For several weeks, Forbes.com column readers have been watching me climb the dividend risk/reward ladder, from 6% yields, then 7%, using only REITs and the power of fundamental analysis. Today, we’re stretching to 8% yields and beyond!
It’s important to survey the current economic environment, including record employment, a fresh Fed chair, new tax rates and rules, and a not-recently-seen, 10-year Treasury yield of 3%.
I believe investors appreciate the unique nature of REITs – companies are generally required to distribute at least 90% of taxable income to shareholders – and I’m pleased companies that are “well-grounded high-flyers,” can be discovered by investors.
Below are eight ideas.
But it’s important to separate these selections from so-called “sucker yields.” Monthly subscribers to Forbes Real Estate Investor are familiar with warnings to avoid dangerous, high-yielding stocks and dividend cuts, and these guidelines: find the right REIT at the right price, with a margin for safety against unknown market risk; never wager with a REIT that could potentially cut its dividend; pay close attention to underlying cash flows; and always protect principal at all costs. Finally: Only invest in REITs you’ve thoroughly researched.
Kimco’s portfolio of 475 company-owned U.S. shopping centers, holds 81 million square feet of leasable space, mostly in top major metropolitan markets. Kimco’s scale advantage is one way the company mitigates tenant risk and enjoys exceptionally strong leasing demand. I consider Kimco one of the best bargains in the REIT sector today, and it’s great to see a management team executing on all cylinders.
CorEnergy (CORR) – 8.3%
CorEnergy ,a guinea pig of sorts, is the first REIT in the Infrastructure sector, so there’s some “acceptance risk.” The company owns essential energy assets, such as pipelines, storage terminals, and transmission and distribution assets, and receives long-term contracted revenue from asset operators, primarily under triple-net participating leases, so lease payments are “operating” expenses (not “financing” expenses). That’s important because in any bankruptcy, real property operating leases are subject to special provisions.
While CorEnergy doesn’t have diversified sources of revenue as other REITs, the “critical mission” attributes provide comfort the assets won’t become obsolete. CorEnergy also has a small cap (about $450 million), so share trades could be volatile at times. CorEnergy’s dividend yields 8.3 percent.
PREIT (PEI) – 8.7%
Pennsylvania Real Estate Investment Trust (PEI) was founded in 1960. Since the Great Recession (2008-09), PREIT has been remaking itself, selling underperforming properties and carving a niche for a larger player to see.
I think we’re entering a wave of consolidation with only a handful of buyers who could acquire a portfolio of malls. For example, Simon Property Group (SPG) could expand its reach by grabbing a cherry-picked portfolio of highly productive malls.
PREIT’s primary focus is retail shopping malls in the eastern half of the U.S., primarily mid-Atlantic region. The portfolio has 29 retail properties (including four in development or redevelopment), with 20.2 million square feet, and a dominant presence in Philadelphia and the Washington, D.C., Metro Area.
It’s a smaller cap mall REIT, with a market cap of $679 million. PEI’s payout ratio is at the low end (based on FFO/share), well-covering one of the highest dividends in the Mall sector at 8.7%. Due to the higher risk as a smaller REIT (and retail REIT), positions should be sized accordingly.
Sabra (SBRA) – 9.1%
Sabra Health Care owns and invests in real estate serving the healthcare industry throughout the U.S. and Canada. As of March 31, 2018, Sabra’s primary portfolio included 515 properties: 380 Skilled Nursing/Transitional Care facilities, 89 Senior Housing communities, 24 Senior Housing communities (operated by third-party property managers), and 22 Specialty Hospitals and other facilities, all covering nearly 54,000 beds.
Last summer, SBRA completed a merger with Care Capital Properties (formerly CCP). One of the top tenants in CCP’s portfolio was Signature HealthCARE – then the second-largest tenant for CCP. And when CCP merged with SBRA, the company planned to reduce its concentration to Genesis – from 33% of NOI to 11% – and Holiday – from 16% to 6%.
About first quarter results, Rich Matros, Sabra CEO and Chairman said the Signature Healthcare restructuring is complete, the Genesis “Exodus” remains on schedule, and the company’s Skilled Nursing concentration goal is 61% by year end, just four points higher than before the close of the CCP merger.
SBRA intends to continue focusing on Assisted Living (AL), Memory Care (MC), and Independent Living (IL) operators to deliver added growth, growing private-pay exposure through acquisitions and portfolio management. The company’s proprietary development pipeline is about $1 billion in future deal flow for primarily purpose-built, senior housing facilities.
SBRA annual dividend pays 9.1%.
Kite Realty Group (KRG) – 8.6%
Kite is a shopping center REIT with a market cap of $1.246 billion, making it a “small cap” REIT.
When Kite went public in 2004, it grew rapidly, and like other REITs, cut its dividend during the Great Recession but the company has maintained a conservative payout ratio.
Today, Kite’s portfolio includes 119 properties in 20 states, covering over 23.9 million square feet. Average shopping centers are about 200,000 square feet, spread among community centers (54%), neighborhood centers (26%), and power centers (20%).
Kite has a strong mix of tenants, primarily need-based and value-oriented retailers. Around 93% are considered internet resistant/omni-channel. Top tenants include Publix, TJ Maxx, PetSmart, Ross, and Lowe’s. Over 70% of annualized base rents come from the top 50 metropolitan statistical areas.
Clearly, retail store closures are weighing on investors’ minds, and spooked Mr. Market. I continue to believe normalization is taking place, especially in more attractive markets, and I continue to recommend higher-quality REITs. Kite’s one of the cheapest shopping center REITs on my list, with a well-covered 8.6% dividend yield.
Ladder Capital (LADR) – 8.5%
Ladder Capital is a diversified commercial real estate company formed in 2008, and became a REIT in 2015. The company’s main business strategy is to originate and securitize “first mortgage” loans, on stabilized, income-producing, commercial real estate properties.
Ladder’s one of the largest non-bank contributors of loans to commercial mortgage-backed securitizations in the U.S. However, the company has a unique model that doesn’t rely exclusively on securitization for revenue, and earns a significant portion of revenue from first mortgage balance sheet loans & property rentals, and expanded market share in commercial mortgage loan originations.
Ladder has a disciplined credit culture with zero credit losses since inception, operating as an internally-managed REIT. LADR’s 2018 quarterly dividend of $0.315 per share, and core EPS of $0.55, shows a very healthy payout ratio. The annual dividend yield is 8.5%.
Omega Healthcare Investors (OHI) – 9.2%
Omega is one of the largest healthcare REITs, providing financing and capital to the long-term healthcare industry as one of the most diversified “pure play” Skilled Nursing REITs. As of March 31st, Omega’s portfolio included over 950 properties, in 41 states, and the United Kingdom. Omega’s investments involve 70 different operators, and comprise approximately 96,000 beds.
The company has long-term, triple-net master leases with cross collateralization provisions. Investments are in 83% skilled nursing, 13% senior housing, and 4% “other.” OHI’s revenue consists of Medicaid (53%), Medicare (34%), and Private Pay (12%). Since leases are triple-net, property level expenses are the operator’s responsibility (labor, insurance, property taxes, capital expenditures). Omega receives fixed rent payments from tenants with annual escalators, and operators receive revenues through reimbursement of Medicare, Medicaid, and private pay for services.
The Q1-18 earnings results helped validate effective, risk management practices are underway. Omega’s dividend yield is 9.2%.
Uniti Group Inc. (UNIT) – 11.9%
Uniti Group still derives significant revenues from the 2015 assets spin-off from Windstream Wireless (WIN). After a quiet start, UNIT rapidly evolved the company from primarily a single-tenant, one-property landlord to servicing nearly 16,700 customer connections through three diverse, complementary business segments: Fiber, Towers, and Leasing. The company acquires and constructs “mission critical” communications infrastructure, as a leading provider of wireless solutions for the communications industry. As of March 31st, Uniti owns 5 million fiber strand miles, approximately 700 wireless towers, and other communications real estate throughout the U.S. and Latin America.
I consider UNIT a Spec Buy, limiting exposure to low single digits in your portfolio. The catalyst for UNIT is the demand for 5G and shared Infrastructure model that provides UNIT with a yield enhancement opportunity. Piggy-backing on its core investments, UNIT can add second tenants that dramatically increase the starting yields, and provide a real boost to the investment thesis.
The company could grow earnings over the next 2-5 years, with less-traditional sources, and possibly private capital, and reduce exposure to WIN; needs to cover the dividend by actual earnings, even with exposure to WIN; and as a Top 10 owner of fiber infrastructure in the U.S., has no direct REIT peer. The company’s tower business is a niche strategy complimenting the Fiber business.
UNIT’s dividend of $0.60 per quarter, has an annual yield of 11.9%, the highest non-“sucker yield” of all the REITs on my newsletter buy list.