These Lucky 7 REITs Yield 7%
“Are ya feelin’ lucky?”
When it comes to my money, I’m not a gambler – especially with my investments. Continually inspired by Benjamin Graham for his value investing approach, my aim for Real Estate Investment Trust (REIT) investing is simply to be… intelligent.
As editor of Forbes Real Estate Investor, I rate REITs and write about ‘em (say that three times fast).
I start by looking at the wide range of publicly-traded REITs – from Shopping Malls to Medical Office Buildings, to Data Centers, Infrastructure, Timber and Farmland, and everything in-between… and then curate the more attractive REIT companies in the newsletter, along with updated recommendations for subscribers. (Just last week, we published the over 45-page August issue.)
Worth repeating – I’m no gambler.
Now, when it comes to your money… I’m also no gambler.
I’m saying all this, to whet your appetite for this article – on the REIT Lucky 7!
Keep in mind… REITs, by law, must deliver a minimum 90% of their income to investors – in quarterly, and sometimes monthly, income.
And, when you see those dividends hitting your account, maybe “DRIP”-ing them when possible, or taking the cash to help round out your intended lifestyle, or fueling more investments, you know Exactly. What. I’m. Talking. About.
In fact, over the past month, I’ve written about REITs paying 5% dividends (click here). Some 6%’ers (here). And players returning 8% plus! (Go here, as you dare.)
But today, it’s the “perhaps overlooked” collection of 7% REITs, the ones rolling on – without the glory, or the attention, yet working hard for you, when you commit your investment capital by owning shares.
I’ve got a list of 7 for you to consider. First, a quick note about risk.
There’s risk in everything. The trick is engaging risk that you understand, that’s measured, calculated, commensurate with your tolerance – and knowing “you gotta play, to win.”
And remember: even not taking a risk – is, itself, risky.
Nope, I’m no gambler. And I never forget my mission, goal, and intent: To help investors allocate capital in REITs with the widest margin of safety.”
So here goes: a fleshed-out, risk-assessed list of seven Lucky 7% REITs…
LUCKY 7% REIT YIELDER #1: Jernigan Capital (JCAP)
The Big WHY: Public since 2015, originates diversified portfolio of development, acquisition and refinance loans – secured by self-storage facilities primarily in the top 50 U.S. metropolitan statistical areas.
Feathers in Its Cap: Dividend yields 7.3 percent. Commercial real estate mortgage REIT lending to private developers, owners and operators of self-storage facilities.
Downsides: Niche player tied mostly to self-storage subsector
Performance YTD: 4.3%
Alpha Insider Management Update: Run by executives with deep experience in self-storage, and who’ve managed through multiple economic cycles.
Bottom Line: JCAP is “deeply discounted” and market is not giving this hybrid REIT enough credit for its purposely crafted multi-discipline platform.
LUCKY 7% REIT YIELDER #2: Blackstone Mortgage (BXMT)
The Big WHY: Generates most of their revenue from lower risk senior secured loans. “Big brother” Blackstone Real Estate (BX) has proprietary insight, long-standing expertise and superior access to deal flow, giving BXMT’s affiliation a great competitive advantage. Could offer attractive outsized returns without complex hedging risk.
Feathers in Its Cap: Around five years ago, BXMT’s completed equity offering raised $660 million in growth proceeds – strong indication of potential of the simple floating rate senior mortgage business plan. Limited new commercial real estate construction, coupled with modest growth, has led to a more favorable investment environment for senior commercial real estate debt.
As part of Blackstone Real Estate, BXMT has access to deal flow, and attractive financing terms where companies leverage the entire BX relationship with banks, underwriting/asset knowledge, reputation and brand, etc., allowing benefits on both sides of balance sheet. Low cost and superior financing structure enhance returns on its loans. It’s a “pure play” senior secured lender, with a simple balance sheet, and 100% performing loan portfolio. European loans total 19% of the portfolio. Has dividend sustainability (the ultimate research metric).
Downsides: As readers may know, I’m normally not a proponent of externally-managed REITs, especially with management & incentive fees, general and administrative expenses, and conflicts of interest. This is an exception. Externally managed by Blackstone (BX), as BXMT is senior vehicle, there are other BX vehicles managed by the same team for different strategies which are not public. Remember too, BXMT does not own equity interests in real estate.
Performance YTD: 7.6%
Alpha Insider Management Update: Blackstone Real Estate (external manager) is a premier debt and equity investment and asset management platform, with access to proprietary deal flow, and property & market information – a valuable differentiator given scale of BX’s real estate business.
Bottom Line: BXMT is my top K.I.S.S. in commercial mortgage REIT sector. Macroeconomic backdrop for commercial real estate fundamentals is sound, fueled by job growth and positive consumer sentiment, real estate operating fundamentals have continued to improve, supply has been limited in most markets and asset classes. The dividend yield is 7.5%
LUCKY 7% REIT YIELDER #3: Pennsylvania Real Estate Investment Trust (PEI)
The Big WHY: Founded in 1960, and since the Great Recession, PREIT has been remaking itself, selling underperforming properties and carving a niche for a larger player to see.
Feathers in Its Cap: Primary focus is retail shopping malls in eastern half of U.S., primarily mid-Atlantic. Portfolio has 29 retail properties (including four in development or redevelopment), with 20.2 million square feet, dominant presence in Philadelphia and the Washington, D.C. Metro Area. Smaller cap mall REIT, with market cap of $679 million. PEI’s payout ratio at low end based on FFO/share. Well-covers one of the highest dividends in the Mall sector at 8.7%.
Downsides: Due to the higher risk as a smaller REIT (and retail REIT), positions should be sized accordingly.
Performance YTD: -6.5%
Alpha Insider Management Update: Management has made PEI ever more attractive as an M&A target, and only a handful of buyers 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.)
Bottom Line: Mr. Market does not recognize this is a hungry dog that’s running well. Can easily roam with really big dogs (i.e. SPG) with plenty of capacity to maintain its dividend. Good bet for the intelligent investor.
LUCKY 7% REIT YIELDER #4: City Office REIT (CIO)
The Big WHY: Invests in high-quality office properties in mid-sized metropolitan areas with strong economic fundamentals, primarily in southern and western United States. Acquisition strategy has concentrated on some of the fastest growing markets across the country.
Feathers in Its Cap: Company has grown from 14 properties to 44, located in San Diego, Seattle, Portland, Boise, Phoenix, Salt Lake City, Denver, Dallas, San Antonio, Austin, Houston, Tampa, and Orlando. Industry projections indicate these cities will continue to perform well, with healthy employment growth and limited competition from new development.
Downsides: Smallest office REIT in our research lab, with market cap around $416 million.
Performance YTD: 2.7%
Alpha Insider Management Update: Management team has average of over 20 years of experience, with over $1.8 billion of real estate acquisitions since 2011. The company internalized management team in February 2016. Management and board of directors own over 8% of the shares.
Bottom Line: Analysts (using FAST Graphs data) estimate CIO will grow FFO/share by 14% in 2018. Meanwhile, shares remain mis-priced, trading at $11.56 with a P/FFO multiple of 11.5x. The dividend yield is 8/1%.
LUCKY 7% REIT YIELDER #5: Outfront Media (OUT)
The Big WHY: One of the largest out-of-home media companies in North America.
Feathers in Its Cap: Portfolio includes more than 400,000 digital and static displays, primarily located in the most iconic and high-traffic locations throughout the 25 largest markets in the U.S., including a major NYC MTA contract.
Downsides: Certainly more risk as billboard revenue is dependent on ad spending, and a weakening economy (or perhaps recession) could limit advertising and weaken the credit quality of some of the customers. (But there’s no recession currently in sight, and the economy is doing well.)
Performance YTD: -5.8%
Alpha Insider Management Update: Company provides an attractive risk-adjusted thesis.
Bottom Line: Well-positioned to perform. Maintains 7.5% dividend yield.
LUCKY 7% REIT YIELDER #6: Kite Realty Group Trust (KRG)
The Big WHY: Shopping center REIT with 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.
Feathers in Its Cap: During Great Recession, like other REITs, Kite cut its dividend (after going public in 2004, and enjoying rapid growth). But since then, to its credit, company has maintained a conservative payout ratio.
Downsides: With a market cap of $1.246 billion, Kite is a “small cap” REIT, with less share volume trading daily, than competitors. But sometimes, smaller is better.
Performance YTD: -10.7%
Alpha Insider Management Update: Portfolio of 119 properties in 20 states, covering over 23.9 million square feet. Average shopping centers are about 200,000 square feet, and spread among community centers (54%), neighborhood centers (26%), and power centers (20%).
Bottom Line: As retail store closures weigh on investors’ minds, Mr. Market is spooked. But 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.
LUCKY 7% REIT YIELDER #7: VEREIT Inc. (VER)
The Big WHY: Owns about 4,100 free-standing buildings (92 million square feet), leased to a variety of retail, restaurant, office, and industrial tenants.
Feathers in Its Cap: Internally-managed full service net-lease REIT with a long-term net-lease structure that provides stable and predictable rent stream payments. The diverse portfolio is across sectors, geographies and tenants. Since April 2015, VER has successfully implemented its business plan, enhanced its portfolio, de-levered its balance sheet and achieved investment-grade ratings. Diversified portfolio includes retail (41.4%), restaurants (22.3%), industrial (17%), and office (19.3%, down from 25%).
Downsides: While overhang of Cole purchase & subsequent sale has vanished, lingering lawsuit and legal costs continue to weigh on investors, and fear of unknown makes it hard to forecast the outcome. But with no criminal charges, lawyers can get down to business, yet depositions aren’t cheap. Settling seems more likely in 2019. Also, forecast is lackluster for this year (-3% based on FFO, compared to average +3% for net lease REIT peers). Company remains focused on dispositions and match funding (dispositions and acquisitions) to achieve growth.
Performance YTD: -0.01%
Alpha Insider Management Update: Conflicts of interest par for the course for previous VER management team, along with accounting scandal that showed they “cooked the books.” Lawsuits followed, and while a long road to recovery, VEREIT’s current management team has delivered on promise of building trust.
Bottom Line: Shares now yielding 8%, are well-covered, and price is highly attractive (based on P/FFO) – especially since litigation is the last cloud remaining.
I own shares in VER, PEI, KRG, OUT, CIO, BXMT, and JCAP.