As Thomas Bohjalian, CFA, Executive Vice President at Cohen & Steers reminds us, “rising rates don’t happen in a vacuum. Interest rates are part of the equation, and sudden moves in bond yields can create volatility. But REITs are not bonds.”
I hear it almost daily, “REITs are getting crushed because of rising rates”, but as Bohalian points out “in an improving economy, landlords can raise rents as tenants fight for more space, potentially increasing cash flows to offset the effects of higher rates.”
In other words, “it should matter why rates are rising, not simply that rates are rising.” Rising Treasury yields have been historically positive for REITs when accompanied by a stronger economy, and the pullback represents an opportunity for dividend investors to take advantage of the opportunity by capitalizing on some REITs with high-paying dividends.
7 REITs Yielding Over 7%
Jernigan Capital (JCAP) is a commercial real estate mortgage REIT that lends to private developers, owners and operators of self-storage facilities. The company went public in 2015 to originate a diversified portfolio of development, acquisition and refinance loans secured by self-storage facilities primarily in the top 50 United States metropolitan statistical areas.
JCAP is “deeply discounted” and the market is not giving this hybrid REIT enough credit for the purposely crafted multi-disciplined platform. More specifically, JCAP is being run by executives with deep experience in self-storage and they have managed through multiple economic cycles. JCAP is yielding 7.3 percent.
Brixmor Property Group(BRX) is a shopping center REIT with a portfolio focused in grocery anchored tenants. Brixmo, with gross leasable square footage of 83 million square feet, is one of the largest “pure play” wholly-owned grocery-anchored platforms in the U.S. (average shopping center size is 170,000 sf). Around 70% of Brixmor’s shopping centers are grocery-anchored and ~76% have an additional anchor.
With a 7.5% dividend yield and one the lowest FFO payout ratios (7.1x P/FFO) in the peer group, Brixmor is a top-quality REIT and is currently rated as a Strong Buy. The deep valuation suggests that Brixmor investors could benefit from the high yield but also the potential for enhanced price appreciation.
OUTFRONT Media (OUT) is one of the largest out-of-home media companies in North America. The portfolio includes more than 400,000 digital and static displays, which are primarily located in the most iconic and high-traffic locations throughout the 25 largest markets in the U.S. The company went public on March 28, 2014, and began operating as a REIT on July 17, 2014.
There is certainly more risk since billboard revenue is dependent on ad spending, as a weakening economy (or perhaps recession) could limit advertising and weaken the credit quality of some of the customers. However, in the absence of a recession, OUT is well positioned to perform and maintains an attractive 7.5% dividend yield. We currently maintain a BUY on OUT recognizing that the company provides at attractive risk-adjusted thesis.
TPG RE Finance Trust, Inc.(TRTX) was incorporated in October 2014 and commenced operations in December 2014 with $713.5 million of equity commitments from seven third-party investors, many of which have significant investment relationships with funds sponsored by TPG, and $53.7 million from TPG affiliates.
I really like TRTX because (1) the business model is simple, underwriting senior secured loans, (2) the loan portfolio is ultra-safe (weighted average LTV of 59.2% and weighted average credit spread for the loan portfolio was LIBOR plus 4.8%,) (3) the external management team is experienced, with two execs previously at LADR, and (4) the dividend yield is 7.7% and I currently maintain a Buy rating on TRTX shares.
EPR Properties (EPR) is a specialty REIT, with an investment portfolio that includes primarily entertainment, education and recreation properties. Entertainment (30% of total assets, 50% of total revenues). Education (25% of total assets, 22% of total revenues). Recreation (34% of total assets, 27% of total revenues).
EPR Properties is a well-managed REIT with a moderate balance sheet and a portfolio of well diversified assets. While the REIT has significant exposure to AMC, they have been reducing exposure through portfolio growth. The portfolio assets, while unique in the REIT space have performed well over time. The portfolio should continue to perform well and EPR should continue to raise the dividend comfortably. Shares are now yielding 7.8% and we maintain a Strong Buy.
Kimco Realty’s (KIM) portfolio consists of 475 U.S. shopping centers (company-owned) comprising of 81 million square feet of leasable space primarily concentrated in the top major metropolitan markets. Kimco’s scale advantage is one way that Kimco mitigates tenant risk.
I consider Kimco one of the best bargains in the REIT sector today and it’s great to see a management team executing on all cylinders. In Q1-18, Kimco achieved 5.4% growth in FFO to $0.39 per diluted share, compared to $0.37 per diluted share during Q1-17 and shares bounced back over 10 percent.
KIM’s valuation metrics scream “cheap” as evidenced by the P/FFO multiple (9.6x) and attractive dividend yield of 7.8 percent (well-covered).
CorEnergy (CORR) is a guinea pig of sorts – the Kansas City-based REIT is the first Infrastructure REIT so there is somewhat of an acceptance risk. CorEnergy owns mission-critical assets and lease payments are “operating” expenses, not “financing” expenses and it’s important to note that in bankruptcy, real property operating leases are subject to special provisions.
CorEnergy doesn’t have the diversified sources of revenue as many of the other REITs, but the “critical mission” attributes provide comfort that the assets don’t become obsolete. CorEnergy is also a small cap (~$450 million market cap) so shares could be volatile at times, but if you can stomach the risk, CorEnergy offers an attractive dividend yield of 7.8 percent.