The potential for a Federal Reserve hike in benchmark interest rates has taken the wind out of the real estate investment trusts’ sails over the last year or so. REITs kick out much of their cash flows as dividends to investors as a way to skirt taxes, so when investors feel like better yields will come from safer Treasuries, dividend stocks like REITs find themselves with the short end of the stick.
But with the Fed apparently kicking the can down the road, investors have been given a green light to buy stronger REITs that have suffered, but as a result sport juicier yields.
By the way: While REITs do initially feel the effect of rising interest rates, the shock eventually wears off, and REITs still manage to outperform stocks by a decent margin. Considering the selloff we’ve already seen in REITs, that initial shock period might already be close to done — and could be finished by the time the Fed actually raises rates.
So, what REITs are worth investors’ dollar? Here’s a look at six high-yielding real estate picks that throw off at least 6% at today’s prices.
High-Yield REITs to Buy: Stag Industrial Inc (STAG)
STAG Dividend Yield: 7.2%
Shares of Stag Industrial (STAG) have been beat up especially hard this year, down 22% for the year-to-date.
On the plus side, yield for new money in this industrial and warehouse REIT has been pushed to more than 7%.
STAG often buys warehouses and other industrial properties trading on the cheap and below replacement cost. That provides the company with a decent margin of safety with regards to the underlying property.
The problem? Often times, the reason those properties are sold for so cheap is that tenant quality isn’t always the best. Warehouses operated by blue-chip firms like FedEx (FDX) often go for premiums. Joe’s Container … not so much.
Stag Industrial’s solution to the problem? Get big. Since its IPO back in 2011, STAG has grown its property portfolio by 269%, encompassing 245 different industrial properties. That takes the bite out of individual-tenant issues across its entire portfolio.
It also helps keep its juicy monthly dividend humming and growing. STAG has upped the ante on its dividend by 33% since coming public.
High-Yield REITs to Buy: CBL & Associates Properties, Inc. (CBL)
CBL Dividend Yield: 7.4%
A lot of ink has been spilled over the death of a traditional shopping experience at the hands of online retailers.
But that reality simply isn’t true. Yes, malls in less-than-stellar locales and lower-income areas are dying, but malls, community centers and “power centers” continue to perform for the REITs that operate them.
That includes CBL & Associates Properties (CBL).
CBL is one of the largest mall REITs in the U.S., and it owns, holds interests in or manages more than 140 properties. Many of those are the dominant enclosed mall and open-air centers for several cities, but CBL has moved beyond just that and begun to developed power center muscle in many upper-income areas.
CBL also recently refinanced more than $314 million of its outstanding mortgage debt tied to several properties. That will allow it to save nearly $2.8 million annually in interest costs, which will help on the cash flow front. And CBL continues to look for ways to reduce its debt load.
The REIT has upped its payout by 35% over the past five years, but also helping jack up CBL’s yield is a 25% year-to-date loss.
High-Yield REITs to Buy: Medical Properties Trust Inc. (MPW)
MPW Dividend Yield: 7.7%
As the saying goes, “there are riches in niches.” That certainly applies to Medical Properties Trust (MPW).
Medical Properties Trust focuses its attention on strictly owning healthcare facilities. That includes everything from standard regional/community hospitals to more specialized acute care, ambulatory surgery and children’s hospitals.
MPW also is considered a hybrid REIT as it owns physical properties, as well as provides financing/investing in loans tied to new hospital construction.
Medical Properties is looking to expand past the U.S. border, specifically in Europe. MPW’s portfolio is roughly 18% international, with the REIT previously boasting Germany and U.K. locations and more recently adding Spain and Italy to the mix. However, the REIT is also expanding domestically, recently closing on a mega-deal that will boost its portfolio size by 20% and be instant accretive to cash flows.
Not that MPW needs the help. The hospital owner continues to see double-digit FFO growth from its portfolio.
That’s exactly what you want to see from a REIT, and should reassure new investors worried about MPW’s 17% year-to-date declines.
High-Yield REITs to Buy: Lexington Realty Trust (LXP)
LXP Dividend Yield: 8%
Lexington Realty Trust (LXP) is the largest among a flavor of REITs: single-tenant properties.
The majority of Lexington’s buildings are occupied by one business only. Many of its office and industrial assets are also triple-net leased — the holy grail for REITs. A triple-net leased setup sees the tenant also paying maintenance costs, taxes and other fees related to the property — which means better margins for the REIT.
Still, the single-tenant focus is weighing on LXP right now.
When your office building is leased by a single company, and that company decides to move on (or, say, files for bankruptcy), your tenant occupancy becomes zero. That was an issue for LXP back during the Great Recession; shares cratered to under $3 and Lexington was forced to cut its dividend.
Since then, LXP has clawed its way back up, but it never fully regained its former highs thanks to these fears.
Still, Lexington has strengthened its position, portfolio and balance sheet since then, making it an attractive buy with a very tasty 8%-plus dividend.
High-Yield REITs to Buy: Whitestone REIT (WSR)
WSR Dividend Yield: 9.4%
Sometimes a big yield comes with some big risks — a situation facing with any investor in Whitestone REIT (WSR).
WSR owns a relatively small portfolio of shopping plazas and other retail real estate (currently 66 properties). The bulk of those are located in Texas, with Houston alone representing 34% of Whitestone’s revenues in 2014.
In case you haven’t noticed, the energy industry is collapsing under the weight of low oil and natural gas prices. That’s a problem for Houston — an energy mecca — which has suffered major job losses across the city. With money drying up, WSR’s tenants could be under some severe pressure.
Still, a nearly 10% dividend is compensating investors for the risk in WSR.
And there are some bright sides in Whitestone. For starters, WSR has made some smart acquisitions on the cheap from other struggling REITs. That’ll help boost cash flows down the road and expand its portfolio/reduce tenant risk. Secondly, the vast bulk of the REITs plazas are anchored by recession-resistant grocery chains such as Kroger (KR), as well as drug stores.
High-Yield REITs to Buy: Annaly Capital Management, Inc. (NLY)
NLY Dividend Yield: 11.8%
When it comes to finding big yields in REITs, mortgage REITs (or just mREITs) are the place to be.
Unlike traditional property owners, mREITS invest in mortgages, loans and other debt tied to properties. This includes providing direct financing for new and existing construction as well.
Add a dose of leverage, and you have a recipe for some pretty significant dividend yield.
The flip side is that the industry can be a mine field for investors, so if you are sniffing around this space, consider the established name of the group: Annaly Capital Management (NLY).
NLY invests in a variety of agency (think government-backed) mortgage securities, collateralized mortgage obligations and other mortgage-related debt. Annaly borrows on the cheap thanks to the Fed’s zero-percent policies, then reinvests that money in higher-yielding securities.
The key for NLY is that it has already begun the process of deleveraging and reducing its borrowing costs well ahead of the Fed’s interest rate decision. NLY has taken a few lumps, but has gone through 2015 mostly unscathed, down just 5% to barely trail the broader market.
Annaly likely won’t have to cut its dividend as interest rates rise, which is saying something considering it sports a thick yield of almost 12%.
As of this writing, Aaron Levitt was long STAG.