I have been investing in REITs (real estate investment trusts) for more than 10 years because of high yields and investment appreciation was helped by reinvested dividends. The extraordinary days of double digit yields have ended, but yields today are attractive at a time when the Federal Reserve just announced that low interest rates should continue for a minimum of 2 years.
REITs manage commercial properties such as office parks, malls and apartment buildings that generate high yields. They may invest in a region, across the U.S. and some have diversified with overseas properties. REITs report earnings per share like other corporations. In addition, they report a larger income figure, FFO (Funds From Operations), which is used to determine dividend payments. REITs must pay 90% of taxable income to keep their favorable tax treatment.
The Dow Jones REIT Index
The Dow Jones REIT Index (DJR) had a good run until early 2007 when it topped out at 356. Even though REITs prepared for the forthcoming recession by trimming expenses, the index was hit hard. It dropped to 86 in less than 2 years, followed by a sharp recovery over the next year. Since then it had a moderate rise with limited volatility. REITs did not share in high volatility for stocks last year, partly because of attractive yields. In addition, most REITs use high leverage to finance properties. Low interest rates will help keep interest expense, a major cost, lower than it would have been if interest rates were at traditional levels. Financing is important for REITs. In the last 3 years, REITs raised $50 billion in common stock to support additional borrowings.
Below are 5 REITs which survived the recession, offer attractive yields and economic recovery should bring higher dividends.
(1) Entertainment Properties (EPR) invests in entertainment and related properties in the US and Canada. Properties include 107 megaplex movie theaters (99% occupied), entertainment retail centers, recreational properties and specialty properties. The stock yields 6.3%.
(2) Glimcher Realty (GRT) invests in retail properties, including regional and super regional malls, as well as shopping centers. The company manages and leases 27 properties, including 23 malls and 4 community centers primarily in the Midwest and east. The stock yields 4.1%.
(3) Home Properties (HME) invests in apartment communities in the eastern US, operating 125 communities with 38,000 apartments in the northeast, Mid-Atlantic and southeast Florida. In 2010 HME renovated 3,000 units following move-outs to generate higher rental income. The stock yields 4.2%.
(4) Simon Property (SPG) invests in real estate markets across the globe. It primarily invests in regional malls, Premium Outlets, The Mills, community/lifestyle centers and international properties. SPG is an S&P 500 company and the largest REIT in the US, invested in 338 retail real estate properties. The stock yields 2.6%.
(5) Tanger Factory Outlet Centers (SKT) operates 39 upscale outlet shopping centers in 25 states coast to coast and in Canada to over 2500 stores operated by 455 different brand name companies. Its notable achievement is that it raised the dividend ever year since its IPO in 1993 (although increases have been minimal) when most REITs cut dividends 3 years ago. The stock yields 2.7%.
Their stocks have done well in the last 10 years, except for GRT. Unlike the others, it has very high leverage and was hurt during the last recession when it slashed the annual dividend from $1.92 to 40¢. As a result the stock dropped in half over the last 10 years. Meanwhile SPG and SKT stocks have more than quadrupled, but appreciation was partially related to a substantial decline in dividend yields.
REIT investments in retail properties have expanded primarily in major enclosed malls with destination stores, like Apple (AAPL), that attract shoppers. Those specializing in multifamily housing should perform well in 2012, as rising demand meets a supply of apartments that's still below its historical trend line. Apartment building in 2011 was the strongest part of the housing sector. REIT investments offer attractive yields and growing dividends from cuts made 3 years ago (except for SKT). SKT has an exceptional dividend record, raising the dividend annually since its IPO in 1993. As long as interest rates are low, investors will be looking for ways to increase income. REIT yields are tempting and may have partial tax advantages in personal accounts. When diversifying a portfolio, REITs should be included for income and long term growth.