, hondodog wrote:

    @Cuprock

    so you missed a dividend, there's 3 more to come this year...i normally put in a limit order to purchase at a set price, so that i can adjust the price for the "lost" dividend...which should adjust, at least briefly, for the reduction of worth caused by distribution of the dividend...

    if you like the entry price (determined that the REIT in question has good $/FFO, good dividend yield/history or potential for growth), then missing 1/4 of the year's dividend should not kill the deal.

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