4-Star REITs Looking to Outperform

With Treasuries at all-time lows and concerns over the stock market's recovery, savvy investors have had to look elsewhere to find solid yields. Sure -- big-name players such as Procter & Gamble and Verizon pay good dividends and have sustainable businesses, but after the financial panic of 2008 and the flash crash this past May, many people are just too fearful to get back in the game.

One sector that has shown resilience and the ability to dish out cash has been real estate investment trusts. The industry had two good quarters in the last of 2009 and the first of 2010, and despite a slowdown in the second quarter of this year, REITs have still managed to outperform the S&P 500. In the first quarter of 2010, year-over-year returns for hotel REITs were up 40%, offices were up 34%, and industrial mixed properties were up 12%.

However, as of this past week, many REITs have already seemed to see stellar gains, which makes one wonder, have they run up too far, too fast? Many of our 165,000-strong CAPS community feel that REITs will continue to outperform the market, so I wanted to take a look at four-star stocks that may just have what it takes to reach five-star status. Check out these five stocks:

Source: CAPS data; Google Finance.

Financial REITs such as Hatteras and Annaly Capital (NYSE: NLY) spin-off Chimera have been able to successfully utilize the low interest rate environment to borrow money, lend it at a higher rate, and pocket the profits in the interim period. With QE2 taking effect and the Fed's blatant implication that rates will continue to stay at rock-bottom levels, companies such as Hatteras and Cypress Sharpride Investments (NYSE: CYS) should be able to continue their borrow-and-lend business model. In the meantime, feel free to collect on those juicy dividends.

Plum Creek is a bit of a different beast as it owns and manages timberland in the United States. As one of the largest REITs of its kind, Plum Creek was able to announce $0.20 per share in earnings for the third quarter, ahead of Zach's analyst estimates of $0.08 per share. This REIT is one to watch, however, because although the company was able to enact cost-cutting measures, revenues actually declined, and we all know that cutting overhead can't last forever.

Both Resource Capital and Northstar Realty are heavily exposed to the real estate sector, which is enough to make any investor uneasy. However, Resource Capital recently announced the closing of two newly originated multimillion-dollar loans, and a senior representative for the company seems bullish, saying that he is "very excited to be originating new loans again and to be participating in the real estate recovery." Northstar, on the other hand, was able to completely crush analyst expectations by 200%, reporting earnings per share of $0.15. This is not to say all is rosy in the near future; reading through the company's latest quarterly report you get the sense that macro conditions and tough unemployment numbers could drag significantly on future earnings.

The Foolish bottom line
Regardless of where you think the real estate or financial markets are headed, it's hard to ignore these REITs as they've been performing well and offer the appeal of extremely generous dividends. In fact, if you're looking for a semi-risky dividend play, this could be the best place to look.

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