About a dozen years ago, I bought several Real Estate Investment Trusts (REITs) to upgrade investment income in my portfolio. Double digit yields were available on REITs without significant extra risk. Since then, yields have plummeted from those extraordinary levels, which brought substantial gains in stock prices and higher dividend income (helped by reinvested dividends).
REIT stocks were punished during the last recession, even though they had been preparing for a difficult period. Along with the stock declines, many REITS, including some of the strongest, cut dividends. Stocks have rebounded, however, and many are near their former highs. The Dow Jones REIT Index (DWRTF) plunged from 350 in early 2007 to 85 in early 2009. Since then, it has rebounded to 263 and has been rising in the last two years, while popular stock averages have been stumbling.
Even though the days of double digit yields are long gone, many REITs still have attractive yields, growing dividends and capital appreciation potential. Below are four REITs that continue to have prospects for higher dividends and stock prices:
Tanger Factory Outlet Centers (SKT) is the leading owner of outlet shopping centers with 39 centers in 25 states coast to coast and in Canada. The centers are located in close proximity to 180 million shoppers with 12 million square feet of top brand names, including more than 435 retail partners. The company has maintained an average occupancy rate of more than 95%.
Management is guiding FFO (Funds From Operations) available to common shareholders in 2012 will be $1.59-$1.63, roughly double the current dividend. This year, the annual dividend was raised to 84 cents, continuing a streak of higher annual dividends (rare among REITs) since the IPO in 1993. In the last 10 years, dividends have risen 40%. At $32.82/share, the stock yields 2.6%.
Simon Property (SPG) is the largest real estate company in the world, and its stock is in the S&P 500 index. SPG owns or has an interest in 336 retail real estate properties in North America and Asia, comprising 244 million square feet, as well as a 29% interest in Klépierre, a publicly-traded French REIT with more than 260 shopping centers in 13 European countries.
SPG just raised FFO guidance for 2012 to $7.60-$7.70. The dividend was cut during the 2009 recession to preserve money for possible acquisitions. But it recovered, and the quarterly dividend was just raised to a record $1.05 ($4.20 annualized). Dividends doubled in the last 10 years. The stock at $156.46 yields 2.7%.
Entertainment Properties Trust (EPR) is a specialty REIT that invests in properties targeting long-term investments that offer sustained performance through economic cycles. EPR has nearly $3 billion of properties, including megaplex movie theatres, public charter schools, other recreational and specialty investments, such as wine industry real estate. There are 160 locations across 34 states with over 200 tenants.
EPR is maintaining its 2012 guidance for investment spending of $250-$300 million and increased guidance for FFO to $3.57-$3.67 (previous guidance was $3.50-$3.70). The dividend was cut 23% during the last recession. Since then the annual dividend has been increased to $3.00, 4 cents below the record level, and it increased 67% in the last 10 years. At $45.01/share, the stock yields 6.7%.
Home Properties (HME) is a multifamily REIT with operations primarily along the East Coast. It has been operating and rehabilitating apartment communities in multifamily rental housing since 1967. HME plans to invest $250 million in multi-family communities in the next 12 months, after purchasing 40,000 apartments for more than $4 billion in the last 10 years.
Management just increased 2012 FFO guidance by 7 cents to $4.00, and the FFO range of $3.96-$4.04 was increased from $3.87-$3.99. Dividends increased 10% in last 10 years, with only a modest cut in the last recession. The $2.64 annual dividend is 4 cents below the prior record, and at $63.83/share, the stock yields 4.1%.
These REITs have excellent records of raising dividends and long term growth. With preparation, they got through the brutal recession that began four years ago. EPR has a higher yield because of a greater perceived risk associated with leisure business tenants. The very high yield should be of interest for investors seeking income who accept the related level of risk. HME's yield is good in today's market, and the other two REITs I mentioned should continue raising dividends, bringing higher income. Their stocks have done well over the long term (at least doubling in the last 10 years). Future growth will come from dividend increases and the outlook is excellent. A bonus for taxable accounts is that REIT dividends generally have a tax advantage; a portion may not be taxable or taxed at capital gains rates.Disclosure:
I am long SKT, SPG, EPR, HME. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.