For above average yields and long-term growth potential real estate investment trusts remain a favorite sector of the financial newsletter advisors. These MoneyShow.com contributors highlight their favorite picks within the REIT sector.
Apollo Commercial Real Estate, yielding 9.8%, is the largest Commercial Real Estate (CRE) firm in the world and offers investors a stable and dependable entry point into the prosperous CRE market.
Over three-quarters of the company’s $5 billion loan portfolio is in secure, first-mortgage loans. The rest is in subordinate loan products. The average loan term is 2.7 years, which means the company will benefit from rising interest rates as it issues newer loans that more accurately reflect current rates.
Additionally, over 90% of Apollo’s portfolio leverages floating rate loans, which means Apollo benefits as rates increase in the short-term. This is a portfolio that was built for a climate of rising interest rates, which we are now in, and which Apollo is currently benefitting from. To wit, the company’s 3Q18 profit grew 8.5% from the previous quarter to $77 million.
Loan originations, meanwhile, have been on a steady upward trajectory since 2012, the year the industry finally started clawing back from the Great Recession. Apollo issued $1.9 billion of new loans in the first half of this year, which is only $150 million shy of the company’s total for 2017 as a whole. Yes, we’re looking at loan origination records here.
This is a growing company in a growing industry, with a strong outlook thanks to those floating rate loans. Book value is right on par with last year at $16.27 per share. As the book value grows with the origination portfolio, expect the stock to tick upward in tandem.
Sure, it’s been a bumpy ride, but we expect a further uptick by year-end, perhaps landing in the $19-$20 range. Of course, with a 9.8% yield, any price appreciation is gravy.
Equity Residential, yielding 3.3%, is a REIT that operates multi-family residential properties in dense urban locales such as Los Angeles, San Francisco, New York and Boston. Its buildings are hip, stylish and modern, with property management teams that prioritize the customer experience above all else. Equity Residential’s buildings maintain strong appeal with the young urban Gen X and Millennial crowd.
With a nearly $25 billion market cap, Equity Residential is one of the largest residential REITs out there. The company had a strong 3Q18, posting same-store revenue growth for the quarter of 2.3% — the top of their guidance range. That puts the company on track for 2.3% revenue growth for the year as well. Renewals increased by 5% for the quarter and occupancy stands at a staggering 96% across the board.
The company offers generous transition perks should residents wish to switch to another Equity property, including out of state, which helps buoy those retention rates. They also just posted their lowest turnover rate in history: only 16% of their units were in transition over the quarter.
The company also entered a new market this past quarter; it purchased two properties in Denver for a combined $275 million. The company is making a bet on Denver growing its 25-34-year-old age group, which has indeed been expanding rapidly in the Mile High City over the past few years. This is a company that is poised for growth; we expect this REIT to pick up steam as we enter 2019.
New Residential Investment Corp., with a yield of 11.6%, pioneered the Mortgage Servicing Rights (MSR) business. Essentially, the company purchases the right to service mortgages from banks and institutions that hold the underlying loans.
Banks were forced to sell off their MSRs in the wake of the Great Recession. New Residential spotted an opportunity and pounced, and the company became a “hidden gem” in the process. Thanks to their stellar track record, they’re not so hidden anymore.
New Residential benefits from rising interest rates, which make MSRs more valuable since homeowners opt not to refinance and hang onto their mortgages for longer. That means mortgage service providers like New Residential extend their revenue generation for longer periods of time.
As a result, book value has increased 40% over the last three years to an all-time high of $16.87. New Residential has also increased its dividend 9% over the last three years, again while the vast majority of mortgage REITs have been slashing dividends thanks to the rate hikes. This is a stock that provides an excellent buffer against a climate of rising interest rates.
Management has been top-notch when it comes to providing value for investors, and we believe they will continue the trend. Don’t be scared off by Wall Street’s knee-jerk reaction to the stock sale. This is a fabulous company with strong fundamentals and powerful macro-economic tailwinds.
The recent dip presents a buying opportunity, as shares will soon rebound once Wall Street remembers how revolutionary this company’s business model truly is.
Welltower, Inc. — a healthcare infrastructure real estate investment trust — has provided investors with 15 years of consecutive annual dividend hikes and currently offers a 5.3% yield.
The trust operates through three business segments and owns interests in properties concentrated in major, high-growth markets in the United States, Canada and the United Kingdom. The Seniors Housing segment offers several types of services, which include independent living, assisted living and memory care communities.
Additionally, the Post-Acute Care segment provides rehabilitation centers that specialize in treating patients recovering from illness or surgery. Finally, the Outpatient Medical segment offers facilities for performing minor medical procedures that do not require a hospital environment.
The current $0.87 distribution converts to a $3.48 annual distribution and a 5.3% dividend yield, which is 7.5% higher than the REIT’s own five-year average yield of 4.9%. In addition to outperforming its own five-year average, the fund’s current 5.3% yield is nearly 64% higher than the 3.22% average yield of the entire Financials sectors, as well as more than 20% above the simple average of the Health Care Facilities REITs industry segment.
After 15 consecutive annual dividend hikes, the fund enhanced its annual payout nearly 50%, which corresponds to a 2.7% average annual growth rate. Even with the two missed dividend hikes – in 2002 and 2003 – the fund still managed to advance its annual payout 55% and maintain an average growth rate of 2.2% per year for the past two decades.
The combination of the steady annual dividend hikes and asset appreciation rewarded shareholders with a total return of 8.6% over the past 12 months. Additionally, the three-year total return was 23% and the total return over the past five years was 33.7%.
My strategy for getting through the next bear market and surviving until the next bull is to own higher yield, dividend-paying stocks that will not cut the dividend through the downturn. These stocks should not fall as far in a bear market. Also, I can take the dividends to average down my share price through the market downturn.
Coming out the other side I will have a lower average cost of shares and a much larger dividend income stream. That’s a win-win strategy to get through a bear market.
Here are three stocks where the dividend is very secure, pay attractive yields. More importantly, they should be able to pay the current dividends through any deep and lasting downturn in the stock market. By lasting, I mean the average bear market length of nine to 12 months.
Starwood Property Trust is a commercial property finance REIT. The book of loans is very conservative with a 62% LTV. The company’s loan clients are highly motivated to make those payments. In recent years, Starwood has diversified the company with the purchase of a commercial mortgage servicing business and acquiring a portfolio of low-income apartment complexes.
Both businesses, especially the servicer, will do very well if the economy slows down. The current $1.92 annual dividend is well covered by a core income run rate of $2.25 per share. The 9.0% yield means large dividends to reinvest as the share price gets cheaper.
Aircastle Limited may be my personal favorite stock to buy in a bear market. Aircastle is an aircraft leasing company with client airlines around the world. The current $1.12 per share annual dividend is backed by about $4.00 per share in free cash flow.
This stock got very cheap in the last bear market even though the financial remained rock like. Picking up these shares at the bottom of the bear resulted in gains that were multiples of the share price. This is a nice 5.9% yield income stock now that gets even more attractive as the share price falls.
Tanger Factory Outlet Centers is the only pure play owner of outlet type shopping centers. In tougher economic times people still like to shop but are more likely to go to an outlet mall to score some deals. The safety factor of owning shares of Tanger is the company’s track record.
There have been two severe bear markets since 1993, so you can believe that the dividend will be secure and grow. Tanger is also very conservative in the management of its balance sheet. This should let the company make accretive acquisitions when its competitors become financially distressed. Tanger Factory Outlet currently yields 6.5%.
Demand for broadband capacity is driving explosive growth in telecommunications, fueled by new technologies capable of delivering the bandwidth and speeds to support ever-increasing internet and mobile traffic. This scenario makes network assets extremely valuable to operators and investors alike.
Uniti Group is an internally managed real estate investment trust engaged in the acquisition and construction of mission-critical communications infrastructure. The REIT is a leading provider of wireless infrastructure solutions for the communications industry. Uniti owns 5.4 million fiber strand miles, approximately 770 wireless towers and other communications real estate throughout the United States and Latin America.
In my effort to find high-yield assets that operate in growing markets with an emphasis on domestic operations, the telecommunications infrastructure industry offers investors some very attractive opportunities.
We’ve made excellent returns in leading cell tower companies over the years, and today I want to add a well-positioned name within the sector that pays an outstanding dividend yield of 12.0%.
Second-quarter results were solid, with the company reporting revenues of $247.3 million and Adjusted Funds From Operations (AFFO) of $0.62 per share. Fiber lines contributed $67.4 million, towers owned contributed $2.5 million and leasing of infrastructure to service providers had revenues of $173.9 million.
Uniti is set to earn AFFO of $2.52 per share for 2018, which more than covers the $2.40 per share dividend payout the company is committed to. UNIT declared a $0.60 quarterly dividend that is set to trade ex-dividend on Sep. 27. Buy Uniti Group under $21.