Summary
- Most high yielding REITs aren't worth buying.
- They are overleveraged, poorly managed, or own bad assets.
- But some exceptions still exist. We highlight two high yielding REITs that we are buying.
Today, the average dividend yield of the REIT ( VNQ ) sector is relatively low at ~3%.
Yields are low because most REITs prefer to retain a significant portion of their cash flow to reinvest in future growth.
Moreover, there are a lot of growth-oriented REITs like cell tower REIT American Tower ( AMT ), data center REIT Equinix ( EQIX ), and industrial REIT Prologis ( PLD ) that grow rapidly and are priced accordingly at a low yield.
That brings down the average yield of the sector.
Luckily, if you are looking for higher yielding opportunities, you can still find that in the REIT sector, but you need to very selective because high yield often also implies high risk. In fact, I would argue that most high yielding REITs aren't worth buying as they are typically poorly-managed, overleveraged, and/or own assets that are losing value. A good example would be Global Net Lease ( GNL ), an externally-managed office-heavy REIT that has routinely yielded ~10%, and yet, its total returns have been very poor:
So the challenge is not to find a high yielding REIT, but it is to find a high yielding REIT that also enjoys high-quality characteristics.
We are specialists at that at High Yield Landlord. We look for high-quality REITs that are temporarily discounted, causing them to trade at a high yield.
The average yield of our actively managed REIT portfolio is currently 5%, but some names in our portfolio yield as much as 8%.
In what follows, we highlight two such high-quality, yet high-yielding REITs that we are buying:
Simon Property Group: 6.5% Dividend Yield
Simon Property Group ( SPG ) is what you would most commonly describe as a "blue-chip" REIT:
- It has a fortress investment-grade rated balance sheet.
- It owns a large portfolio of class A assets.
- It has the best track record in its entire sector.
- It has a clear path to long-term growth.
- It is run in a shareholder-friendly way.
Yet, despite that, SPG is today priced at an estimated 50% discount to NAV, just 9x FFO, and it yields 6.5% dividend yield due to its discounted valuation.
Typically, such high-quality REITs trade at closer to 20x FFO, a small premium to NAV, and a low yield.
Why is SPG so cheap?
The answer is simple: it is a mall REIT and the world thinks that Amazon ( AMZN ) is going to kill malls.
It has caused its market sentiment to suffer and its valuation multiple to contract.
We think that this is a great opportunity because the market appears to have missed that the type of malls that SPG owns isn't going anywhere. In fact, they may even benefit from the growth of Amazon as it kills lower quality malls, lowering competition, and consolidating traffic towards the highest-quality malls such as those owned by SPG:
Simon Property Group
Amazon has been growing for a long time already. Everybody knows about it by now, and yet, SPG malls are today more productive than ever. Their sales per square foot and rents have kept on steadily rising over the years, even as e-commerce grew much larger.
This is because Class A malls are in the best locations, have flexible layouts, are adding non-retail uses, and now increasingly many retailers are refocusing their efforts on a smaller fleet of stores at trophy properties. These stores at malls can then also serve as showrooms, return centers, and last-mile delivery warehouses to supplement their e-commerce efforts.
It benefits SPG because there is only a limited number of trophy malls, but a growing number of retailers who want to refocus their efforts on these specific properties.
Simon Property Group
This makes perfect logical sense and yet, the market still isn't seeing it. The market thinks that all retail is bad and that's the opportunity. SPG just hiked its dividend by another 6%, boosted its full-year FFO guidance, and guided for the strong performance to continue.
With >5% annual growth and a 6.5% yield, investors can expect to earn double-digit total returns even without any valuation multiple expansion. But we think that the company also has an additional 50% upside potential. Even at a 50% higher share price, SPG would still trade it at a lower FFO multiple than most other REITs.
Ladder Capital: 7.65% Dividend Yield
Ladder Capital ( LADR ) is one of the few mortgage REITs that we like. Most mortgage REITs are priced at a high yield, but that's because they are heavily leveraged, poorly managed by fee-hungry external managers, and their business models are very risky.
LADR is different. It is what we would describe as a high-quality mortgage REIT:
- It is internally-managed
- The managers are well-aligned with shareholders
- The balance sheet can withstand significant changes in interest rates
- The company's revenue is set to increase with interest rate hikes
- And it presents an interesting catalyst to unlock value
Even then, LADR is discounted, just like most other mREITs, which are currently out of favor. We have initiated a small position in LADR because we think that its high 7.5% dividend yield is sustainable and set for further growth as its cash flow is set for rapid growth following the recent rate hikes:
Moreover, LADR also owns a portfolio of net lease properties, which is today more valuable than ever before, and we expect them to sell this portfolio to refocus their efforts on lending.
Cap rates for the type of net lease properties that they own have compressed significantly and this hidden value is waiting to be unlocked. Here is what the CEO said in a recent conference call:
We continue to believe that our real estate portfolio is not properly reflected in our stock price, even after we sold a small portion of our holdings at attractive gains. We believe the bigger gains in this book of business are not yet realized.
He added that:
The sale that iStar ( STAR ) conducted of their net lease portfolio, certainly caught my eye and a few of our shareholders have even indicated to us perhaps, if we thought we could replace it in, we do think we can replace it by the way. Perhaps we should sell our entire portfolio or else put it off balance sheet in a net lease REIT that we manage externally. So these are all scenarios that we occasionally look through.
Net Lease Advisor
Currently, LADR's book value is $13.57, but if you adjust this for the growing value of its net lease portfolio, we estimate that its real book value is closer to $15 per share.
Today, you can still buy shares at around $11, which provides margin of safety and future upside potential, and while we wait for the share price to recover, we earn a generous 7.5% dividend yield.
Bottom Line
Historically, we have managed to outperform the broader REIT ( VNQ ) market by selectively investing in undervalued, high-yielding REITs like SPG and LADR. Today, our Core Portfolio holds 24 similar opportunities and pays a 5.3% dividend yield.
For further details see:
2 New Buy Alerts With 6% Dividend Yield And High Upside