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This Small Cap REIT Is a Diamond in the Rough

How Safe Is the Dividend?

Despite the fact that it pays a dividend in line or even above its peers -- 5.21% -- only pays out 43% of funds from operations as dividends compared to the industry standard of 85%.

Bottom line, if anything this should prove a major upside for the stock. The company only pays out 43% of FFO, giving it a lot of upside if it decides to raise the dividend, which the company has a lot of room to do.

Even in the company's presentations, it constantly emphasizes its ability to raise the dividend and the company ties it to its ability to amortize debt. Namely, the company pays down interest and principal on its loans, thereby reducing total debt on its properties, and allowing it to raise the dividend it pays to investors. In fact, the company followed through on this promise, recently raising the dividend 8%.

CapLease: A Diamond in the Rough

CapLease has an attractive preferred issue available, the Series A, which has a yield of 8.22%. As noted above, the common shares have sky-rocketed over the last year (perhaps because of the muted Nestle-related risks) and the company's year-over-year total return is an extraordinary 64.11%.

Data from SNL Financial

I consider CapLease a strong buy and I recommend this gemstone of a REIT. The company's dividend yield of 5.21% is "sparkly" sound and maybe the triple-net landlord is learning some lessons from one of its crown-jewel tenants, Tiffany. I think there is a strong chance that CapLease might just be another "diamond in the rough".

CapLease peers include Realty Income (O), National Retail Properties (NNN), American Realty Capital Trust (ARCT), American Realty Capital Properties (ARCP), and W.P. Carey (WPC) Lexington Realty Trust (LXP).

At the time of publication the author held no positions in any of the stocks mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.
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