CareTrust REIT Inc. has several qualities that make it a solid investment in a dividend-producing portfolio, says Brad Thomas, chief analyst at iREIT Investor.

Most healthcare REITs like CareTrust have declined in value, but Thomas is optimistic on the longer-term prospects for shares.

Care Trust “has continued to transform its balance sheet, reducing risk in every quarter, and I continue to maintain a ‘buy’ rating,” Thomas writes on the SeekingAlpha blog. “However, as I mentioned in my article yesterday, I am holding back on purchasing new shares in net lease and healthcare REITs until mid-December (when the Fed meets again).”

REIT shares have come under pressure with the possibility that the Federal Reserve this year will raise interest rates for the first time since 2006. A rate hike would make bond yields more attractive compared with dividend payers like REITs.

Thomas admits that the CareTrust shares have fallen 10 percent since he purchased them in August. But he offers four reasons for the longer-term outlook for the REIT, whose ticker is CTRE.

1. Improved Diversification. CareTrust bought Liberty Nursing Centers, giving it control of 14 facilities. “This $177 million acquisition not only grew revenue and carries a cash yield of over 9.5 pecent, but it also improves CareTrust’s over diversification.”
2. Small-Cap REITs Can Have Undiscovered Value. “Under-analyzed small-cap REITs flying under the radar can offer better potential for growth over the long term,” Thomas writes. “Because CTRE is small ($521 million market cap) the company does not need to invest as much on new deals to grow.”
3. Improved Balance Sheet. After selling 16.3 million shares of common stock, CareTree was able to improve its debt to earnings metrics and to fund the Liberty acquisition. “Following the offering, Moody's (B2) and Standard & Poor's (B) both changed the respective credit outlooks on CTRE's public debt from stable to positive.”
4. Conservative Dividend Payout. “CTRE has industry leading dividend protection with ample room for growth,” Thomas says.

Meanwhile, REITs that focus on mall and retail properties this month got a chill after Nordstrom Inc. cut its profit forecast for next year because of declining traffic at its department stores.

Headwinds at Nordstrom are a concern for REIT investors as top-tier malls, where the department store is an anchor, have long been considered immune to the woes suffered by strip malls and less appealing or poorly located shopping centers, according to Reuters.

"The challenge is if a lot of these department stores start to get distressed or falter at the same time," said D.J. Busch, an analyst with Green Street Advisors in Newport Beach, California.

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