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Selected real estate could be an income investment option for 2024. As of this writing, seven real estate investment trusts (REITs) are paying dividends ranging from 8.7% up to 15.4%.
These REITs and others like them are literally designed to pay dividends, and that's how the rules were written in 1960 when Congress enacted these real estate investments into law.
REITs avoid taxes at the corporate level, but instead must pay out at least 90% of their taxable income and redistribute it to investors as dividends.
As a result, our REITs' average yield is around two to three times the market's. But you can do a lot better than just “average.” The seven REITs we'll review today have a yield of 12.1%, or roughly eight times the S&P 500's.
High Yield REITs
Contrarian outlook
With that level of income, you could probably retire on dividends alone, but you should be careful.
Meanwhile, the Federal Reserve (Fed), whose hawkish interest rate policies have worked against REITs for years, finally appears ready to cushion the blow to the real estate industry as a whole: Not only did the Fed pause rate cuts at its most recent Federal Open Market Committee (FOMC) meeting, but it also hinted at the possibility of three rate cuts in 2024 (via “Dot Plot” ).
REITs trade like bonds. When interest rates rise, REITs fall. That's why these stocks have fallen so much over the past two years. Rising interest rates have pushed down the prices of REITs.
However, now is the time for interest rates to “invert” thanks to the Fed. That said, a slowing economy isn't ideal for all homeowners, so it's important to be cautious.
Let's start with a couple of mortgage real estate investment trusts (mREITs), which don't own physical real estate but instead own “paper” in the form of securitized mortgages and other loans. mREITs boast some of the highest dividends ever, but you need to be especially careful in this space.
Armor Residential (ARR, 15.2% dividend yield) invests primarily in mortgage-backed securities (MBS) issued or guaranteed by U.S. government-sponsored institutions such as Freddie Mac, Fannie Mae, and Ginnie Mae. Currently, 92% of the portfolio is invested in 30-year fixed-rate pooled mortgages, 5% in agency commercial MBS, and the rest in “TBAs” (literally “to be announced,” an agreement to buy or sell MBS at some point in the future).
The mREIT business is tough in general, but the past few years have been bad for Armour and other REITs as rising mortgage rates have pushed up interest rates on new loans and eroded the value of existing loans. However, there may be reason to be optimistic about Armour as the Fed is expected to cut rates in 2024, which is a favorable environment for mREITs.
But that's probably not the case.
ARR is disappointing
Y Chart
The middle chart shows that Armour is a stock I would avoid at all costs. The company's stock price has been declining its dividend since 2011. Even if the current dividend yield is attractive, there is no precedent for future earnings to be as attractive.
Ready Capital (RC, 13.6% yield) is a more palatable option. This mREIT originates, acquires, funds, and services small and mid-sized commercial loans. Roughly half of the company's core revenue comes from bridge loans, with the rest coming from a combination of construction loans, fixed-rate CMBS, Freddie Mac loans, small business lending, and mortgage banking.
The company is also larger than it was just a year ago, announcing in May the completion of a merger with Broadmark Realty Capital, a specialty real estate finance company that originates and services residential and commercial construction loans.
Reddy's dividend isn't the highest, but it has been steady since the mREIT went public. It dropped from 40 cents in early 2023 to 30 cents in early 2024, but that's seen as temporary and mostly a result of absorbing Broadmark's lower-margin portfolio. But the dividend should rise again once the merger starts to bear fruit, an attractive prospect for a stock that already yields nearly 14%.
Now, let's look at some more specific equity REITs, starting with Highwoods Properties (HIW, 8.7% yield), an office REIT focused on Southern and Southeast markets including Atlanta, Charlotte, Dallas, Nashville, and Orlando.
To see just how bad the state of office real estate is, one need only look at this publicity piece on the company's website: “We're in the business of creating workplaces, creating environments that inspire experiences that enable the best and most talented people to achieve more together than they could apart.”
You know it's bad when they can't even say the word “office.”
Following the COVID-19 outbreak, Highwoods recovered to near its pre-pandemic highs by 2021, but after a year or so of stagnation, the Fed began raising interest rates and the stock has since fallen about 40%, lagging far behind the broader real estate sector.
There's little reason to be bullish on office real estate in general. While there's a growing trend back to the office, many tenants are still downsizing. But the opportunity is that many of these tenants are simultaneously upgrading to better quality (and more expensive) properties. This bodes well for HIW, which is generally a good operator and whose cash, FFO and other key metrics have been trending broadly in the right direction for over a decade.
Service Properties Trust (SVC, 9.7% yield) is unusual in the REIT industry in that it focuses on both hotel real estate and retail assets. The portfolio consists of 221 extended-stay hotels and 761 service-focused retail net-lease properties in most parts of the U.S., Puerto Rico and Canada. The latter is closely tied to Travelcenters of America/Petro Stopping Centers, which accounts for more than two-thirds of the annual minimum rent, as well as other tenants such as Great Escape and Life Time Fitness.
A few months ago, I said I was interested to see if SVC could maintain momentum following its significant dividend increase in October 2022. However, the October 2023 dividend announcement came up empty.
That's not to say SVC won't raise its dividend in the future, but it's not making a habit of it. This isn't surprising. As mentioned above, SVC has a strong ability to pay its dividend, but it also faces paying off over $1 billion in debt over the next two years. It's also spending a lot of money on upgrading its Hyatt (H) and Sonetra hotels. Patience is needed on this front.
Uniti Group (UNIT, 10.9% yield) is a communications infrastructure REIT. The company is one of the top 10 fiber optic providers in the U.S., boasting more than 139,000 miles of fiber optic routes and more than 8.4 million miles of fiber optic strands, connecting 300 metropolitan markets and providing high-speed network services to more than 28,000 customers.
While Uniti's infrastructure is effectively supplying basic necessities at the moment, the REIT spun out of regional telecommunications operator Windstream isn't as reliable as other communications infrastructure stocks like American Tower (AMT) and Crown Castle International (CCI).
While the interest rate cut is very welcome for Uniti, it's not a good sign that interest rates will still be high even if they are cut further, given the company's high leverage. The company currently has $5.6 billion in debt compared to $34 million in cash. This will put considerable pressure on Unit stock's only current advantage: its high dividend.
Just two months ago, Brandywine Realty Trust (BDN, 11.5%) looked like dead money, having lost more than a quarter of its value and in desperate need of a recovery, but just a few weeks later it's actually turning a modest profit.
The hybrid REIT, which owns more than 40% residential, 27% life sciences, 24% office, and the rest a mix of property types in scattered markets including Philadelphia, the Washington DC area, and Austin, Texas, hasn't changed much. It's only been a few months since it cut its dividend by 21%. It's also dealing with lower-than-expected occupancy rates and hundreds of millions of dollars in bond and JV debt maturing in 2024.
But it's still very cheap, at about 4.5 times next year's projected operating cash flow (FFO), making it hard to bet on it.
Global Net Lease (GNL, 15.1%) also boasts a very high yield, even though its dividend is once again heading in the wrong direction.
Global Net Lease is a commercial REIT operator with assets in 10 countries, including the United States, as well as the United Kingdom, the Netherlands, Finland and France. The company leases more than 1,300 properties to 815 tenants across 96 industries. The company's real estate portfolio was significantly strengthened by its merger with The Necessity Retail REIT, which closed in September. The merger made the company the third largest publicly traded net lease REIT.
GNL says the transaction should be 9% annualized accretive to adjusted FFO per share in the first quarter after closing and significantly reduce net debt to adjusted EBITDA, but I'd like to see a bit more specifics.
For now, Global Net Lease is on my watch list, and the big event circled on my calendar is the company's fourth-quarter earnings release, scheduled for February 2024, which should also include its first earnings guidance for the combined company.
Brett Owens is the Chief Investment Strategist at Contrarian Outlook. For even more great income ideas, get your free copy of his latest special report, “The Early Retirement Portfolio: Massive Dividends Every Month, Forever.”
Disclosure: None