As a general rule, there are only two common reasons to own real estate investment trust (REIT) shares - the normally above-average yields that these companies pay and the diversification benefits of incorporating real estate into a portfolio. In some cases, though, REITs can also provide above-average capital appreciation for risk-tolerant investors willing to buy in when things still look difficult.
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Although the REIT sector has generally recovered since the worst of the fall of 2008 and spring of 2009, the recovery seems to have flattened out this year. Does that mean it is time for investors to consider this sector again, or is the uncertain state of the economy an argument for waiting a little longer?

Hospitality Properties Trust (NYSE:HPT)
With a healthy-looking 8% yield, this owner of hotels and travel centers (truck stops) would seem to be another way to play the eventual recovery in economic activity, particularly business and leisure travel. Unfortunately, the mid-priced travel industry is still taking its licks and operators like Marriott (NYSE:MAR) continue to struggle to fill rooms. Overcapacity in the hotel space and an inability of operators to meet minimum rent thresholds are certainly threats to the dividend, but risk-tolerant investors might look to this idea as a double play on both income and economic recovery.

Liberty Property Trust (NYSE:LRY)
Like Hospitality Properties, Liberty sports an above-average yield, but a fair share of risks as well. Liberty owns a diversified mix of office and industrial properties in the Mid-Atlantic and Southern regions, but the company has had to trade lower rents for higher occupancy. That has pressured operating income, and the slow pace of job growth suggests companies are not going to be desperate for space soon. Still, the company has a relatively solid balance sheet and has continued to develop properties throughout the recession - suggesting that when the recovery comes, this company can take advantage.

Duke Realty (NYSE:DRE)
Duke Realty closes out the list as perhaps the highest risk-reward stock of the three. Like Liberty, Duke operates office and industrial properties, but with more of a focus on the Midwest. Duke is also more geographically concentrated, with Indianapolis, Cincinnati and Atlanta comprising more than one-third of the company's business.

This recession has hit Duke hard; occupancy rates are recovering, but funds from operations are at the lowest point in well over a decade. Making matters worse, the company could have some debt maturity issues in 2011 that might lead it to either sell properties (likely not allowing for the company to get a good price), cut the dividend or some combination of the two. Then again, if rates can stay low for a little while longer and occupancy rates (and rents) move higher, the company should be able to navigate this tight spot and investors could be in line for above-average capital gains.

The Bottom Line
These three REITS have standout dividend yields and appreciation potential for good reasons - they are risky names with difficult near-term prospects. Moreover, high relative yields are in part a function of missing out on the runs seen in other names like Simon Property (NYSE:SPG), SL Green (NYSE:SLG) or Public Storage (NYSE:PSA). If that were not enough, top-rated real estate funds have by and large not made any of these three names major holdings in their portfolios. All that said, there is a credible recovery thesis for each of these names, and the above-average income payouts may be enough to tempt investors who are looking to play the laggards in the sector. (For related reading, take a look at How To Assess A Real Estate Investment Trust.)

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