Retirement: 3 Niches Of Opportunities For Up To A 10% Yield

Summary

• Investing in bonds and stocks is not enough to generate income in 2020.
• Retirees must become more sophisticated and invest in alternative investments, such as real assets.
• We discuss three market niches that are ideal to income investors and retirees to generate 6%-10% yields in today's yield-less world.
• Looking for a portfolio of ideas like this one? Members of High Yield Landlord get exclusive access to our model portfolio. Get started today »

In the past, retirees had the luxury of investing in a diversified portfolio of bonds and stocks to generate sufficient income in retirement. Today, the idea of retirement has become much more challenging and retirees must develop a more sophisticated investment plan to generate high and safe income.

On one hand, bonds pay close to nothing and produce negative returns after inflation and taxes:

Data by YCharts

And on the other hand, stocks are not much better. Even after the coronavirus sell-off, yields remain exceptionally low and it sure does not feel that investors are getting compensated for the risk undertaken:

Data by YCharts

With traditional bonds and stocks out of the picture, retirees must become more creative than ever to generate passive income in 2020. Unless you have millions to invest, you will have to find alternative investments with greater yields.

At High Yield Landlord, we believe that the best opportunities to generate high income are real-asset backed investment sectors:

• The represent essential infrastructure.
• They are mostly resilient to the cycle.
• They generate contractual income.
• They are inflation protected.
• They are less volatile.

Now this does not mean that you should go out and buy high-yielding shares of just any REIT, MLP or infrastructure company. Yes, they own real assets, but not all real assets are created equal. Some are more cyclical than others, and most importantly, some are more exposed to the recent pandemic.

Below we outline three overlooked market niches that are ideal to generate high and steady income in today’s uncertain environment.

#1 - Pandemic-Proof Equity REITs

Retail, office and hotel REITs are greatly affected by the recent pandemic. People are not spending money at malls. They are not commuting to work. And they sure aren’t taking holiday trips. Therefore, these three real asset sectors are experiencing significant stress and dividends are at risk.

However, there also exists a number of property sectors that are mostly unaffected by the recent crisis.

Class B Apartments: Everybody needs shelter. And affordable housing with low income-to-rent ratios should fare fairly well even in a deep recession. Some rents will be missed in the short run, but the cash flow should remain resilient to the most part. Independence Realty Trust (IRT), a conservatively financed Class B apartment REIT, recently noted that payment collection was strong in April and that they have plenty of liquidity to face the crisis. Their share price is trading at a 35% discount to NAV and it pays a fully-covered 7.5% dividend yield.

source

E-commerce Distribution Centers: Amazon (AMZN) is booming right now because people are sitting at home, bored out of their mind and shopping online. They are in a rush to hire another 100,000 employees to handle the increased demand. REITs that own distribution centers and lease space to Amazon-type companies are doing great in this crisis. Monmouth Real Estate (MNR) is one of the most e-commerce exposed REITs with a diversified portfolio of industrial properties. Its average remaining lease terms are eight years and about 80% of its rent comes from investment grade rated clients. The company has never cut its dividend, not even in 2008-2009. Right now, it yields 5.5% and trades at an estimated 30% discount to fair value.

source

Medical Office Buildings: Healthcare infrastructure is just as essential as drugs to fight this pandemic. REITs that own high quality medical office buildings are in a good position to continue earning steady cash flow through this crisis. Physician Realty Trust (DOC) is a blue-chip with a strong investment grade rated balance sheet and a track record of 15% annual total returns since its IPO. Right now, it's moderately discounted and offers a 6% dividend yield.

source

Apartments, distribution centers and medical office buildings are just three examples among many other resilient property sectors.

Some REITs will greatly suffer from the pandemic, but others won’t, and now offer great opportunities. Defensive REITs that commonly trade at 3%-5% dividend yields are now offered at 6%-8% yields after the sell off. This is a great opportunity for retirees, and we are buying at High Yield Landlord.

#2 - Real Asset Backed Preferred Shares

Preferred shares pay higher and safer income than common shares. On the other hand, they generally have lower growth and appreciation potential.

Most importantly preferred shares are higher on the capital stack and all dividends and / or liquidation proceeds are senior to common shares. Therefore, they are ideal investments for retirees who are more interested in dependable income than in future growth.

However, we would not invest in just any preferred share. Most of them have little assets to back them up in case of things turn south and offer worse risk-to-reward than common shares.

We invest in preferred shares that:

• Are backed by real-assets and contractual income.
• Forced to pay dividends for tax reasons.
• Trade at discounts to par value.
• Have significant common equity cushion to absorb losses.

These features provide additional margin of safety in case things turn south. On the flip side, if things go as planned, they also have additional upside potential as they reprice closer to par value.

Right now, there exists exceptional opportunities to earn >8% yields in a 0% interest rate world because the market is still in panic mode. We don’t expect these yield levels to last for long.

A good example are the Series D preferred shares of UMH Properties (UMH.PD) which currently offer an 8.5% dividend yield and ~30% upside to par value. The company owns a diverse portfolio of manufactured housing communities that generate resilient income even in times of crisis. Sure, some rents will go unpaid in this crisis as people lose their job, but to the most part, the cash flow will be defensive and there will be plenty of it to service the preferred shares. We recently interviewed the management for members of High Yield Landlord and the company explains that they expect to even maintain their common dividend.

We own a portfolio of 12 preferred shares. We call it the “Safe Haven” Portfolio.

#3 - Asset Backed Property Loans

This last one has been a real Safe Haven for us during the recent crisis. We invest in a diversified portfolio of private property loans through various crowdfunding platforms.

These loans are not risk free, but they are safer than traditional equity investments because they have a low ~60% loan to value on average and first-rank priority in case of trouble. The equity holdings have to lose everything before the loan investor loses a penny.

So there's a ~40% built in equity cushion in each investment and the borrowers sure do not want to lose this equity by going in default. Therefore, they will do anything they can to meet payments and remain current on their loans.

Occasionally, you suffer losses. That's inevitable. But on average, we have been able to earn ~8% per year from these investments. I'm yet to suffer any losses. I have been through a few property foreclosures and each time the crowdfunding platform was able to recoup full principal plus interest.

What's also nice about these investments is that they have a short 12-month duration. Therefore, we are getting a steady stream of loan repayments. It allows us to gradually redirect capital towards the now opportunistic REIT investments.

Investor Takeaway

In today’s 0% interest rate environment, retirees must become more sophisticated than ever and target alternative investments to generate sufficient income.

Simply investing in bonds and stocks isn’t enough anymore.

We believe that real asset investments are the answer. Their returns are primarily income and this income is backed by essential infrastructure that our society desperately needs. By building a diversified real asset portfolio with some defensive REIT investments, real asset preferred shares, and asset back loans, investors may today earn up to 8% yields.

Don’t take it just from me. Large institutional investors, such as pensions plans, are currently rushing toward real asset investments to generate income in today's yield-less world

Brookfield (BAM), a pioneer in real asset investing, expects an additional $45 trillion to move into real asset investments over the coming decade:

source

We believe that you can profit from this capital shift by investing ahead of the crowd. Real assets are the only remaining option to generate high and reliable income in 2020. We already have adapted our portfolio for this new reality, have you?

Analyst’s Disclosure: I am/we are long DOC; IRT; UMH; MNR; BAM. 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.

Comments

[SchlarbD]

Suggesting retirees use REITS to be more sophisticated and invest in alternative investments, such as real assets should come with the warning that they are taking on a lot more risk to get that yield. Each investor has to decide his own risk tolerance. Most investors lost during the first quarter especially in REITS.

This is a time of great uncertainty. There is a big disconnect between what is happening in the real world and in the stock market. Unemployment is at 15% this has affected every property sectors especially real assets. Many are asking for rent reductions and some just cannot afford to pay even in your picks. Doctor’s office many are closed. No job means cannot pay the rent for apartment. The risk is too high to chase yield with this uncertainty. More dividend cuts are coming and see at least one of your picks cutting dividend payments probably IRT.

You wrote... “Real assets are the only remaining option to generate high and reliable income in 2020.” No way!!! The uncertainty is too high in my opinion. Time will tell but I see a significant drop in value in all the stocks wiping out your yield. I will take my conservative investments versus your real assets until things settle! 

You wrote...”Occasionally, you suffer losses. That's inevitable. But on average, we have been able to earn ~8% per year from these investments. I'm yet to suffer any losses.” A little confusing.

Good luck to you. We will see at the end of the year if you have loses. I know I will not but at this point in time with all the uncertainty I rather preserve capital and get little yield than invest in the current environment.

[Jussi Askola, CFA]

Most individual investors do so poorly because they misunderstand that the best time to invest is when it looks like the world is coming to an end. The best time to invest is not when everything is sunshine and rainbows.

You need to accept uncertainty to earn returns. If done properly, REITs can be very attractive for retirees, especially at current prices: seekingalpha.com/...

[Cyclenut]

Hey there, nice week for EPR.. Overall speaking ..

[Jussi Askola, CFA]

That is correct. It is up quite significantly, and there was some interesting news on AMC getting a new activist investor. However, with a company like EPR, I would not monitor weekly results. It is very volatile. It should be a long term investment. Invest like a landlord ;) Link free trial: seekingalpha.com/...

[normwho7]

I watch weekly and daily results and buy on the dips with small positions

[Badbally]

If you have a large enough portfolio, can’t you just drawdown a % to make ends meet instead of having to invest for yield? What’s the downside besides paying taxes on the redemptions?

[Cyclenut]

Investing for yield preserves capital , no loss of shares and steady income

[Jussi Askola, CFA]

That would force you to sell a portion of your portfolio at the worst time when equities are cheap. It permanently destroys value.

[rcray]

One distribution stock worth looking at is Griffin Industrial Realty (GRIF) which has been adding to its warehouses in Connecticut, the Lehigh Valley in Pennsylvania , Charlotte NC, and Orlando (I own some). The capitalization rate is almost 8 %, well above most all REIT's.
Preferred stocks are not a great investment. With the explosion in the money supply and massive government deficits inflation is likely to happen after this year and preferreds, with a fixed dividend, are no protection against inflation (like bonds).
Medical buildings should do well in the future but this year will be difficult. The panic over the coronavirus means patients, even with chronic diseases, are not seeing their doctors (cardiologist visits are down about 2/3rds for example) and medical staff are being laid off. Medical landlords will have a little trouble collecting rents for a while.

[Jussi Askola, CFA]

Thank you for sharing. I agree that it is a good opportunity. We own 2 other industrial REITs at High Yield Landlord: seekingalpha.com/...

[Mr Bad Example]

Telehealth services is a genie that will not go back into the bottle. There will be more of it in the future. Less need for medical office space.

[Jussi Askola, CFA]

I would be careful to make such quick assumptions. There is a massive demographic wave in favor of increasing demand and most people will prefer to visit in person.

[stevenweinberg33]

How does your doctor take a physical exam of you through a computer screen? Right now every one of those telemedicine physician notes is written with “deferred” under the Physical Examination section. Hope that holds up in malpractice court.

[optomos]

It will work well for general visits where they can use a webcam to see your tonsils or prescribe medication for a cold or general dermatology visits, but it can never replace some of the more common like the annual checkup. There is no way Telehealth can provide for lab work or more serious exams. Telehealth is complimentary; it will not replace doctor visits unless they decide to bring back house calls.

[Herman Tai]

UMH.PD is trading at 22.25 now. It does not offer a 8.5% yield anymore.

[Jussi Askola, CFA]

@Herman Tai That's correct. The price has appreciated before the article was published. However, even at the current price, I am a buyer.

[Gadom]

I agree the UMH preferred is worth the risk even in the current environment.

I am not sure about DOC. currently both primary care and specialty providers have seen about a 45% drop in visits and revenue. Hospitals have seen similar drops in their outpatient services. They are mainly taking care of sick patients who they don't make money on and have very few elective procedures like arthroscopy that are the profitable segment. In addition, there trying to make up for these shortfalls by low revenue telehealth visits. Telehealth does not have any ancillary services that boosts the invoice such as in office EKGs, PFTs,shots etc.

Anthem in their earnings call this week predicted that 30%, a staggering number, of their commercial book of business will move to Medicaid, the ACA, or nothing as a result of the Covid crisis. All of those are far lower reimbursement. Additionally it is predicted that some 25% of visits will remain telehealth and not go back to face-to-face. This has to have an impact on bricks and mortar. In addition you look at Walmarts very successful entrée into real primary care healthcare in Georgia you wonder if there will be overcapacity as far as facilities.

Healthcare delivery is a low margin business over all. For sure healthcare is not going away and long-term there will be more and more outpatient services. Just not sure if now is the time to get in.

BAM Long term this will do well but short term not sure. There might be more downside. Any thought on BAM preferreds.

[Jussi Askola, CFA]

@Gadom Note that MPW just reported a 96% collection rate for rents across its hospital portfolio. Hospitals and medical office buildings owned by REITs generally have 3-5x rent coverage and good credit tenants.

This does not mean that they are immune to the crisis, but I expect them to fare much better than most other property sectors.

Thank you for your comment.

[Escaping the united states]

Non profit hospitals still pay rent and if doctor visits switch to over the computer then there would be no reason to cosule an American doctor. Just outsource it to a doctor in India.

[Investing With Confidence]

People want a local doctor they can sue.

Can't sue a dude on other side of world.

[viggen]

Thanks for this. Any good platforms, brokers or providers for asset backed property loan transactions?

[Jussi Askola, CFA]

@react55 Thank you for your question. Please note that we discuss those platforms in great detail at High Yield Landlord: seekingalpha.com/...

Among others, we invest through EstateGuru and Groundfloor.

[Other Side Of Trade]

Thanks for the article. Correct me if I'm wrong, but I thought UMH recieved a substantial portion of it's income from a portfolio of other REITs, some of which (CBL) have been real losers. Cheers.

[Jussi Askola, CFA]

@Other Side Of Trade Thank you for your question. That is a common misconception. The securities portfolio is tiny. It represents ~5% of assets. The remaining 95% is invested in manufactured housing. You can ignore the securities and the company would still be undervalued.

We recently interviewed the CEO for members of High Yield Landlord: seekingalpha.com/...

[Gridbird]

@Jussi Askola, Its such a low amount now because the results in investing in the reit stuff was disastrous for the company. At one time it was worth more. I just got back into B series, but that doesnt mean I hold any respect for this outfit and high relative leverage.

[Jussi Askola, CFA]

It has always been 5-10%. Already in 2019, they agreed to stick to 5% going forward.