Real estate investment trusts (REITs) are currently sources of retirement. Many pay dividends which are Three or even four times the market average.
In addition, these owners are cheap. They trade at cash flow multiples that make them bargains against the S&P 500.
Why are these offers available? Rising prices.
In the short term, higher rates mean higher capital costs for REITs and more competition for income (as bond yields also rise). This sent property stocks plummeting – which is great news for us dividend investors, as it means they pay more.
Today we’ll be looking at a surprising three-pack of REITs that are earning 3-4x the broader stock market and outperforming not only the sector in recent months, but also the much better performing S&P 500.
And oh by the way, each of these three REITs has increased their dividends over the past year. Let’s get into them.
Innovative Industrial Properties (IIPR)
Dividend yield: 6.5%
Warehouses and logistics centers are among the most popular types of REITs, but despite the name, that’s not what Innovative Industrial Properties (IIPR) is.
It’s a weed REIT.
To be more specific, IIPR is a rare real estate game that provides capital to the regulated cannabis industry. It has a sale-leaseback program in which it buys independent industrial and retail properties (primarily marijuana grow facilities) and leases them, providing cannabis operators with large inflows of capital to expand their businesses.
The resulting portfolio currently has 111 properties representing approximately 8.7 million leasable square feet in 19 states.
Innovative industrial properties have put the REIT sector to shame since its IPO in December 2016 – returning more than 600% to the sector’s 28% – but like many growth stocks, IIPR has struggled in 2022. The The stock is down nearly 60% year-to-date, even with a recent rebound, reflecting the deep pain being felt in the marijuana industry.
But the IIPR has diverged from both real estate and cannabis over the past three months, at the top 19% from mid-teens losses for these two market segments.
An excellent third quarter report helped. The company’s adjusted funds from operations (AFFO) jumped 25% year over year to $2.13 per share, well above what is needed to cover the $1.80 dividend $ per share. (And nine-month AFFO is up 32%.)
By the way, this dividend has grown like a weed. That $1.80 a share is 20% higher than it was a year ago, and it’s ballooned 64% a year since the first 15-cent payout in 2017.
Rating is OK, but definitely not great. Despite a massive hemorrhage of stocks in 2022, the IIPR is trading at just over 13 times the AFFO forecast, reflecting a great deal of confidence remaining in the stock despite its precipitous fall.
Simon Real Estate Group
Dividend yield: 6.2%
Whoever said malls were dead, well, they might still be right, but the mall mega-REIT Simon Real Estate Group (SPG) at least shows signs of life.
Simon owns more than 250 properties around the world, including locations in the 25 largest US markets by population. This laser focus on brick-and-mortar real estate naturally made it a pariah at the start of COVID, and although SPG stocks eventually came within a whisper of their pre-COVID highs last year, they have again struggled in 2022, well over 20%.
Simon himself had a ball of a third quarter, in which he beat FFO estimates, improved occupancy 160 basis points year-on-year to 94.5%, signed 900 new leases and increased minimum base rents by just under 2%. .
What fuels success? Well, the online shopping trend, which accelerated during COVID, has pulled back a bit, prompting businesses to keep opening stores. But SPG and other mall operators are getting more creative about their spaces, opening them up to coworking suites, spas, fitness centers and other non-traditional mall tenants.
It’s also worth noting that Simon increased his payout to $1.80 per share, about 9% higher year-over-year.
To be clear: SPG has hacked its dividend by 38% in 2020, to $1.30 per share from $2.10 previously. So shareholders still aren’t quite on board, but SPG has increased its payout every quarter for two years now. And that dividend is only about 60% of Q3 FFO, so hedging isn’t an issue here.
At issue is the main headwind that SPG will face, namely the recession predicted by just about every economist and strategist. Malls in general, and SPG in particular, have inherent difficulties when the economy falters. So there is still room for Simon’s situation to get worse before then, and if so, it will eventually get better.
Getty Realty (GTY)
Dividend yield: 5.4%
Sole Tenant Commercial REIT Specialist Getty Realty (GTY) is a unicorn in 2022. It has not only outperformed the real estate sector for the past few months and all year, it has actually generated gains (on a total return basis) so far in 2022.
GTY defines the term “boring is beautiful”.
It is a massive net leasehold REIT, with over 1,000 properties in 38 states and Washington, DC. But its retailers are downright yawn-worthy: car washes, auto parts and service stores, convenience stores and gas stations. Tenants understand Valvoline (tourist office)
The attraction here, then, is clearly not abrupt growth, it’s stability. And you’ll find that in more than the real estate portfolio.
Many of its indebted brethren are busy bearing the costs of higher interest rates. But Baird’s analyst team points to Getty’s “low leverage, no near-term debt maturities and no apparent trouble on the horizon.” This has allowed them to focus on investing (both acquisition and development) in new properties while other companies seek to exit.
The dividend paints a similar picture. The most recent increase in payouts was a 5% increase to 41 cents per share, which is very much in line with its average annual dividend growth of 5.1% over the past five years. But compared to many REITs that have had to return to the dividend channel during COVID, this kind of consistency is welcome.
Brett Owens is Chief Investment Strategist for Opposite perspectives. For more income ideas, get your free copy of his latest special report: Your early retirement portfolio: huge dividends, every month, forever.
#highquality #highyielding #REITs #buck #market #trend