5 Overlooked REITs to Boost Your Portfolio: American Capital Agency Corp. (AGNC)

Can a single metric point you toward the best stock buy out there? Alas, probably not. However, by using the right ones that are important to a particular industry, we can negotiate our way through the hundreds — if not thousands — of options.

In the case of REITs, investors often don’t get very far beyond the yield, especially when considering double-digit yielders such as Annaly Capital Management, Inc. (NYSE:NLY) and American Capital Agency Corp. (NASDAQ:AGNC). In general, there is nothing wrong with these REITs or others like them that focus on generating their income from the interest rate spread of the mortgage-backed securities that they invest in. However, there is a large crop of REITs that generate income by using the same interest rate spreads to invest in property and generate income off of the corresponding rents. This is where I’ll be looking to find some hidden gems.

American Capital Agency Corp. (NASDAQ:AGNC)Please tell me the metric!
Most REITs, regardless of type, will use debt in order to magnify their returns. If they didn’t do this, their ability to purchase any asset would be severely restricted by the amount of capital they have available, which would ultimately reduce the return on investment for investors. As we learned during the financial crisis, too much of the wrong type of debt can have catastrophic consequences, so we need to take a look at the debt-to-equity ratio to make sure that the REITs aren’t over-levered to an extreme amount.

I managed to find five high-yielding REITs with a debt-to-equity ratio below 1.0, meaning that they currently have more equity than debt on their balance sheets. I’m going to take a quick look behind the numbers at the five on the list and present you with my favorite of the group at the end of this article. Here’s the list:

Company REIT Industry Market Cap D/E Ratio Dividend Yield
Government Properties Income Trust Office Buildings $1.35B 0.70 6.9%
Senior Housing Properties Trust Residential $4.31B 0.70 6.4%
LTC Properties (NYSE:LTC) Healthcare Facilities $1.14B 0.48 5%
Entertainment Properties Trust Retail $2.22B 0.91 6.3%
Hospitality Properties Trust Hotels/Motels $3.18B 0.87 7.3%

Source: FinViz.com.

Rent check from the government
As its name suggests, Government Properties Income Trust is in the business of renting office buildings to various government agencies at the state and national level, with 73% of current properties leased to the U.S. government. Having the federal government as its primary customer will help ensure that rents will continue to be paid, and an average remaining lease term of over five years  will hopefully preclude investors from seeing any surprise vacancies over the next few years, preventing massive fluctuations with earnings.

Options because of an aging populace
Two other REITs on this list, Senior Housing Properties Trust and LTC Properties, could be strong options going forward, especially as the baby boomers continue to age and move onto the next phase of their lives. Senior Housing owns and operates a variety of property types that cater specifically to older Americans. Its portfolio of 384 properties in 40 states  consists of independent living and assisted living communities, retirement communities, nursing homes, wellness centers, and other medical facilities.

Long-term care can also be important to an aging population, which is an area where LTC Properties excels. The bulk of its properties are split between skilled nursing facilities and assisted living facilities, though some of the investments are through loans and not strictly property leases. That said, only 18% of its current portfolio expires prior to 2017, providing some predictability to its future earnings.

Travel and leisure
The final two companies on the list boast diverse portfolios that are a little more exciting than the other three. Entertainment Properties Trust has a very diverse portfolio of properties, including movie theaters, family entertainment centers, metro ski parks, water parks, and public charter schools. The majority of its investments — around 57% — remain in “megaplex” theaters, which can see attendance change based on the quality of the movies available. Nevertheless, people will continue to go to the movies, and Entertainment Properties Trust will be there to reap the rewards.

Finally, Hospitality Properties Trust invests in a variety of hotels and travel centers across the U.S., with a total of 475 properties located in 44 states. Many of these locations operate under such nationally recognized brands as TravelCenters of America LLC (NYSEMKT:TA), Marriott International, Inc. (NYSE:MAR), and Wyndham Worldwide Corporation (NYSE:WYN) Hotel Group, among others. It’s hard to avoid seeing one of its 145 travel centers along the various highways of the country, and it also benefits from a diverse mixture of hotel brands. For investors, the bulk of its current debt matures in 2017 or later, giving it a long lead to renew its many lease agreements while providing it in steady income to maintain its sizable dividend, which is the highest of the five REITs on this list.

My choice is…
All five of these REITs provide opportunities for differing reasons, but all have seemingly strong balance sheets with small debt loads. Of the five, however, I favor Government Properties Income Trust, if only because its tenant base skews to some organizations that can’t really avoid paying rent, even in the worst of times. A close second would be Hospitality Properties Trust, primarily because of the size of its dividend and its presence on many of the highways across this country.

The article 5 Overlooked REITs to Boost Your Portfolio originally appeared on Fool.com and is written by Robert Eberhard.

Fool contributor Robert Eberhard has no position in any stocks mentioned. The Motley Fool owns shares of Annaly Capital Management.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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