A Real Estate Investment Trust (REIT) is an equity pool that is use as collateral to finance real estate investments. Equity contributors, or shareholders, have much to gain: a REIT must pay 90% of profits through dividends in order to meet SEC regulations. The result is monstrous dividend yields, sometimes topping 10%.
A REIT can be publically or privately traded. The problem with privately traded REITs is that they are not a liquid investment; shareholders are required to hold onto the investment until a pre-specified liquidation date. Publically traded REITs are traded on public exchanges alongside stocks. Publically traded REITs typically trade close to book value, limited investors' downside risk.
For investors who are looking to maximize dividend returns who can stomach allowing an experienced management team use a levering strategy, 5 REITs you may consider are Agree Realty Corporation (ADC), Alexandria Realty Estate Equities (ARE), Annaly Capital Management (NLY), CBL & Associates (CBL) and Chimera Investment Corporation (CIM).
Annaly Capital Management manages a portfolio of U.S. residential mortgage-backed securities issued and guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae. Annaly employs a "Barbell Strategy," which means they invest in adjustable-rate mortgages and fixed rate mortgages. The adjustable rates outperform when interest rates rise: the yields will adjust upwards, pushing up the price of the underlying security. Meanwhile, if rates fall, the adjustable rates will perform consistently with the overall market while fixed rate securities will increase in value. Annaly purchases these securities by acquiring financing at a lower rate; their profit comes by investing at a higher interest rate that they are financed. When investors deliver capital to Annaly, Annaly will invest the equity while using it as collateral to lever up and purchase more securities. This means Annaly can deliver 14% on a fixed income piece returning 6%. If you can stomach the risks inherent with levering up on an arbitrage opportunity and a debt-to-equity ratio hovering around 6-to-1, with a dividend yielding over 13% Annaly is one of the safest and highest returning investments available on the market.
Another major positive is the modest price-to-book ratio of 1.1. By keeping the book value and the price value relatively close, investors are protected against downside risk in the stock price.
Agree Realty Corporation (ADC) offers a 6.47% dividend yield to investors, collecting lease revenue to single tenant leases as well as industry leaders. The portfolio contains 88 properties in 21 states, with 89% of lease revenue coming from national tenants such as Walgreens and Kmart. In order to increase the value of portfolio holdings, Agree focuses on developing retail opportunities, which is a demographically favored business.
A major negative: as of December 31st 20% of annualized revenue was from Borders. After the third quarter of 2011, Agree told shareholders not anticipate any reduction in the company's dividend rate due to the disposition of the former Borders properties or the Borders bankruptcy. Investors can be encouraged that the Borders issue seems to be resolved going forward without any dent in dividend returns. Investors can be rightfully disappointed that new tenants have not been found yet, as a result the third quarter ended in a net loss of $0.19 per share. Investors who believe the space can be filled quickly may see a good buying opportunity, but I would recommend an REIT with a more diverse group of paying tenants.
Alexandria Real Estate Equities proclaims themselves the landlord of choice to the life Science industry, focused principally on cluster development of properties containing life-science laboratory space. The dividend yield is only 2.7%, which is associated with the lower risk leverage ratio: Alexandria has a debt-to-equity ratio of .8.
Alexandria's management shows faith in their own operations as they continue to invest more into their properties than they actually earn from leasing them. Real Estate assets have increased by 30% in value since the end of 2007. In the same time period, cash available has increased more than ten fold from $8 million to $91 million, and the debt-to-equity ratio has decreased from 185% to 88%.
Alexandria's books reveal a focused management strategy that's primary focus is to improve the value of the properties they own, and continue to strengthen the balance sheet to minimize downside risk. Appreciation will most likely be experienced over the long-term as Alexandria adds value to its' owned properties. Investors looking to make sizable dividend income in the short term need to look elsewhere.
CBL & Associates Properties, Inc. offers a dividend of 4.79%. CBL primarily owns regional malls that are the dominant retail facility in middle market areas. Levered four-to-one, with a price to book a two-to-one, and a price/earnings ratio at 292, the numbers don't seem to line up quite as well as some of the other REIT's we have examined. Sound management coupled with aggressive expansion has convinced the market that this REIT has some value to it.
Dividends have steadily decreased in the past few years, falling over 60% from $2.06 a share annually in 2007 to the current rate of $0.80 a share today. Expert mid-size malls investors may find a value buy here, but there are plenty of other options that will produce a better return that belong in an individual's portfolio over CBL & Associates.
Chimera Investment Corporation focuses on mortgage-backed securities. Revenues from these securities provide a divided of $.11 back to investors, which yields 14.43%. This can also be bought below book value; the current price-to-book ratio is .85. We don't see quite as much leverage as we might expect from a REIT yielding 14%: debt-to-equity is 110%. CIM is a subsidiary of Annaly Capital Management.
A 14% yield with a stock that has sound balance sheet, trading below book value with an experienced management team is a tough find. A good buy for any investor who can be satisfied with a 14% annual return.
The range of REITs available to investors is wide and varied, all carrying a unique set of risks and opportunities. Individual investors can differentiate the options in order to determine which REITs are best suited for their portfolio. Investors seeking an optimally performing portfolio are likely to find that REITs can provide additional diversification while offering a great balance between risk and reward.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.