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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 4.14% (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 Healthcare Realty Trust (HR) and W.P. Carey Inc. (WPC)

Healthcare Realty Trust

Healthcare Realty Trust is a real estate investment trust (REIT) that owns, manages, and develops medical office and other outpatient-related medical facilities in 28 states. As of the end of March, 2013, the company had about $3.0 billion invested in 205 income producing properties and mortgages (excludes assets held for sale). The company’s properties total approximately 13.5 million square feet. It also provides management services to about 140 healthcare providers nationwide, totaling 10.1 million square feet.

Healtcare’s 12 properties that have yet attained stabilization should do so by the end of 2013. At the end of March, these properties were 65% leased and 45% occupied. The company anticipates them to be 75% to 85% leased and 65% to 70% occupied by the end of this year. Once these properties are stabilized, management thinks they will produce operating income upwards of $25 million per year. As a group, they are already profitable, having generated operating profits of $900,000 in the fourth period of last year and $1.3 million in the first interim of 2013. The REIT is building two facilities for Mercy Health, a hospital operator. These are in Oklahoma City and Springfield, Missouri. They are set to come on line (fully leased) later in 2013 at an aggregate cost of nearly $203 million.

Looking forward, acquisitions and divestitures are an integral part of Healtcare Realty’s long-term growth strategy. As of early May, the company had purchased two properties for a total of $32.5 million, and looks to spend up to $200 million on acquisitions in 2013. On the other hand, the company expects divestitures to be about $60 million or so, this year.

The company differs from most healthcare REITS. Specifically, it does not own living facilities, having sold them six years ago, and hence is not as dependent on Medicare reimbursement. HR shares offer a dividend yield that is above the REIT industry average.

The dividend appears to be well covered by funds from operations. Shareholders who reinvest their dividends can take advantage of a 5% discount on their new shares.


W.P. Carey

W.P. Carey is a global real estate investment trust (REIT), that invests in commercial properties, as well as operates publicly owned non-traded real estate investment trusts. The company also provides asset management services and offers real estate financing solutions, including long-term net lease financing for major companies in the U.S. and globally. At the end of 2012, the company managed an investment portfolio of $14.1 billion. It has agreements with 120 or so corporate obligers.

W.P. Carey continues to focus on quality in expanding its property portfolio. The company’s occupancy rate of nearly 99% reflects sound work that its asset managers have done over the years. With an average lease term of 8.8 years, the company’s current path should remain stable over the next several months. Acquisitions, dispositions, and redevelopments will continue to play important roles moving forward. Despite the economic malaise that has persisted in some areas, management remains optimistic about long-term potential in Europe and Asia. In contrast with those in the U.S., companies in these regions typically have more corporate-owned real estate.

As a leader in sales-leaseback transactions, W.P. might well see high returns on these relatively untapped acquisition opportunities. The company has already engaged in strategic dispositions and secured a greater variety of capital sources. This will likely place WPC in a strong position to further accelerate its growth activities. W.P. shares offer a dividend payout that is above the REIT mean. The dividend is adequately funded, and the streak of 48 consecutive quarterly hikes should remain intact for the foreseeable future.

 

Company

Ticker

Dividend Yield

Annaly Capital Mgmt.

NLY

12.33

Corrections Corp. Amer.

CXW

5.95

Digital Realty Trust

DLR

6.09

Duke Realty Corp.

DRE

4.21

Geo Group (The)

GEO

5.75

HCP Inc.

HCP

5.11

Health Care REIT

HCN

5

Healthcare R'lty Trust

HR

4.69

Hospitality Properties

HPT

6.47

Liberty Property

LRY

5.15

Mack-Cali R'lty

CLI

5.02

Realty Income Corp.

O

5.16

Ventas, Inc.

VTR

4.14

W.P. Carey Inc.

WPC

4.84

Washington R.E.I.T.

WRE

4.53

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