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Investment Ideas

Since the financial crisis the REIT space has been a great place for investors to get exposure to real estate. The Vanguard REIT ETF (VNQ - Free Report) is up 350% since the bottom in 2009, and that’s not counting the hefty 4% dividend that the ETF pays out.

While this has been a good investment, there are signs certain REITs are starting to top out, especially those exposed to the troubling mall and retail sector. In addition, a potential rate hike by the Fed could cause investors to sell high yielding stocks, like utilities and REITs, as they can find acceptable yields in safer instruments.  

Below I want to focus on top ranked REITs that will still look to do well, even if others start to struggle. These stocks are all Zack Rank #1 (Strong Buy) or Zacks Rank #2 (Buy) and do not have exposure to retail.

Apple Hospitality (APLE - Free Report) is a Zacks Rank #1(Strong Buy) that invests primarily in the lodging real estate markets of the United States. The Richmond, Virginia based company was founded in 2007 and is focused on income-producing real estate.

Apple has a market cap of $3.2 Billion and a forward PE of 11. The stock sports a Style Score of “C” in Growth and Momentum and pays a yield of 6.4%.

The company reported Q1 earnings on May 5th in which it saw EPS at $0.40 verse the $0.38 expected. Revenue was in line at $225 Million and fiscal year 2016 RevPar growth was seen at 3.5-5.5%. CEO Justin Knight had some comments on the quarter:

“Our broad geographic presence, with a diverse mix of demand generators, and our focus on Hilton and Marriott select service and extended stay hotels were key to our results in the quarter. With occupancies strong across the majority of our hotels, the continued focus of our asset managers and management companies on rate growth and operating cost control yielded an increase in Comparable Hotels Adjusted Hotel EBITDA Margin of 60 basis points. 2016 is off to a good start for the Company and we believe our hospitality platform and focus positions us to perform well for the remainder of the year.”

Apple next reports earnings on August 4th and estimate revisions for the current quarter are rising. Over the last month, estimates have ticked up to $0.51 from $0.50 a gain of 2%. In addition, estimates for the next year have gained 5% over the same time frame, jumping from $1.79 to $1.88.

Brookfield Canada is a Zacks Rank #1(Strong Buy) that invests in real estate, focusing on the ownership and development of office properties in Toronto, Calgary and Vancouver. The Toronto based company makes investments in commercial offices to create its portfolio.

Apple has a market cap of $600 Million and a forward PE of 16. The stock sports a Style Score of “B” in Value and Momentum and pays a yield of 4.70%.

The stock started off the year in a rough spot, selling all the way down to $16 because of market weakness. Since then the stock has jumped back to $22 and has held gains after a 6.90% beat last quarter.

The company next reports earnings on August 9th and estimate revisions are rising in all time frames. Over the last 60 days, estimates for the current year have gained 11.6%, from $1.20 to $1.34. Estimates for fiscal year 2017 have gained 8.5% over the same time frame, jumping from $1.30 to $1.41.

Summit Hotel (INN - Free Report) is a Zacks Rank #1(Strong Buy) that is a hotel investment company. The company engages in acquiring, owning, renovating, repositioning, and asset-managing and selling premium-branded limited-service and select-service hotels in the upscale and midscale without food and beverage segments of the United States lodging industry.The Austin, Texas based company was founded in 2004 and has 40 full time employees.

Summit has a market cap of $1 Billion and a forward PE of 9. The stock sports a Style Score of “B” in Value and pays a yield of 4.46%.

The company reported Q1 earnings on May 3rd in which it saw EPS at $0.32 verse the $0.31 expected. Revenue was seen at $118.1 Million verse the $116 Million. The company guided fiscal year 2016 AFFO at $1.31-1.37 verse the $1.32 expected. Pro forma RevPar growth was seen at 4.0-5.5% verse the previously seen 3.5-5.5%.

Summit next reports earnings on August 1st and estimate revisions for fiscal year 2016 and 2017 are rising.  Over the last month, estimates for 2016 have gone from $1.27 to $1.30 a gain of 2.3%. For 2017, estimates have gained 10.3% over the same time frame, jumping from $1.35 to $1.49. Looking at the chart below, you can see that Summit hasn’t missed on EPS since early 2012.

Gaming and Leisure Properties (GLPI - Free Report) is a Zacks Rank #2(Buy) that owns real estate properties including casino facilities and other assets. The Pennsylvania based company is a self-administered, self-managed REIT primarily engaged in the property business, which will consist of owning, acquiring, developing, expanding, managing, and leasing gaming and related facilities.

GLPI has a market cap of $6.75 Billion and a forward PE of 12. The stock sports a Style Score of “B” in Growth and pays a yield of 6.70%.

The company reported Q1 earnings on April 26th in which it saw EPS at $0.70 verse the $0.69 expected. Revenue was seen at $148.8 Million verse the $149 Million expected. The company raised fiscal year 2016 FFO to $2.93 verse the 2.84 expected. CEO Peter Carlino had some comments about the quarter:

“After the PNK acquisition closes, we will have created a triple-net REIT industry leader and our portfolio will be significantly more diversified than it was at the time of our spin. Looking forward, we believe this increase in size enhances a significant competitive advantage, and the increased diversity improves the stability of our cash flows and further protects us from variabilities in regional gaming.”

The company next reports earnings on August 4th and estimate revisions for fiscal year 2016 and 2017 are rising.  Over the last 60 days, estimates for 2016 have gone from $2.66 to $2.85 a gain of 7%. For 2017, estimates have gained 11% over the same time frame, jumping from $2.71 to $3.01. The company hasn’t missed on EPS since 2014 and will go for its tenth straight EPS beat in August.

In Summary

REITs have treated investors well over the last seven years, but it is perhaps time to pick specialized REITs instead of a broad basket. Exposure to retail and rising interest rates could harm future appreciation chances for certain companies. Sticking with highly ranked stock will insure that the company is fundamentally intact and the dividend will remain.

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