3 Safe High-Yielding REITs To Help You Sleep Well At Night
Summary
- How is it possible to have both a "safe" and "high-yield"?
- We will show you how.
- Whenever a REIT is paying too much in dividends, it’s not in good shape to handle whatever’s around the corner.
- This idea was discussed in more depth with members of my private investing community, iREIT on Alpha. Learn More »
guvendemir/E+ via Getty Images
It seems almost surreal when you see an article titled “Safe High Yield”, so I’m sure you’re scratching your head now thinking, “This is just another click bait title, there is no way to find high yielding REITs with safe dividends.”
Well, let me assure you, I am not exaggerating when I use the word “safe” in front of “high yield”, I intentionally wanted to highlight the adjective that wordhippo.com describes as,
- Not exposed to danger or harm
- Bearing no injuries or harm
- Not dangerous and unlikely to cause or lead to harm
- Dependable, or capable of being trusted
I like the last description, as per my application to this article, and in the spirit of describing the 5 REITs highlighted below, I want to provide ample evidence that these high-yielding real estate stocks generate dividends that are dependable and can be trusted.
Does this mean that I will include Omega Healthcare Investors (OHI) on the list below?
The short answer is no.
While we do have a “Strong Buy” on OHI, we recognize that the price deterioration is directly correlated to dividend safety. And while OHI’s management team has done a very good job at navigating the labor issues related to Covid-19, the risk of a dividend cut is elevated.
As I explain in my new book, The Intelligent REIT Investor Guide,
“a safe and growing dividend is mandatory to acquire a blue-chip label...Maintaining a modest payout ratio is good policy for two reasons: taking advantage of opportunities that come up and insuring against pitfalls.”
Whenever a REIT is paying too much in dividends, it’s not in good shape to handle whatever’s around the corner.
And speaking of OHI, we admire the fact that the company has been managing its dividend policy, that has improved considerably since 2019:
Source: iREIT / REIT Base
Keep in mind, OHI has not reported Q3-21 earnings (Nov 5th), and I do anticipate a higher payout ratio.
However, OHI has tools at its disposal such as security deposits and personal guarantees, that could provide the company time to transition the troubled operators. As I explain (in my book)
“higher payout ratios don’t necessarily mean dividend cuts are looming.
Most REITs in most environments are good at that. All the same, excessively high figures aren’t something to mess around with…that’s why blue-chips have lower dividend payout ratios."
So, in an effort to select the “safest high yield” REITs I decided to screen using our iREIT Tracker tool.
iREIT on Alpha
I would like to point out that much of our success at iREIT on Alpha has been our ability to avoid REITs that cut dividends.
Our screening process is driven by adhering to quality standards in which we carefully select “safe” REITs defined by steady earnings, conservative payout ratios, and healthy balance sheets.
It’s no fluke that we avoided chasing yield and subsequently avoided losses associated with EPR Properties (EPR), Washington Prime, and CBL Properties (OTCPK:CBLAQ).
Source: Yahoo Finance
As you can see from this 5-year chart (above) Vanguard Real Estate ETF (VNQ) shares are up 37% over 5 years, while EPR Properties (EPR) has lost 30% in value and CBL Properties is under water by ~99% (over 5 years).
Note that CBL’s dividend 5-years ago was 9% and EPR’s dividend yield was over 6%, clearly a yield that was “exposed to harm” and “not dependable”.
Thus, selecting the highest-yielding REIT in each category is not recommended, and by carefully researching fundamentals, the investor can generate superior total returns.
VICI Is A Prime-Time Player
Our first pick is Vici Properties (VICI), a gaming REIT that recently announced Q3-21 earnings.
We have been high on VICI since the company listed shares (in 2018) and specifically we have been impressed with the wide payout ratio (82% in Q3-21), as viewed below:
Source: iREIT / REIT Base
VICI has generated impressive earnings growth that has resulted in steady dividend growth. In Q3-21 VICI generated AFFO per share of $0.45 and also increased 2021 AFFO guidance from $1,010 million to $1,035 million to $1,040 million to $1,045 million.
Notably, per-share AFFO guidance was lowered from $1.82-$1.87 to $1.79-$1.80 due to lower interest expenses and higher share-count expectations of 580 million instead of 555 million shares. Also, its Venetian acquisition deal was delayed from Q4-21 to Q1-22 due to Nevada permitting delays.
Source: FAST Graphs
In Q3-21 VICI maintained $4.9 billion of liquidity – $670 million of cash, $1 billion on its untapped revolver, and $3.3 billion of forward equity proceeds.
So we’re maintaining our Strong Buy thesis, recognizing the value of this trophy investor. Shares of this net-lease top grower are trading at 16.6x p/AFFO with a 4.9% dividend yield.
Source: iREIT on Alpha (CAGR is 11.4%)
As viewed below, VICI shares have returned 19.5% year-to-date, under-performing the Vanguard Real Estate ETF (VNQ) that has returned over 27% this year.
Source: FAST Graphs
2022 is going to be a big year for VICI and we remain super bullish with regard to the MGM Growth (MGP) merger as well as other deals the pipeline of ROFR’s (right of first refusals).
We consider the current AFFO multiple 16.5x cheap compared with other net lease peers, and as viewed below, we are forecasting shares to return 23% over the next 12 months.
Source: FAST Graphs
We See "Green" With S.L. Green
S.L. Green (SLG) is another attractive REIT that has maintained disciplined risk management practices.
As seen below, the company’s payout ratio (as of Q3-21) is 75.6% based on AFFO per share:
Source: iREIT / REIT Base
SLG did cut the dividend in 2009-2010, however (as viewed below) the office REIT has done a great job of clawing its dividend back.
Source: FAST Graphs
As viewed below, SLG has steadily grown its dividend, and even after a reset in 2020, the distribution has increased above pre-covid levels. Notably, SLG has grown its dividend by 15% CAGR since 2012 (note: SLG pays monthly dividends).
Source: iREIT on Alpha
SLG has returned 19.2% year-to-date, under-performing VNQ that has returned over 27% this year.
Source: FAST Graphs
SLG has solid Q3-21 earnings that included FFO per share of $1.78 (+1.7% y/y) vs. $1.59 for consensus (included $0.16/share in termination income at 609 Fifth Ave with WeWork).
Cash SS NOI was positive to +3.6% (vs. -2.4% in 1H21) and One Vanderbilt is now 91% leased (78.7% occupied).
SLG recently raised 2021 FFO guidance by $.05 per share (at the mid-point) to $6.45 - $6.65 per share.
AFFO is forecasted to decline by 10% in 2021 and another 9% in 2022, yet the payout ratio (75%) provides a nice cushion. We view SLG as a longer-term play, recognizing that earnings per share will not normalize until late 2022.
Source: FAST Graphs
Nothing Could Be Finer, That A REIT In Carolina
Our final “safe high yield” pick is Highwoods Properties (HIW), an office REIT focused on the southeastern US.
As viewed below, HIW’s payout ratio in Q2-21 was 79.6%.
Source: iREIT / REIT Base
One of the things that I like about HIW is the fact that the company did not cut its dividend in the Great Recession (the only office REIT that can claim that record).
Source: FAST Graphs
As you can see below, HIW did not begin to grow its dividend until 2017, and during that time the company has increased the dividend by around 3% per year (“CAGR”):
Source: iREIT on Alpha
As seen below, HIW has also underperformed VNQ year-to-date:
Source: FAST Graphs
In Q3-21 HIW delivered strong FFO of $0.96 per share and same property cash NOI growth was also strong at 6.4% (includes the repayment of temporary rent deferrals).
Excluding these repayments, same-property cash NOI growth would still have been a healthy 5.2%.
Because of the stellar results HIW updated the 2021 FFO outlook to $3.73 to $3.76 per share, up $0.07 at the midpoint from the prior outlook. HIW also raised the same-property cash NOI growth outlook to 6% to 7%, up more than 150 basis points at the midpoint.
As seen below, we are super bullish as we forecast HIW to return ~20% over the next 12 months.
Source: FAST Graphs
Happy SWAN Investing
Over the last decade I have been perfecting my trade here on Seeking Alpha, by researching and analyzing REITs and focusing on fundamentals. As I explain in my book,
“During the Covid-19 pandemic, investors found that scale advantage especially was critical, allowing certain large, intelligently diversified REITs to grow their dividends anyway during those darkest hours. Those that weren’t as expansive or well-placed, meanwhile, were forced to cut their payouts.”
I concluded the book as follows,
“While I’m more than willing to slap the “speculative” label on specific REITs when appropriate, the largest sector is filled with more than merely “adequate” returns.
It offers the real chance of securing a worthwhile, enjoyable, sustainable retirement for you to enjoy, with something to pass on to your loved ones should you so choose.
That’s the power of REITs…a power I’m proud to promote whenever I can.”
Sharesight: Durable Income Portfolio (annualized since August 2013)
Author's Note: Brad Thomas is a Wall Street writer, which means he's not always right with his predictions or recommendations. Since that also applies to his grammar, please excuse any typos you may find. Also, this article is free: written and distributed only to assist in research while providing a forum for second-level thinking.
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This article was written by
Brad Thomas has over 30 years of real estate investing experience and has acquired, developed, or brokered over $1B in commercial real estate transactions. He has been featured in Barron's, Bloomberg, Fox Business, and many other media outlets. He's the author of four books, including the latest, REITs For Dummies.
Brad, with his team of 10 analysts, runs the investing group iREIT® on Alpha, which covers REITs, BDCs, MLPs, Preferreds, and other income-oriented alternatives. The team of analysts has a combined 100+ years of experience and includes a former hedge fund manager, due diligence officer, portfolio manager, PhD, military veteran, and advisor to a former U.S. President. Learn moreAnalyst’s Disclosure: I/we have a beneficial long position in the shares of VICI, OHI, SLG, HIW either through stock ownership, options, or other derivatives. 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.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
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