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TheStreet Open House

Corporate Office Property Trust: A Good Offense Is Owning 'Defense'

NEW YORK (TheStreet) -- Stability, consistency and growth. These are three traits investors look for when determining where and how to invest their capital.

These are the same three traits that attract investors to real estate investment trusts.

The question is which REIT sector will best achieve cash-flow stability, tenant consistency and growth of cash flow and dividends.

One REIT area that investors have overlooked is the office sector.

The office sector currently has 18 REITs with a combined market capitalization of $50 billion dollars and a dividend yield of 3.50%.

The year-to-date return for the sector has been 7.53%, which about average across sectors. But this is better performance than the more popular apartment, self-storage and health care sectors.

These factors suggest that investors should consider this sector for future returns and performance.

The office sector is improving, according to Karen Nickerson a senior credit officer with Moody's Investors Service:

"Signs are encouraging for the office sector, but risks remain. The U.S. labor market is improving, corporate profits are strong and balance sheets are stable. Office vacancy in the fourth quarter 2011 declined 50 basis points to 16% year-over-year, according to a fourth-quarter report by CBRE Econometric Advisors. However, Europe's debt situation remains unsettled and U.S. fiscal policy remains uncertain. In light of these unknowns, we expect the office market recovery to remain tentative."

While the sector begins to rebuild and grow, a good offensive strategy might be owning defense -- defense-related office properties, that is.

As the only global hyperpower, the U.S. spends more on defense than any other country (by a multiple).

Unlike many sectors of the office market that will begin to fully recover when the employment situation gains steam and strength, office REITs that focus on the government and defense-related industries should recover quicker and show greater stability.

A prime example of one of these REITs is Corporate Office Properties Trust (OFC).

It focuses on providing office and data-center space for the government and for defense contractors in the information technology industry.

Dividend

One of the first things a REIT investor looks for is dividend stability. COPT produced a stable dividend through the recession but slashed its dividend 30% beginning in 2012, from 41 cents to 28 cents.

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