How To Get 6.3% Dividends From REITs At Low Cost

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Includes: AMT, APLE, APT, APTS, CBL, CCI, CIO, CORR, DLR, EXR, HASI, HCP, HIFR, LADR, LMRK, LXP, O, OHI, ROIC, SBRA, SKT, UBA, UNIT, VER, WPC, WPG
by: Michael Foster Financial Services

Summary

Analyzing REITs' P/FFO ratios, dividend sustainability, and debt load uncovers a portfolio of attractive REITs to purchase.

These REITs are diversified in a variety of ways and provide greater upside than the average REIT surveyed.

An expansion of this methodology could uncover more REITs worth buying while also discounting other REITs that are superficially appealing but fundamentally flawed.

Real estate investment trusts (REITs) not only provide superior returns to the S&P 500 over a long period of time, but many withstood the Global Financial Crisis despite its real estate focus and offer far superior dividend yields.

We can use a few simple screening criteria to create a portfolio of sustainable dividends yielding over 6% that also offer capital gains upside and a growing income stream. In what follows I will start with a universe of roughly 30 REITs and look at a variety of metrics to create a portfolio that offer a higher, more reliable income stream than the whole while also paying significantly less for that bigger dividend yield.

Income Pricing

One important consideration in choosing a REIT is how much you are willing to pay for its income stream, which is calculated as funds from operation (FFO). The chart below shows just how widely priced different income streams are at different REITs:

At a P/FFO ratio above 50, Lexington Realty (LXP) is by far the most expensive, while CBL & Associates (CBL) is the cheapest at just 3.1. A total of 16 REITs are cheaper than the average P/FFO ratio of 16:1:

CBL & Associates

Washington Prime Group (WPG)

Preferred Apartment (APTS)

CorEnergy Infr Trust (CORR)

Uniti Group (UNIT)

Ladder Capital (LADR)

InfraREIT (HIFR)

Tanger Factory Outlet (SKT)

City Office REIT (CIO)

Omega Healthcare (OHI)

VEREIT (VER)

Urstadt Biddle Properties (UBA)

Apple Hospitality REIT (APLE)

HCP (HCP)

Landmark Infrastructure (LMRK)

W.P. Carey (WPC)

So far, based on pricing alone, all of these look like viable options compared to the broader universe of REITs selected for this article:

Ticker

Price

Dividend Yield

FFO/Share

Price/FFO

CBL

$8.52

12.4%

2.815

3.0

WPG

$8.58

11.7%

2.648

3.2

APTS

$20.21

4.5%

3.820

5.3

CORR

$36.46

8.2%

5.122

7.1

UNIT

$15.85

15.1%

2.037

7.8

LADR

$13.75

9.7%

1.806

7.6

HIFR

$22.88

4.4%

2.822

8.1

SKT

$25.20

5.3%

2.853

8.8

CIO

$13.40

7.0%

1.442

9.3

OHI

$32.19

7.8%

3.394

9.5

VER

$8.23

6.7%

0.761

10.8

UBA

$22.65

4.7%

2.029

11.2

APLE

$19.18

6.3%

1.551

12.4

HCP

$26.47

5.6%

1.962

13.5

LMRK

$17.55

7.9%

1.154

15.2

WPC

$69.65

5.7%

4.549

15.3

HCN

$68.31

5.1%

4.119

16.6

NNN

$42.36

4.3%

2.557

16.6

KIM

$19.18

5.6%

1.088

17.6

ROIC

$19.20

3.9%

1.073

17.9

EXR

$81.92

0.0%

4.382

18.7

STOR

$25.75

4.6%

1.358

19.0

O

$56.27

4.5%

2.988

18.8

AMT

$137.47

1.8%

6.827

20.1

DLR

$123.84

3.0%

5.859

21.1

SBRA

$21.44

7.6%

0.888

24.1

CCI

$99.00

3.8%

3.966

25.0

SRG

$42.95

2.3%

1.396

30.8

HASI

$24.71

5.3%

0.711

34.7

LXP

$10.42

6.7%

0.197

53.0

Growth Pricing

Going a bit further, we should also consider growth. Broadly speaking, investing generally involves two approaches: buying value or buying growth. When buying growth, investors will forgo high prices if those high prices are offset by high growth. To apply this to REITs, do we find a correlation between high pricing and revenue growth?

The chart above demonstrates that high-priced REITs like LXP do not necessarily come with high growth. APTS, CIO, OHI, CORR, and LMRK look like low-cost growth REITs.

Income Growth Pricing

To combine both approaches, would we find any REITs that offer affordable prices relative to dividend growth? In other words, can we buy REITs with strong dividend growth rates at relatively lower P/FFO ratios?

From this perspective, UNIT, CBL, WPG, LADR, CORR, LMRK, OHI, and SBRA offer the best values, although the growth rates in these cases are extremely small or non-existent.

Dividend Coverage

The future of each REIT's payouts depends on strong dividend coverage. In the case of REITs, this is calculated by comparing FFO to dividends.

Such an analysis suggests that APT, AMT, HIFR, CBL, WPG, SKT, UBA, and CORR offer the most attractive risk/reward profiles. The high yields at CBL and WPG make them particularly attractive, while the relatively lower but still healthy coverages and much higher yields of VER, OHI, LADR, and APLE make them particularly appealing.

Debt Loads

A key to REIT growth is managing debt loads to fund growth without being over-levered. The debt-to-equity ratio of REITs provides an excellent insight into how REITs are managing their balance sheet:

Little variation here indicates this metric is better used to weed out over-levered REITs instead of choosing buying options. From that perspective, SKT, AMT, WPG, CBL, and LADR look best avoided right now.

Pricing versus Recent Returns

To return to the theme of growth investing, are any REITs providing unusually high total returns lately relative to their pricing?

By comparing these REITs' P/FFO ratio to their 1-year total returns, some immediate winners become apparent: APTS, HIFR, CORR, LADR, WPC, and CIO. It also becomes apparent that LXP is best avoided, as it is far too expensive relative to its recent returns.

Long-Term Returns

Are recent returns sustainable? One way to answer this question is to look at how REITs have performed over a longer time period.

Several REITs have fared poorly in the last three years, but APTS again appears as a viable option. Additionally, CORR, DLR and HASI look especially appealing, with AMT, EXR, O, ROIC, CORR, and CCI somewhat less so.

Overview and Conclusions

This broad-brushed look at REITs indicates there are a few "sure buys" among REITs right now and some more less confident but still interesting "buys". On most metrics, APTS and HIFR are strong buys, while CIO, CORR, WPC, and OHI are also compelling REITs right now.

Comparing this portfolio to the broader REIT universe selected here is illuminating.

Ticker

Price

Dividend Yield

FFO/Share

Price/FFO

APTS

$20.20

4.5%

3.820

5.3

CIO

$13.24

7.1%

1.442

9.2

CORR

$36.10

8.3%

5.122

7.0

HIFR

$22.74

4.4%

2.822

8.1

OHI

$32.03

7.8%

3.394

9.4

WPC

$69.78

5.7%

4.549

15.3

6.3%

9.06

This selection gets us a 6.3% yielding portfolio at an average P/FFO ratio of 9.06, about 50% cheaper than if we bought all of the REITs profiled here.

Buying the broader universe would also give us a portfolio average yield of 6.06%, lower than this selection, while also costing more and ensuring we buy into REITs with higher debt loads and lower recent and longer-term total returns.

A Plea

While I have been investing in REITs for many years, I have not written publicly on them for a couple of reasons. Firstly, most of my attention and research is devoted on CEFs; secondly, there are excellent writers out there who do in-depth due diligence on REITs (most notably Brad Thomas, although I must tip my hat to Bill Stoller and Jussi Askola). If writers would like me to continue to cover REITs more regularly, and if there are any names you'd like me to cover or other aspects of REITs you'd like me to start digging into, please let me know in the comments below.

Disclosure: I am/we are long OHI.

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.

Additional disclosure: We may initiate a position in APTS, HIFR,, CIO, CORR, and WPC in the next 30 days.

Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.