As investors have scrambled to find anything that throws off decent income in this age of low interest rates, real estate investment trusts have gotten the nod. And there’s naturally plenty to like. Designed as pass-through entities, REITs kick back the lion’s share of their cash flows as big dividend distributions to investors.
That results in average dividend yields in the 4% to 7% range. Hardly shabby.
Of course, when it comes to ensuring that those big dividends keep humming along, there are a few metrics that count, but perhaps none more than one called “funds from operations.”
FFO is essentially a measure of cash flows created by adding depreciation and amortization expenses to earnings, and to many investors, it’s the single-most important thing you can look at when examining REITs. Forget about EPS or P/Es — it’s all about the FFO if you want to make sure you’re getting a safe dividend with the potential to grow.
If you don’t have time to look for yourself, don’t worry: We’ve got a list of five great REITs with the cash — er, funds from operations — to keep kicking back those sweet dividends:
REITs to Buy: Urstadt Biddle Properties (UBA)
UBA Dividend Yield: 5.8%
Owning strip malls, shopping plazas and other grocery store-anchored properties can be pretty boring. But it also can be pretty profitable. Just ask Urstadt Biddle Properties (UBA).
Urstadt’s 73 different properties are located in a prime area of the country: wealthy New York, New Hampshire and Connecticut suburbs just north of New York City. This portfolio of grocery-store-anchored plazas boast high rents, strong consumer demographics and huge barriers to entry thanks to lack of available space and zoning laws.
Because UBA has been operating in the area since the 1960s, it has a stronghold on some of the best turf around. So if retailers want to tap these wealthy consumers, they have to give UBA a call.
This also results in rising cash flows and dividends. The latest bump for UBA was a 20% year-over-year increase in its second-quarter adjusted FFO. This continues Urstadt’s streak of improving its FFO, which in turn should help UBA keep up its 21-year streak of increased dividends.
REITs to Buy: Prologis (PLD)
PLD Dividend Yield: 4.4%
Come to think about it, there’s nothing particularly sexy about owning warehouses and industrial factories, either. Still, Prologis (PLD) makes logistics and global trade cool … or at least lucrative.
Prologis’ warehouse and logistics empire spans 21 countries and 670 million square feet of property, either through direct ownership or investment. And PLD touts major companies such as Amazon (AMZN) and UPS (UPS) as major customers.
The empire has been built on the growth in e-commerce, retail distribution and supply chain optimization. The former means supplying warehouses near hotbeds of consumer activity, while the latter means focusing on warehouses near major ports.
PLD has succeeded on both fronts.
Prologis has seen its occupancy surge to 95.4%, prompting a record 14.4% increase in global rent rates on signed leases. And higher rents help feed that FFO. For the latest quarter, PLD saw its FFO jump by 8%. Based on its continued positive results, management expects a full 17% growth in FFO for all of 2015.
For investors in PLD stock, that should mean Prologis’ latest 11% dividend hike won’t be its last.
REITs to Buy: Public Storage (PSA)
Dividend Yield: 3.4%
Benefiting from America’s housing crisis — in both the trend toward downsizing and growth in the number of renters — self-storage REITs have been on fire since the recession.
Public Storage (PSA) is the king of this realm.
PSA owns and operates more than 2,200 locations nationwide and has a hefty presence overseas as well. That size (and orange brand recognition!) makes Public Storage the prime bet for investors looking at adding some self-storage REITs to their portfolio.
It also makes PSA a profitable cash flow machine.
The demand for more storage space (the REIT is 95.4% occupied) helped PSA increase rents 6.3% during the second quarter. Those rental increases as well as rising sales helped the firm report stronger FFO metrics during the first half of the year. PSA saw an 8% YOY increase in its FFO.
And as we’ve said strong FFO performance at REITs drives strong dividends. Since 1990, PSA has increased its quarterly payout by a whopping 750%. With cash flows and FFO still growing, investors can be assured that PSA’s dividend will keep growing as well.
REITs to Buy: Mid-America Apartment Communities (MAA)
MAA Dividend Yield: 4%
Like PSA, Mid-America Apartment Communities (MAA) has been on fire since the recession. Only this time as owner of apartment homes.
MAA owns 254 apartment properties representing more than 79,000 units. The vast majority of these units are located in the southern states. It was here that the housing boom/bust hit the hardest, and it still features one of the largest contingencies of foreclosures and renters in the country. Additionally, MAA’s dual focus on both primary and secondary markets allows it to capture a spectrum of incomes (richer city tenants vs. suburban ones).
All of this has resulted in crazy demand for MAA’s apartments. Occupancy now sits north of 96%, which is great for an apartment REIT, and rents increased by an average of 4.7% during the last quarter.
From a dividend point of view, core FFO per share at MAA increased a whopping 15% to reach $1.36 per share in the quarter. That’s a record for the REIT and builds upon previous FFO gains. Management expects the gains in cash flow to continue as results remain positive.
This should help MAA boost its already juicy payout further.
REITs to Buy: W. P. Carey (WPC)
Dividend Yield: 6.8%
While W. P. Carey (WPC) only recently became a REIT (via a merger), it has been around as a real estate giant since the 1970s. WPC actually created the concept of a sale-lease back transaction- which is now standard fare in the commercial real estate world.
Since that time, WPC has become one of the biggest hybrid REITs around. And as a hybrid, WPC owns physical buildings, provides capital to other builders/owners of real estate and manages buildings and investment portfolios of properties.
One of the biggest drivers of FFO has been the REIT’s owned portfolio of real estate.
W. P. Carey owns nearly 900 properties across the globe. The vast bulk of these are triple-net leased, which means the renters are required to pay taxes, upkeep and other costs associated with the property. That means WPC can reap better margins and cash flows than many of its non-triple-net peers.
This is helping management guide to a full-year FFO range $4.76 to $5.02 per diluted share. That’s well above the current $3.82 per share in dividends that WPC pays out — meaning more increases could be on the way to bolster Carey’s already healthy dividend yield.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.