I recently realigned my long-term diversified retirement portfolio to skew a bit more into REITs, and specifically, REITs that paid sustainable yields above 7.5%. I was seeking to de-risk a bit from regular equities, and these were surprises I discovered on the way.
REITs can have a sizable advantage over other income investments. As real estate, their underlying assets are likely to appreciate over time, even given near-term bumps. As long as tenants can pay their rent (and other expenses in triple net lease situations), and that rent pays the property mortgages, then the REIT is in good shape. Ideally, REITs have money to spare to pay out and raise dividends.
I’ve got three REITs that are high yield in nature, and they are also diversified across different industries and geographies. So while I may get hit if the entire sector suffers its usual occasional correction, I’m less exposed if those hits are narrower in nature.
High-Yield REITs to Buy: Independence Realty Trust Inc (IRT)
Independence Realty Trust Inc (IRT) is a commercial real estate firm that owns, operates and lends against apartment properties. It focuses on “A” and “B” level properties in “non-gateway” markets, an area generally ignored by other REITs.
IRT gets a lot of flak and does carry some risk because it has a fair amount of debt, at 72% debt-to-market cap. However, the risk must be put in perspective. The maturities are staggered, with about 40% due in 2017 and 2018 and the rest in 2021 and beyond.
However, IRT is selling some properties and repaying debt, as well as having an interest rate hedge that keeps interest capped at 3% on about $200 million of the debt. Dividend coverage is a bit tight, but I think it is sustainable.
IRT pays $0.06 dividend monthly, or 7.7% annually.
High-Yield REITs to Buy: Ladder Capital Corp (LADR)
Ladder Capital Corp (LADR) is one of the REITs I customarily have avoided, being a commercial mortgage REIT. I’ve been scared of the credit risk involved in this sector but have come to feel more comfortable with it.
LADR deploys capital by investing in commercial real estate debt, as well as equity. Obviously, that means LADR would prefer environments where demand for commercial property outstrips supply, and that’s where some parts of America are right now.
Now, what I like about LADR is that after originating loans (or buying them), they don’t hold on to them. They package them up in securitized offerings. It also is diversified in the types of loans it handles — 43% first mortgage, 24% net lease or equity, 12% first mortgage secured securities and 13% mezz loans.
LADR is a high-yield security, that provides $1.10 in annual dividend payments, or a yield of about 8.5%. The payments are made quarterly.
High-Yield REITs to Buy: New Senior Investment Group Inc (SNR)
New Senior Investment Group Inc (SNR) is a spin-off from Newcastle Investment Corporation, and is owned by an affiliate of Fortress Investment Group (FIG). It handles REITs in the increasingly important sector of senior housing. This is an ongoing growth sector, as America continues to age and people become more and more accustomed to using quality senior living facilities.
There’s another important angle for senior living facilities, and that has to do with how the facility gets paid. Government-paid rents are not as popular as they used to be. There are many problems with getting government programs to pay up, and fraud is rampant. However, SNR uses private-pay clients for the most part.
SNR has 154 properties, consisting of 105 independent-living facilities and 44 assisted-living homes. Occupancy has been on the rise, and strongly so. Its annualized dividend is $1.04 per share, or about 8.5% annualized.
As of this writing, Lawrence Meyers owns IRT, LADR and SNR.