Searching for high yields is difficult with the low interest rate policy from the Federal Reserve which is likely to continue for at least two years. But Real Estate Invest Trusts (REITs) have traditionally been useful for earning high income. Below are two I purchased roughly 14 years ago and the investments have grown around 8 fold. Unfortunately such rates of returns will be virtually impossible to replicate. An improved outlook for REITs caused yields to plummet from double digits because investors are willing to accept lower yields which caused dramatic gains in stock prices. Reinvested dividends contributed to the gains and with lower starting yields, gains from reinvested dividends will be less going forward.
Entertainment Properties Trust (NYSE:EPR) owns 112 megaplex theaters with 8.8 million square feet, and restaurant, recreation and specialty properties with 4.4 million square feet. It also owns 35 public charter schools, five vineyards and eight wineries. The theaters are 99% occupied, public charter schools 100% occupied, and the overall real estate portfolio is 98% occupied. Initially EPR owned multiplex theaters (with at least 16 screens) and diversified with holdings in other recreational properties.
2011 revenue rose 4% to $302 million. Funds From Operations (FFO) per share were $3.20, above $2.81 in 2010. FFO as adjusted was $3.43 per diluted share, above $3.34 in 2010. FFO is an industry standard for earnings used for set the dividend.
Guidance for 2012 investment spending is $250-$300 million. The company expects to add 8-10 new build-to-suit theater investments totaling $80-$100 million and close on $75 million of other entertainment and recreational properties during 2012. There are $40 million in commitments for the development of five additional public charter schools expected to open before the end of the year.
FFO guidance was increased to $3.50-$3.70, above previous guidance of $3.44-$3.64. The quarterly dividend was raised 7% to 75 cents per share in Q1. Over the last 10 years the annual dividend increased from $1.90 to $3.00. But the quarterly dividend was cut from 84 cents to 65 cents at the start of 2009 (common among REITs during the recession).
Home Property (NYSE:HME) is a multi-family REIT with investments primarily along the U.S. East Coast that provide dependable financial returns. The apartment communities generate excellent financial results through physical improvements and a commitment to customer service which allows for increases in rental income. Average monthly rental rates in 2011 increased 3.7% to a record $1,171. Occupancy rates rose to 95.5% from 94.8% in 2007. Property investments are in suburban D.C., Baltimore, Suburban New York City, Philadelphia, Boston-Portland (ME) and North Lauderdale. HME acquired 5431 apartments in the last two years.
Last year, revenues rose 12% to $580 million and FFO increased 26% to $190 million. FFO per share increased 14% to a record $3.54 from $3.10 in 2010 (the largest increase in its history). The dividend was $2.48 in 2011, up from $2.32 in 2010. The quarterly dividend was just raised 4 cents to 66 cents per share ($2.64 annualized). HME has increased the annual dividend for 17 years, every year but one (2009).
HME invested $501 million to close on 2,817 acquisitions (a record number) in 2011. The goal for acquisitions in 2012 is $200-$300 million with an objective for dispositions worth $50-$150 million. Typically, properties that have reached their full potential are sold to redeploy the proceeds for purchasing communities which can generate higher returns. A large repositioning pipeline ensures a steady flow of units available for upgrading to drive growth. HME is guiding $3.79-$3.95 FFO per share in 2012.
REITs remain largely yield plays with lesser expectations for capital appreciation. The days of double digit yields are long gone. Attractive (highest) yields today are around 5%. EPR stock is $47.82 with a 6.3% yield and HME is $60.85 with a 4.3% yield. Both have a good history of raising dividends although there were dividend cuts during the recent recession. The higher yield for EPR is because of a greater perceived risk for leisure property tenants. The EPR annual dividend is 36 cents below its record level and the annual dividend for HME is just 4 cents below its record. For taxable accounts, REIT dividends generally have a tax advantage, a portion may not be taxable. Last year 63% of the HME dividend was taxable and 73% of the EPR dividend was taxable (those figures change every year).
The yields are good along with excellent prospects for dividend increases (to record levels in the near future). Capital appreciation has been good. EPR stock doubled in the last 10 years and HME rose about 75%. They got through the brutal recession in good shape (as did other REITs) and have excellent prospects for dividend growth which brings higher stock prices.