Real estate investment trusts aren’t the sexiest investment in the market, but REITs can be solid, consistent stocks that also pay a high yield. Slow and steady wins the race when it comes to investing, and well-managed REITs take exactly that approach.
The basic concept of REITs is essentially the same regardless of the type. A REIT draws down relatively cheap fixed- and/or floating-rate debt, build or buys real estate and/or buildings, and gets cash flows from that property by leasing it out in some form. It could be to a business tenant, or to nightly tenants if it’s a hotel.
The debt is serviced with the cash flow, and debt may get paid down, as well. After expenses are deducted, including taxes, 90% of the remaining earnings are distributed to shareholders. The more efficient the company cash flows, the higher the yield.
Here are three REITs that yield more than 7%.
High-Yield REITs: Independence Realty Trust (IRT)
Dividend Yield: 7.8%
Independence Realty Trust Inc (NYSEMKT:IRT) has jumped on the trend of apartment rental properties. The business is booming because of a shortage of housing in many cities. IRT will lend money against these properties, but will also own and operate them.
They have a different niche than most REITs in this sector. They don’t operate in gateway markets, and focus on the upper and middle markets, or in “A” and “B” properties.
IRT does carry more debt than I would like, and its fourth quarter was disappointing. Still, it is selling properties, and using the money to pay down debt. The dividend coverage has been better, but it is still over 100%. 60% or so of the debt matures in 2021 or later, and most of it is hedged, so some $200 million of debt is effectively being serviced at only 3%.
It’s also a monthly, paying a dividend of 6 cents, or 7.8% annually.
High-Yield REITs: City Office REIT (CIO)
Dividend Yield: 7.9%
City Office REIT Inc (NYSE:CIO) is a much smaller star in the REITs universe, but I also like to have a mix of smaller plays because they have more potential to grow, and therefore generate capital gains as well as dividends.
CIO invests in mid-sized urban market office properties — higher-end stuff. It only has 19 properties. However, what I like is that it has chosen specific cities where job growth is strong — places like Tampa and Boise and Dallas. It’s investing prudently but aggressively, from $300 million in properties off its IPO to $816 million as of Q4.
It’s got about $370 million in debt, and 80% of it matures in 2021 or later. 50% of its properties have government tenants, and the cash flow it is generating has generally been enough to cover dividend.
Adjusted funds from operations fell short twice in the past two years, but the risk is reasonable considering the 7.9% yield and growth potential.
High-Yield REITs: Starwood Property Trust (STWD)
Dividend Yield: 8.5%
Starwood Property Trust, Inc. (NASDAQ:STWD) is a REIT that I used to avoid like the plague, thanks to ongoing irrational fears after the mortgage crisis. I just did not like commercial mortgage REITs. But I got over that fear, thanks to this REIT that has a dividend yield of 8.5%.
STWD is a short-term mortgage lender that generally will only makes loans of up to five years, on average, both floating first and mezzanine loans. It has extremely conservative underwriting and, as a result, its portfolio has never had any realized loan losses.
STWD also plays in a space I do like, which is for distressed loans that require special servicing. It also plays in an area that few companies like to do because it isn’t sexy: making smaller fixed-rate mortgage loans of up to $20 million. It then bundles and sells them off.
Lawrence Meyers is the CEO of PDL Capital, and manager of the forthcoming Liberty Portfolio stock newsletter. As of this writing, he has a position in all the stocks mentioned. He has 22 years’ experience in the stock market, and has written more than 1,600 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.