EC 10 Of The Highest Yielding REITs Analyzed In Detail

Investors looking to generate higher levels of income from their investment portfolios should take a look at Real Estate Investment Trusts, or REITs. These are companies that own real estate properties and lease them to tenants, which generates a steady stream of income. The bulk of their income is then passed on to shareholders, through dividends. You can see all 171 REITs here.

The beauty of REITs, for income investors, is that they are required to distribute 90% of their taxable income to shareholders annually, in the form of dividends. In return, REITs typically do not pay corporate taxes. As a result, many of the 171 dividend-paying REITs we track offer high dividend yields of 5%+.

Bonus: Listen to our interview with Brad Thomas on The Sure Investing Podcast about intelligent REIT investing in the below video.

 But not all high-yielding stocks are automatic buys. Investors should carefully assess the fundamentals to ensure the high yields are sustainable. This article will discuss 10 of the highest-yielding REITs around, with market capitalizations above $1 billion. The list excludes mortgage REITs, which have their own unique risk factors. Some of the REITs presented here are high-quality businesses worthy of further consideration, while others should be avoided.

High-Yield REIT No. 10: The GEO Group (GEO)

  • Dividend Yield: 9.0%

GEO operates a diversified portfolio of correctional, detention, and residential treatment facilities. It provides these services to government agencies around the world. The company has operations in the United States, Australia, South Africa, and the United Kingdom. Geo owns and/or manages a total of 141 facilities.

Source: Earnings Presentation, page 3

On 4/30/19, Geo Group reported first-quarter earnings. Total revenue of $610.7 million rose 8.1% from $564.9 million in the same quarter a year ago. FFO-per-share, as adjusted, increased 17.5% to $0.67.

The company believes its shares are currently undervalued, which is why it has $105 million currently authorized to repurchase shares.

For 2019, Geo expects total revenue of approximately $2.5 billion and full-year 2018 adjusted FFO-per-share to be in a range of $2.64 to $2.70, which represents an increase of 7.2% at the midpoint.

Geo appears to have a secure dividend. The annualized payout of $1.92 per share represents a 2019 payout ratio of 71% to 73%.

High-Yield REIT No. 9: Apollo Commercial Real Estate Finance (ARI)

  • Dividend Yield: 9.9%

Apollo Commercial Real Estate Finance, Inc. was founded in 2009. It is a real estate investment trust (REIT) that invests in debt securities including senior mortgages, mezzanine loans, and other commercial real estate-related debt. Apollo’s investments, placed in the U.S. and Europe, are collateralized by the underlying estate properties. Apollo is externally managed by ACREFI Management, LLC, an indirect subsidiary of Apollo Global Management, LLC. Apollo Commercial Real Estate Finance holds a $4.9 billion commercial real estate portfolio, with 26% of this portfolio made up of Hotels, 17% Office Properties, 14% Urban Predevelopment, 12% Residential-for-sale inventory and 11% Residential-for-sale construction. The company has roughly 34% of its portfolio based in Manhattan, New York, 14% in the United Kingdom, 13% in the Midwest, 12% in the West and 11% in the Southeast.

Source: 2019 Investor Presentation, page 3

On April 24th, 2019, Apollo announced first-quarter results. For the quarter, operating earnings increased 16.3% year-over-year and beat analyst estimates by 8.7%. Furthermore, net interest income grew 31% year-over-year. Meanwhile, book value per share declined by 0.4% sequentially from Q4 2018 as stock awards vested. The company also invested over $200 million in a first mortgage loan as well as nearly a quarter billion dollars-worth of subordinate loans during the quarter.

Apollo’s two main growth catalysts are growth of its overall loan portfolio and higher investment returns from existing loans. In the most recent quarter, Apollo committed $744 million to first mortgage loans and $52.8 million to subordinate loans. These continued investments should buoy the business.
The company successfully grew earnings-per-share since its 2009 inception, but growth has stagnated over the past several years. Apollo has leaned heavily on equity sales to finance its growth. Moreover, the company has outstanding preferred securities with 8% dividend rates that take up more than 10% of net income. As a result of this dilution, we do not anticipate a significant improvement in bottom-line results over the intermediate-term.

Source: 2019 Investor Presentation, page 8

Apollo has an exceptionally high dividend yield, but it also has a high dividend payout ratio that investors should closely monitor going forward. This is often the case with extreme high-yielders. The company has frequently distributed over 100% of annual earnings. While payout ratios greater than 100% are possible when cash flows exceed earnings – as is the case with Apollo – this significantly limits the company’s safety in lesser times.

During the last recession, Apollo posted a net loss in 2009, reflecting its sensitivity to recessions and downturns in commercial real estate activity. Due to the elevated payout ratio, the company funds growth through the issuance of common and preferred equity, both with dividend yields of 8%+. In turn, this creates a high hurdle rate, limiting the company’s growth prospects. So far it has worked out fine, but we are certainly cautious moving forward.

As of the most recent report, the Apollo held $110 million in cash and $5.1 billion in total assets (comprising of 76% commercial mortgage loans and 21% subordinate loans) against $2.6 billion in total liabilities (73% of which were secured debt arrangements). As a mortgage REIT, the company lacks any significant competitive advantages and remains highly sensitive to interest rate and macroeconomic conditions.

High-Yield REIT No. 8: Chimera Investment Corporation (CIM)

  • Dividend Yield: 10.6%

Chimera Investment Corporation invests in a portfolio of mortgage assets, including residential mortgage loans, agency and non-agency residential mortgage-backed securities, agency mortgage-backed securities secured by pools of commercial mortgage loans, commercial mortgage loans, and other real estate related securities. Chimera Investment Corporation was founded in 2007 and is headquartered in New York, New York.

Source: Q1 Earnings Slides, page 3

CIM reported earnings on May 1st. Q1 core EPS of 57 cents slipped from 58 cents in both Q4 2018 and Q1 2018. By issuing $200M of series D preferred stock in the quarter, the company was able to grow its investment portfolio and lower the company’s overall cost of capital. Q1 net interest income of $147.4M was almost even with $147.9M in the year-ago quarter while economic net interest income of $151.3M compared with $153.6M in Q4 2018 and $145.4M in Q1 2018. The total portfolio net interest margin stood at 2.4%, with agency portfolio NIM at 1.2% and residential mortgage credit portfolio NIM at 3.4%.

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Disclaimer: Sure Dividend is published as an information service. It includes opinions as to buying, selling and holding various stocks and other securities. However, the publishers of Sure ...

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