8 REITs For Tax Advantaged High Yields And Growth

by: Avi Morris

Real Estate Investment Trusts (REITs) manage apartment buildings, commercial properties, office parks, malls and other real estate. They invest in a region or across the US and some have diversified with overseas properties. REITs are primarily thought of as high yield securities. In addition to reporting earnings per share, they report a larger income figure FFO (Funds From Operations) that includes non-cash items such as depreciation. Dividends are paid from FFO and typically not all are taxed as ordinary income.

More than 10 years ago, many REITs had double digit yields. Then investors bid up stock prices, sharply reducing yields. The Dow Jones REIT Index (DJR) had a strong performance until early 2007 when it peaked at 356. REITs were hit hard by the recession, dropping to 86 in less than 2 years. There was a substantial rebound to 280, even though many dividends were reduced during the recession. With substantial mortgage borrowings, REITs are a major beneficiary of low interest rates.

Dow Jones REIT Index -- 10 years

Below are 8 REITs with attractive yields. They survived a very difficult recession and economic recovery should bring higher dividends. 3 have already raised dividends in 2013.




Omega Healthcare Investors (NYSE:OHI)



Senior Housing Properties (NYSE:SNH)






Sun Communities (NYSE:SUI)



Campus Crest Communities (NYSE:CCG)



Highwoods Properties (NYSE:HIW)






Home Properties (NYSE:HME)



(1) Omega Healthcare Investors provides financing and capital for long-term healthcare industry, focusing on skilled nursing facilities. The company has mortgages on nursing facilities, assisted living facilities and other specialty hospitals located in 35 states and operates healthcare operating companies. The annual dividend was just increased 4¢ to $1.80. Last year 52% of the dividend was taxed as ordinary income.

(2) Senior Housing Properties owns properties in 38 states and Washington, DC. There are 249 senior living communities and 2 rehabilitation hospitals, 108 properties leased to medical providers and 10 wellness centers. Last month, SNH sold 11.5 million shares at $23.80 per share. 63% of the 2012 dividend was taxable.

(3) EPR Properties 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 in 34 states with over 200 tenants. 62% of the dividend in 2012 was taxable.

(4) Sun Communities leases parcels of land for manufactured homes and recreational vehicles. Additionally, it sells and leases homes to residents primarily in the midwest, south and southeastern US. There are 159 properties, including 141 manufactured housing communities, 8 RV communities and 10 properties. 49% of the 2012 dividend was taxable (based on the first 3 dividends in 2012).

(5) Campus Crest Communities owns and manages high-quality properties located close to campuses in 33 student housing properties containing approximately 6,300 apartment units. The annual dividend was increased from 64¢ to 66¢ in January. Only 3% of the 2012 dividend was taxable.

(6) Highwoods Properties owns or has interests in 338 in-service office, industrial and retail properties with 35 million square feet and also owns land. Properties are located in Florida, Georgia, Missouri, North Carolina, Pennsylvania, South Carolina, Tennessee and Virginia. 75% of the 2012 dividend was taxable.

(7) Home Properties invests in apartment communities in the eastern US, operating 125 communities with 38,000 apartments in the northeast, mid-atlantic and southeast Florida. 76% of the 2012 dividend was taxable.

(8) HCP, Inc. (HCO) is an integrated REIT that invests primarily in the healthcare industry. Assets are diversified among 5 distinct sectors: senior housing, post-acute/skilled nursing, life science, medical office and hospitals. It is the only REIT that earned the Dividend Aristocrat status. Last month the annual dividend was increased from $2.00 to $2.10, extending its steak of higher annual dividends to 28 years. 73% of the 2012 dividend was taxable.

There is nothing simple about real estate accounting. Besides taxing dividends as ordinary income, other classifications for the balance of dividends include: qualified dividends, long term capital gain, unrecaptured 1250 capital gain and return of capital (non-taxable). For these companies, the bulk of the remainder of dividends is classified as return of capital, not taxed presently, but some income can fall into the other categories.

My favorite in the group is EPR. 14 years ago I purchased shares for $15, motivated by an 11% yield. Since then, the stock has more than tripled and the shares have almost tripled from reinvested dividends. Current income provides a 60% annual return based on the original investment.

More than 15 years ago, the company began investing in megaplex theater properties (with at least 16 screens). Now its $3+ billion portfolio has investments in 3 property categories: entertainment (megaplex theaters), education (public charter schools) and recreation (vineyards, wineries and ski parks). The bulk of investments are in theaters which led the company to diversify its holdings in recent years. The bulk of investments are in theaters which led the company to diversify its holdings in recent years. Some have doubts about owning movie properties, but no tenant has ever failed to make a rent payment. Investors have not understood non-traditional asset classes which provide opportunity for those who do and want to invest in a company with a track record of growing dividends. The 6.3% yield is high and the track record of dividend growth has been excellent.


Disclosure: I am long 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.

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