HCP, Inc. (HCP), Government Properties Income Trust (GOV), Digital Realty Trust, Inc. (DLR): Three High Yielding REITs with Sticky Tenants

Valuation and conclusion

All three REITs I have mentioned offer compelling dividend yields, ranging from roughly 4.7% for HCP, Inc. (NYSE:HCP) to 5.2% for Digital Realty Trust, Inc. (NYSE:DLR) and 6.7% for Government Properties Income Trust (NYSE:GOV) (based on stock closing price on July 9, 2013). Comparing price-to-earnings ratios for REITs tend to be a futile exercise, so I will compare their price to funds from operations (FFO) ratios instead. The reason for this is because net income incorporates non-cash depreciation expenses, which usually don’t matter for REITs since most of their depreciable assets are land and property. Land and property don’t usually depreciate over time, but may actually gain in value as the years go by and land prices appreciate; therefore, funds from operations, which adds non-cash depreciation expenses back to net income, is a better proxy for a REIT’s true financial performance. Below is a table summarizing the three REIT’s valuation multiples:

Valuation Metrics (based on July 9, 2013 closing share price)

Based on both dividend yield and price to FFO ratios, it seems that Government Properties and Digital Realty Trust, Inc. (NYSE:DLR) offer more reasonable valuations than HCP, Inc. (NYSE:HCP). Valuation for Government Properties Income Trust (NYSE:GOV) looks particularly reasonable, with a dividend yield greatly exceeding the market (and REIT industry) average, and a modest price to FFO ratio. I think Government Properties’ share price may be pressured due to concerns about government budget cuts; however, as I explained previously, tighter public budgets may encourage government entities to lease more and not less as they sell properties they own to raise cash and move operations to leased properties. As such, I believe Government Properties Income Trust (NYSE:GOV) may warrant a look for risk-averse investors who are thirsty for yield.

The article 3 High Yielding REITs with Sticky Tenants originally appeared on Fool.com and is written by John Park.

John Park has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. John is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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