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Profit From The Shale Boom With 2 REITs Yielding Up To 7.6%

Thursday, November 21, 2013 - 1:00pm

One of the boldest energy predictions of the past 10 years is about to become reality.

According to the International Energy Agency, the U.S. will eclipse Russia and Saudi Arabia and become the world's top oil producer by 2015. And looking forward, that trend is going to accelerate, with the agency saying that booming production has the U.S. on track for energy independence in 20 years.

But while that bullish trend will give energy companies a big boost, it's also going to have a huge effect on local and regional economies. High-production states such as North Dakota, South Dakota and Nebraska already enjoy the lowest levels of unemployment in the country. And as energy companies continue to add tens of thousands of new employees, those strong local and regional economies will fuel record demand for temporary housing, permanent housing and commercial real estate.

That's why I'm bullish on a little-known group of real estate investment trusts (REITs) that are exclusively focused on strong regional economies in position to profit from the North American shale boom.

Not only do these REITs have the ability to produce big gains, but they also carry some of the industry's biggest yields that are more than double the yield of the 10-year Treasury.

And that is creating a big opportunity for investors.

Here are two high-yield regional REITs ready to profit from the North American shale boom.

Investors Real Estate Trust (NYSE: IRET)
Investor Real Estate Trust is a mixed bag of commercial and residential assets, owning and operating multi-family residential properties and medical, retail and industrial properties. The REIT is a direct play on some of the strongest regional economies, with operations in a dozen states across the upper Midwest and the Rockies.

Investor Real Estate Trust recently opened a 108-unit development in Minot, N.D., that was more than 80% leased in mid-October. The company also has more than $200 million invested in current developments in the high-growth North Dakota market, which has the lowest level of unemployment in the country.

Long term, Investor Real Estate Trust also continues to divest its holdings in commercial markets to focus on even higher-growth opportunities in residential markets. But in spite of the bullish outlook, this REIT looks undervalued, trading with a forward price-to-earnings (P/E) ratio of 12, a 25% discount to its peer average of 16. IRET also carries an outsize dividend yield of 6.2%.

UMH Properties (NYSE: UMH)
UMH Properties is another regional REIT cashing in on the American shale boom. But where IRET is focused on permanent housing in the upper Midwest, UMH specializes in manufactured homes in Northeast states such as New York and Pennsylvania, which are benefiting from the lucrative Marcellus Shale play in Pennsylvania. Rising single-family home prices and interest rates have driven record demand for manufactured housing, which can cost 50% less per square foot than traditional housing.

That's why UMH continues to pursue an aggressive expansion strategy, acquiring 39 properties in the past three years to almost double its portfolio to 74 communities with more than 13,000 homes. The REIT is on track to earn $0.57 a share in fiscal 2013. That gives it a forward P/E ratio of 16, directly in line with its peers. UMH also carries a massive dividend yield of 7.6%.

Risks to Consider: As high-yield instruments, REITs are extremely sensitive to fluctuation in interest rates, which has weighed heavily on the group in the past six months as rates spiked higher. Both REITs are also vulnerable to weakness in the energy industry, which is another high-beta sector highly leveraged against strong global economic growth.

Action to Take --> The North American shale boom is driving demand for residential and commercial real estate in high-production states such as North Dakota and Pennsylvania. That has both Investor Real Estate Trust and UMH Properites in position to capitalize, focused exclusively on strong regional economies benefiting from low levels of unemployment. And with both REITs carrying huge yields, both offer a compelling combination of growth and income.

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Michael Vodicka does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.