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Saturday, January 15, 2011

4 Small REITs Delivering FAT Dividends

Real Estate Investment Trusts as a whole have performed very well over the last two years with the Dow Jones Equity All REIT Index up 28.47% in 2009 and 22.15% through November 30 of this year. REITs are no longer a deep value investment, but still may be enough of a value to add income to your portfolio.

Below is a high level overview of four small capitalization REITs that get very little coverage and are currently rewarding shareholders with large payouts.

First Real Estate Investment Trust of New Jersey (FREVS.OB) may be one of the most off the radar quality REITs that exists. Likely a result of its small size and that it does not trade on a major exchange. Based in Hackensack, New Jersey, the trust owns a mix of primarily retail commercial properties and residential apartments in New Jersey, New York, and Maryland. The trust was formed in 1961 and still holds several properties purchased in the sixties and seventies which are on the books for well under the current market value.

Funds From Operations were down year over year for the period ended July 31, 2010. The trust should be releasing its year ended October 31, 2010 annual report in the next 30-40 days which should give some direction as to how the recovery is progressing in the trust’s areas of operations.
The stock price has recovered and is trading in the middle of its 52 week range and at less than half of the highs the stock hit in 2005. While I do not expect it to get back to 2005 levels anytime in the near future, it has a strong yield at 6.7% and should have some upside price potential as the economy and real estate improve.

Whitestone REIT (WSR) is a relatively new player to the public markets making its debut on August 26, 2010. The trust targets what it has titled Community Center Properties™ which it defines as visibly located properties in established or developing culturally diverse neighborhoods. The trust primarily owns retail and other commercial properties located in Houston, Dallas, San Antonio, Phoenix and Chicago.

The trust has been busy since its IPO acquiring The Citadel, a Class A property in Scottsdale, Arizona with 28,547 square feet in September and Sunnyslope Village, a Class B property in Phoenix, Arizona with 111,227 square feet. Management believes it has acquired both of these properties significantly below their respective replacement costs.

The trust has $27 million in cash and 14 unencumbered properties on its balance sheet which should give the it the flexibility it needs to acquire and upgrade existing properties. The trust appears to be making timely investments that should add to the bottom line as the economy improves. Whitestone is currently trading at the high end of its 52 week range and is yielding 8.17%.

Monmouth Real Estate Investment Corp. (MNR) owns nearly 7,000,000 square feet of industrial space located in 25 states and has been in operation since 1968. The trust prides itself on the quality of its tenant’s such as Coca Cola (KO), Anheuser-Busch (BUD), Caterpillar (CAT), Mead Paper (MWV), Sherwin Williams (SHW) and Federal Express (FDX). Of these high quality tenants, 49% of its rentable square feet was leased to Federal Express and subsidiaries. This certainly adds concentration risk to the trust’s portfolio.

The trust has been actively acquiring additional properties over the last year purchasing 4 properties totaling 838,000 square feet in fiscal year ended September 30, 2010 for $53,140,000 and 2 more properties totaling 448,000 square feet for approximately $20,350,000 so far in fiscal 2011. The trust plans to pursue additional acquisitions throughout fiscal 2011.

The trust also owns a $42.5 million investment portfolio of primarily common and preferred REIT stocks including a small position Mission West Properties (MSW). The three largest holdings which make up 28% of the total value are UMH Properties, Inc. (UMH), Sun Communities, Inc. (SUI), and Getty Realty Corporation (GTY).

The trust is currently trading at the high-end of its 52 week range and yields 7%.

Mission West Properties Inc. (MSW) is a very focused REIT in that it owns and operates 112 properties totaling approximately 8.1 million square feet in the Silicon Valley area of San Francisco. Most of portfolio properties are commercial R&D properties that are typically leased to technology firms. Among the trust’s more noteworthy tenants are Microsoft (MSFT), Apple (AAPL), NEC (NIPNF.PK), NVIDIA (NVDA), and Stryker Corporation (SYK).

The company has not been an aggressive acquirer of property in recent years. To date, they have only acquired one property during 2010. Funds From Operations were a little soft in the most recent quarter ended September 30, 2010 which may put the current dividend in jeopardy. In order for the trust to grow and protect its dividend it is important to see an improving business environment in the Silicon Valley. The trust still has major vacancies within its portfolio and has leases of nearly 740,000 rentable square feet rolling over in 2011 and another million in 2012.

This investment carries a higher degree of risk given the size of the trust, but it is currently paying you an 8.66% yield for the risk. Patient investors could be rewarded, but must be prepared for the dividend to be cut. The trust did receive a buyout offer of $13.55 per share in cash in July of 2007. Of course we know what has happened to real estate since that time and would not expect a similar offer in today’s environment.

Disclosure: I am long WSR shares. I receive no compensation to write about any specific stock, sector or theme.

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