Nobody will claim that real estate investment trusts (REITs) are the coolest stocks to own. They don’t appreciate in leaps and bounds. They don’t grab the headlines. But REITs have proven that, with reliable and consistent management, they will deliver steady returns and pay attractive dividends.
REITs all adhere to the same federal law that requires they pay out at least 90% of net earnings to shareholders, as dividends. Thus, REITs are effectively arbitrage plays. They draw inexpensive debt, use the money to purchase or develop real estate of some form, then generate cash flows of various amounts by leasing the property. Sometimes REITs just get rent, and sometimes the tenant pays for insurance and maintenance, along with property taxes (if all three, it’s called a “triple net lease”).
After expenses are paid, debt gets serviced and taxes are taken out, 90% of the remainder is distributed as a dividend.
REITs to Buy: Avalonbay Communities (AVB)
Dividend Yield: 3.1%
One area that has become attractive over the past few years are apartment REITs. During the housing crisis, many Americans lost homes and had to downsize into apartments. That drove up demand, which drove up rent, which meant good times for apartment REITs.
Avalonbay Communities Inc (NYSE:AVB) actually enhances the apartment approach by also operating and owning multifamily communities. AVB will purchase distressed communities and renovate them or create them from scratch.
AVB describes itself as owning “287 apartment communities containing 83,123 apartment homes in 10 states and the District of Columbia, of which 23 communities were under construction and nine communities were under reconstruction. These 287 apartment communities are located in 18 high barrier-to-entry markets characterized by a low supply of zoned apartment land and lengthy entitlement processes.” As a matter of fact, around 20% of its communities are here in Southern California, and there’s one right down the street from me.
AVB has returned about 8% annually over the past five years, not including dividends. That yield is presently at 3.1%. AVB pays that as $1.42 per share every quarter, and its Funds from Operations is more than enough to cover that dividend, coming in at $1.90 per share in the last quarter.
REITs to Buy: Retail Opportunity Investments Corp (ROIC)
Dividend Yield: 3.8%
Retail Opportunity Investments Corp (NASDAQ:ROIC) is another REIT that has some property in my neighborhood, and it gave me the chance to see exactly what kind of operation it runs.
ROIC says it buys, and then either leases or will reposition shopping centers. Not just any shopping centers, though — they must be in small communities in a high-traffic zone. In addition, they aren’t located in large urban areas, but in areas that are mid-to-upper income, anchored by national or regional supermarkets and drugstores, and are only being sought after in the three western states. The markets must also have high barriers to entry, and have value-add opportunities by mixing in new tenants.
It has been somewhat aggressive over the past few years, and is presently at almost 10 million square feet of shopping centers across 86 centers.
This REIT is yielding 3.8%, paying 75 cents per share per year, and trades presently at $19.78.
REITs to Buy: Senior Housing Properties Trust (SNH)
Dividend Yield: 7.8%
Ron Baron is a mutual fund manager who I learned about very early in my investing career. He coined a phrase called a “sunrise industry,” an industry that was about to begin long-term growth thanks to some kind of secular movement in a sector. Senior living was that industry and that trend continues.
Senior Housing Properties Trust (NASDAQ:SNH) is doing so well that it pays a 7.8% dividend. It also doesn’t simply focus on senior living facilities, but other facilities that service that sector. It owns assisted and continuing care retirement communities, skilled nursing facilities and medical office buildings, and even rents to clinics and biotech tenants. Its portfolio is valued at $8.6 billion, which is spread across 434 properties in 42 states and Washington, D.C.
41% of its properties are actual medical buildings, and 53% are senior living communities. Even better, a mere 6% of the entire portfolio carries any form of mortgage or capital lease.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance. He has 20 years’ experience in the stock market, and has written more than 1,200 articles on investing. He also is the Manager of the forthcoming Liberty Portfolio. Lawrence Meyers can be reached at [email protected]. As of this writing, he did not hold a position in any of the aforementioned securities.