The selected properties are: of As I write this article, seven real estate investment trusts (REITs) are paying dividends ranging from 8.7% to 15.4%.
These REITs and their ilk are literally designed to provide dividends. That’s how Congress created the rules when he legislated these real estate investments in 1960.
REITs avoid taxes at the corporate level. But instead, they must collect at least 90% of their taxable income and redistribute it to investors as dividends.
As a result, our average REIT yield is approximately two to three times the market. But we can do much more than just “average.” The 7-pack of REITs we’ll be reviewing today has a yield of 12.1%, or about 8x the S&P 500.
With this level of income, you can retire on dividends alone. But be careful.
Meanwhile, the Federal Reserve, whose hawkish interest rate policy has been detrimental to REITs in recent years, finally appears ready to strangle the real estate industry. The Fed not only paused at its most recent Federal Open Market Committee (FOMC) meeting, but also suggested (through a “dot plot”) that we could see three different interest rates. cut In 2024.
REITs are traded like bonds. When interest rates rise, REITs fall. That’s why these stocks have fallen so much over the past two years. Rising interest rates are having a negative impact on REIT prices.
But now, thanks to the Fed, it’s time for interest rates to “reverse.” That said, the economic slowdown isn’t ideal for all landlords. You must be particular about it.
Let’s start with a pair of mortgage real estate investment trusts (mREITs). mREITs do not hold physical real estate, but instead hold “paper”, usually securitized mortgages and other loans. mREITs have some of the highest dividend payouts you’ll ever find, but you need to be especially cautious in this space.
Armor Residential (ARR, dividend yield 15.2%) It primarily invests in mortgage-backed securities (MBS) issued or guaranteed by U.S. government-sponsored institutions such as Freddie Mac, Fannie Mae, and Ginnie Mae. Currently, 92% of the portfolio is invested in 30-year fixed-rate pool mortgages, 5% in agency commercial MBS, and the remainder in “TBA” (literally “to be announced”, i.e. buy or buy contract). In the future he will sell MBS).
The mREIT business is generally a very difficult business, but the past few years have not been favorable for Armor or other REITs. This is because rising mortgage rates increase payments on new loans and reduce the value of existing loans. However, with the Fed expected to pursue interest rate cuts in 2024, an accommodative environment for mREITs, there may be some optimism for Armor.
But probably not.
This middle chart is why Armor is a total no-no for me. The company’s stock price has been on a permanent dividend cut since 2011. So even if current yields are attractive, there is no precedent to support the idea that our future returns will be this sweet.
Ready Capital (RC, yield 13.6%) A more delicious choice. This mREIT originates, acquires, finances, and services small and medium-sized commercial loans. Approximately half of its core earnings are derived from bridge loans, with the remainder coming from a combination of construction loans, fixed rate CMBS, Freddie Mac loans, small business lending and mortgage banking.
The company is also bigger than it was just a year ago. In May, the company announced the completion of its merger with Broadmark Realty Capital, a specialty real estate finance company that originates and services residential and commercial construction loans.
Ready’s dividends aren’t the prettiest, but they’ve been much more stable over the mREIT’s listing period. The drop from 40 cents in early 2023 to 30 cents in early 2024 is expected to be temporary, primarily as a result of the absorption of Broadmark’s tight margin portfolio. But once the merger begins to bear fruit, the dividend should rise again, an attractive prospect for the company’s stock, which already yields nearly 14%.
Now, I want to dive into more specific equity REITs.And I start with Highwoods Properties (HIW, yield 8.7%)an office REIT focused on Southern and Southeastern markets including Atlanta, Charlotte, Dallas, Nashville, and Orlando.
Just look at this PR job posted on their website to see how bad office real estate is. ”
When they don’t even want to say the word “office” you know This is bad.
After COVID-19, Highwoods was actually able to recover near its pre-pandemic highs by 2021, but after being stuck for a year or so, the Fed started raising interest rates and the stock has since fallen around 40%. %, lagging far behind the broader market. Real estate sector.
There’s little reason to be bullish on office real estate in general. While there is a growing momentum to return to offices, many tenants are still downsizing. But the opportunity lies in the fact that many of these tenants are simultaneously upgrading to higher quality (and more expensive) properties. This bodes well for his HIW, which is generally a blue-chip operator whose cash, FFO, and other key metrics have been trending in the right direction for more than a decade.
Service Property Trust (SVC, yield 9.7%) Unusual in the REIT industry, it features a dual focus on hotel real estate and retail assets. The company’s portfolio consists of 221 extended-stay hotels and 761 service-oriented retail net lease properties across much of the United States, Puerto Rico and Canada.The latter is heavily We partner with Travel Centers of America/Petro Stopping Center, which accounts for more than two-thirds of our annual minimum rent, and other tenants such as The Great Escape and Life Time Fitness.
A few months ago, I said I was interested in seeing if SVC could maintain its momentum after its big dividend increase in October 2022. However, the dividend announcement for October 2023 was not increased.
That’s not to say SVC won’t increase its dividend at some point in the future, but the habit isn’t built. That’s not shocking. As mentioned earlier, SVC has excellent dividend coverage, but at the same time he has to deal with over $1 billion in debt maturities. Each For the next two years. We’re also investing a lot of money into upgrading it. Hyatt (H) and Sonestra Hotel. This requires patience.
Unity Group (UNIT, yield 10.9%) A REIT that provides telecommunications infrastructure. The company is a top 10 fiber provider in the U.S. with more than 139,000 fiber route miles and 8.4 million strand miles of fiber, connecting 300 metro markets and providing high-speed network services to more than 28,000 customers.
While Uniti’s infrastructure is effectively powering basic necessities at this time, the REIT spun out of regional carrier Windstream is not as reliable as other telecom infrastructure names such as . American Tower (AMT) and Crown Castle International (CCI).
While a rate cut would be welcome for Unity, the fact that interest rates are low but still high doesn’t bode well given its high leverage — the company currently has $5.6 billion in cash compared to just $34 million in cash. have a dollar debt. That could very well put pressure on a high dividend, but that’s the only thing UNIT stock is really looking forward to at the moment.
In less than two months, Brandywine Realty Trust (BDN, 11.5%) It looked like dead money. It had lost more than a quarter of its value and was in dire need of recovery. Fast forward just a few weeks and we’re actually seeing a gradual rise.
This hybrid REIT owns a variety of properties in scattered markets, including Philadelphia, with more than 40% residential, 27% life sciences, 24% office, and the remainder scattered across various property types. However, there are no major changes from before. Washington DC area and Austin, Texas. There are only a few months left until the 21% dividend cut. It also still has lower-than-expected occupancy and hundreds of millions of dollars in bond and joint venture debt due in 2024.
But the fact that it’s still very cheap at roughly 4.5 times next year’s projected funds from operations (FFO) makes it difficult to bet on it.
Global Net Lease (GNL, 15.1%) It also has a very high yield, even though the dividend is trending in the wrong direction.
Global Net Lease is a commercial REIT operator with assets in 10 countries, including the United States, the United Kingdom, the Netherlands, Finland, and France. He boasts more than 1,300 properties leased to 815 tenants across approximately 96 industries. This is a major step forward for the real estate portfolio thanks to the merger with The Necessity Retail REIT, which was completed in September. This combination makes the company his third largest publicly traded net lease REIT.
GNL says the transaction should increase annualized adjusted FFO per share by 9% in the first quarter after closing and meaningfully reduce net debt to adjusted annualized EBITDA, but I think a little more. I would like to see the specific details.
For now, Global Net Lease is on my watchlist. The big event circled on my calendar is the company’s fourth-quarter earnings release, scheduled for February 2024, when we should also get the first earnings outlook for the combined company.
Brett Owens is the firm’s chief investment strategist. contrarian outlook. For more great income ideas, get his latest special report for free. Early Retirement Portfolio: Earn huge dividends every month, forever.
Disclosure: None