Like it or not (and that’s my first joke), you and I live in a world of contrasts. Black/white. Up/down. Taller/shorter. Richer/poorer. Like it/or not.
It’s the reality of contrasts that lets something be seen. As a thought exercise, try seeing any horizontal lines, in a world made up, say, of only vertical lines. You need the contrast(s). To make the point again: things exist (in part), by virtue of their opposite.
‘Tis certainly the case with investing. This stock’s better than that stock. This earnings number beat that estimate. This one, yields more than that one. Etc.
When I assess nearly 160 REITs in my coverage of Real Estate Investment Trusts - as editor of Forbes Real Estate Investor - I’m constantly analyzing and making judgements.
At this point in my three decades plus career, I’ve gotten much of it down to a science. (The rest? Daily discovery, experiments, postulating, learning, failing, learning, and repeat.). So, imagine my excitement when I headline a column, “4 REITs that Yield At Least 8%.” I actually imagine how it might attract your attention - and now, I’ve got to deliver.
The four high-flyers I’ll mention today are in a class I call “worthy.” That’s in contrast to A LOT of competitors, who brandish high yields, beyond stratospheric (mesospheric?) -- dividend yields as window-dressing, thoroughly ill-priced, unsustainable, a sucker’s bet.
Please don’t look to me to recommend any of those “sucker yields.” I know they’re out there, ‘cause I see them, daily. In fact, just this week, a REIT I’ve been shouting (screaming) from the mountaintops, to “avoid if you can,” lowered its dividend, by, oh, over 60%. Ouch.
That REIT is CBL & Associates Properties, Inc. (CBL). I won’t dwell on my long-predicted warnings. If you chart them, you can see some of the ride investors have been taking (without my blessing).
The last time I wrote about 8% yielders here, was in September. So it’s time for another swing at this rarified air. Let me just warn, as always, to do your own investigations. I have. And each of these four 8%’ers is a BUY or STRONG BUY.
These four come from the REIT sectors of Office, Health Care, Shopping Center, and Mall. Here’s a little blurb on each, to get you going (no charge). Closing words of advice…
REIT #1: City Office (CIO)
The Big Why: City Office is one of our New Money portfolio picks and this means that we are monitoring shares closely in hopes of owning this outlier, betting that shares could return 25% in 12 months. Since inception, the New Money Portfolio has returned 10.9%, on target to achieve our targeted results, and hopefully City Office will deliver the goods.
Feather in its Cap: City Office focuses on assets valued at $25-100 million with targeted cap rates of 7-8%. CIO does not have as much competition for these assets, and this is a competitive advantage. The company leverages local property manager relationships to source acquisition opportunities and efficiently operate.
These secondary markets are supply-constrained, and this means CIO benefits from high credit tenancy, below-market in-place rents, and acquisition prices below replacement cost. The company leverages local property manager relationships to source acquisition opportunities and efficiently operate.
Downsides: CIO invests in "secondary markets" which are more volatile, but with less competition from larger institutional investors. Local real estate operators lack the capital to compete, and the outsized population and employment growth are strong catalysts.
Bottom Line: We are maintaining our STRONG BUY recommendation and we believe that as CIO’s dividend becomes safer (payout ratio under 100%), the valuation gap should tighten, providing investors with an attractive total return thesis. We believe the 8.5% dividend yield is attractive.
REIT #2: Omega Healthcare Investors (OHI)
The Big Why: "Baby boomers" started to turn 75 in 2016 and the age 75+ cohort will grow on both an absolute and relative basis through at least 2040 as the baby boomers replace the baby bust generation within the 75+ population. The percentage of hospital discharges to skilled nursing facilities has remained steady in recent years, suggesting they are in a prime position to benefit from this demographic wave, aka the Silver Tsunami.
Feather in its Cap: Omega is one of the largest healthcare REITs and is one of the most diversified "pure play" Skilled Nursing REITs. The company has long-term, triple-net master leases with cross collateralization provisions and most operators have strong credit profiles (with security deposits of three to six months).
Downsides: Most of the negative news regarding the reliability of Omega's rents is related to the company's operators. Several skilled nursing operators have experienced pressure and this has resulted in a deterioration in earnings.
Bottom Line: Although the dividend is not growing today, I am confident that the company is positioning itself for the “silver tsunami” and eventually the company should be positioned to begin growing the dividend in the future.
REIT #3: Kite Realty (KRG)
The Big Why: Kite’s portfolio consists primarily of need-based and value-oriented retailers. Around 93% of the tenants are considered internet resistant/omni-channel and over 70% of ABR is coming from the top 50 MSAs. Kite has a broad geographic reach that includes many major markets, such as Las Vegas, Dallas, Orlando, Raleigh, Indianapolis, and White Plans.
Feather in its Cap: Kite’s tenant base is 93% internet-resistant, as the company has a strong mix of tenants, and several of its top tenants include Publix (OTC:PUSH), TJ Maxx, PetSmart (NASDAQ:PETM), Ross (NASDAQ:ROST), and Lowe's (NYSE:LOW).
Downsides Kite is very similar in performance and price to Kimco and Brixmor REITs but its management's strategy is not as dynamic and transformative as the alternatives. Also, Kite’s portfolio is positioned with more secondary market risk.
Bottom Line: Kite is undervalued (P/FFO ratio of 7.9x) with an attractive 8.1% dividend yield.
REIT #4: PREIT (PEI)
The Big Why: PEI has sold a significant amount of underperforming properties, and the company has carved out a niche such that a larger player may now see the value that the differentiated REIT offers. As a result, PEI has drastically improved its portfolio, and that has enabled the company to enhance relationships with in-demand retailers.
Feather in its Cap: improved fundamentals, strong demographics, low payout ratio, experienced management team, solid estimates, attractive yield. The success of PEI’s anchor replacement program and robust tenant demand are a testament to the strength and compelling nature of the well-positioned portfolio.
Downside: Size: PEI is small and has no scale advantage and limited growth opportunities.
Bottom Line: We believe that PEI is positioned as an M&A target. The company is too small to generate meaningful economies of scale and has limited growth prospects. We believe the 9.4% dividend yield is attractive.
I own shares in CIO, OHI, PEI, and KRG.