Angling for Some Ample REIT Yields

It's getting harder to find a decent dividend yield among real estate investment trusts these days, but it's not impossible.

REITs, long considered an alternative to bond investing because of their healthy dividends, are now yielding an average of 80 basis points below the 10-year Treasury note -- a record low.

Blue-chip REIT names have even wider spreads. Simon Property Group (SPG), the country's largest mall owner, yields 3.5%, compared with the 10-year Treasury note yield of 4.89% Monday. Luxury-apartment developer AvalonBay(AVB) has just a 2.8% yield.

Putting aside mortgage REITs, which boast higher dividends but are also much riskier plays, there are lesser-known REITs with dividend yields that are at least 100 basis points above the yield of the 10-year Treasury note. Most are in the triple-net lease and health care sectors.

Income-oriented investors may want to look at Spirit Finance (SFC) and Nationwide Health Properties (NHP), both of which boast dividend yields of 7%.

Spirit Finance

Spirit Finance makes most of its money from sale-leasebacks, whereby the company buys properties from restaurant chains, movie theater operators and other companies and then leases the sites back to the original owners. The leases average 15 years and are triple-net, meaning tenants pay all of the operating expenses, including real estate taxes, insurance and maintenance.

Triple-net leases provide steady rental streams but unsexy growth. That's why the sector trades at about 13 times its estimated 2006 funds from operations (a REIT proxy for earnings), lower than most REIT sectors.

Spirit Finance, which completed its IPO in late 2004, trades at 13 times its estimated 2006 funds from operations, right near its sector average.

For 2006, analysts expect the company's FFO to grow by 33%. This is much higher than the growth expected from two triple-net peers: Commercial Net Lease Realty (NNN) (with projected 10% growth) and Realty Income (O) (7% growth).