Loading...

There are a few sectors and industries that income investors can turn to, virtually without fail, to find above average dividend yields. Real estate investment trusts, commonly referred to as REITs, are one such industry (others include utilities and limited partnerships).

The high dividend payouts in the REIT sector relate to two aspects of these securities. First, REITs, as their name implies, own real estate or real-estate related securities (in the case of mortgage REITs). This asset type is known for its cash flow generation. Second, REITs are structured as pass through entities for tax purposes. This allows these companies to avoid corporate taxation, but requires that the vast majority of earnings be “passed” on to shareholders as dividends. Potential investors should note that dividends shareholders receive from a REIT are taxed as ordinary income.

Just because REITs, in general, have a tendency to pay material dividends, doesn’t mean that all REITs do. Just as with other sectors, some REITs are geared toward growth and others toward income. To highlight those that fall into the latter category, we used the online screening tools of The Value Line Investment Survey to highlight those REITs with yields above the current median of 3.68% (see list below).

It is important to keep in mind that an above-average yield can be an indication that the market believes the dividend payment is at risk. That said, a high yield could also present a good buying opportunity if a company is merely misunderstood. The screen turned up several interesting REITs, including Realty Income Corp. (O) and Hospitality Properties Trust (HPT).

Realty Income Corp.

Realty Income is a real estate investment trust that owns commercial properties. Facilities are rented primarily under triple lease agreements. As of the end of 2012, the company owned 3,013 properties in 49 states, containing over 37.6 million leasable square feet, with a 97.2% occupancy rate. Retail is 87% of rental revenue; agriculture, 5%; other, 8%. Realty Income’s wholly owned subsidiary, Crest Net Lease, Inc. owned 3 properties as of the end of 2012. Realty acquired American Realty Capital Trust (ARCT) in January of this year.

The company issued more than 45 million common shares for American Capital Realty Trust. The move boosted the real estate investment trust’s top line by more than 40% and will likely result in a marked increase in funds from operations this year. We estimate a smaller, but still good, rise in FFO in 2014. The purchase also bolstered the credit quality of Realty Income’s tenants and made its tenant base more diverse. More than a third of the company’s revenues will likely come from investment-grade tenants this year, relative to 20% in the year prior. As of the end of 2012, retail represented 87% of the REIT’s business; following the ARCT transaction, this tally dropped to approximately 78%.

Overall, acquisitions are an integral part of Realty Income’s strategy. Last year, the company purchased 423 properties for $1.16 billion. This year, management estimates another $550 million of acquisitions, over and above the ARCT transaction. We feel this REIT has more than enough liquidity to achieve this objective.

After the ARCT acquisition, the board of directors increased the monthly dividend by 19.2%. Subsequently, as of April, the board lifted the monthly payout once again, although the increase was slight, at less than 1%. We look for further increases down the road, as quarterly dividend growth is the norm for this REIT. At the recent valuation, Realty Income is above the REIT pack for its dividend yield. At nearly 4.5%, it is about 50 basis points above the REIT median.

Hospitality Properties Trust

Hospitality Properties Trust is a real estate investment trust that presently owns 289 hotels and 185 travel centers in 44 states, Puerto Rico, and Ontario, Canada. Acquired and subsequently spun off TravelCenters of America (TA) to shareholders in January of 2007. Major hotel tenants and managers include TA, Marriott, InterContinental, Sonesta, Hyatt, Wyndham, Carlson, and Morgans.

Hospitality Properties' expansion plans are an ongoing initiative. Management will continue to invest in renovations in 2013, especially for the Wyndham and Sonesta brands, which were added to HPT’s portfolio (along with the Morgans Hotel Group) last year. Indeed, more than 80 hotels are likely to be renovated during the first half of this year, which will moderate RevPAR (revenue per available room) growth, post renovations. Until that time, management doesn’t look for operations to normalize until 2014. What’s more, the company intends to augment its international footprint in Latin America and Europe. Management announced a letter of intent with NH Hoteles (Spain) to invest about $375 million in 10 hotels. This transaction is slated to close this summer. Furthermore, we look for additional complementary acquisitions in order to bolster its pipeline.

The REIT has taken initiatives to enhance its balance sheet and reduce debt. Hospitality recently initiated an initial public offering of 14 million units of common stock at $25.55 a share. Management might well use a portion of these proceeds to deleverage the balance sheet.

These shares are one of the highest-yielding REITS under our coverage, at more than 6.5%, based on recent market prices. Although we don’t forecast a dividend hike over the next year or two, management indicated that an increase might well be in the cards thereafter, following the aforementioned renovations and rebrandings.

 

Company

Ticker

Dividend Yield

Annaly Capital Mgmt.

NLY

11

Hospitality Properties

HPT

6.65

Mack-Cali R'lty

CLI

6.15

Geo Group (The)

GEO

5.31

Corrections Corp. Amer.

CXW

5.23

W.P. Carey Inc.

WPC

4.8

Liberty Property

LRY

4.58

Realty Income Corp.

O

4.57

Health Care REIT

HCN

4.4

Healthcare R'lty Trust

HR

4.14

HCP Inc.

HCP

4.14

Washington R.E.I.T.

WRE

4.09

Duke Realty Corp.

DRE

3.86

Weingarten Realty

WRI

3.8

UDR, Inc.

UDR

3.78

Penn. R.E.I.T.

PEI

3.78

Kimco Realty

KIM

3.68

     

At the time of this writing, the author did not have any positions in any of the companies mentioned