3 Top REITs Yielding Up to 12.2%
May 30, 2018
Earn Income Without Tenants
I love the idea of owning rental properties, but who wants the hassle of dealing with tenants? You have to find a renter that won’t trash your place. Then you have to chase down payments each month. Never mind getting a call at two in the morning about a clogged toilet.
Sure, collecting those rent checks represents a good stream of income (plus the growing property values). But for most of us, it’s just not worth the hassle.
Thankfully, there’s an answer.
For years, I’ve suggested readers investigate the growing number of real estate investment trusts (REITs). These partnerships buy properties and manage all of the day-to-day operations. It provides a convenient way to invest in rental properties without the hassle of dealing with tenants.
More importantly, they also make for good income streams. Thanks to a number of tax advantages, it’s not uncommon to find REITs with yields ranging as high as 10% to even 15%. And because tenants pay their rent on a monthly basis, most trusts pay their shareholders in the same fashion.
To help get you started, I’ve highlighted three of my favorites. Now to be clear, this list doesn’t constitute a group of buy recommendations. Some of these firms have had impressive runs recently, and might not necessarily present the best place to put fresh money to work right now.
All of these names, however, run profitable businesses and pay out growing distributions to investors. I would recommend adding all three to your watchlist and doing more research on them later.
American Campus Communities, Inc.
Student housing can be a lucrative investment. You have a built-in group of tenants looking to rent each year. And because housing is strategically located next to universities, these properties often rise quickly in value.
American Campus Communities, Inc. (NYSE:ACC) has capitalized on the underserved market for student housing. Over the years, the company has quietly built a sprawling property empire. And with over 206 communities in its portfolio, American Campus Communities now stands as the largest owner of university housing in the country.
This strategy has paid off, with the company having reported 12 straight years of net operating income growth. Annual funds from operations per share has grown at a six-percent compounded annual clip, significantly outpacing peers in the real estate industry. And with a distribution yield coming in at nearly five percent, this trust could deliver impressive total returns going forward.
Extra Space Storage, Inc.
You can make a lot of money investing the leaders behind big, booming industries. And these days, self-storage facilities now represent one of the fastest-growing businesses in the country; the amount of self-storage facilities now outnumbers McDonald’s Corporation (NYSE:MCD) restaurants nationwide. (Source: “In Nation of Hoarders, Self-Storage Spots Outnumber McDonald’s,” Curbed, April 20, 2015.)
Case in point: Extra Space Storage, Inc. (NYSE:EXR). The partnership owns over 1,500 self-storage units across the country, totaling some 115 million square feet. And business, it seems, is booming; during the first quarter of 2018, the REIT posted a 7.1% increase in revenues year-over-year. Further, same-store revenue increased more than five percent. (Source: “Extra Space Storage Inc. Reports 2018 First Quarter Results,” Extra Space Storage, Inc., May 1, 2018.)
This boom has paid off for investors too. The unit price has climbed about 23% in value over the past year, recently approaching a fresh all-time high. As long as we continue to live in a nation of hoarders, self-storage REITs should keep cranking out impressive returns.
Two Harbors Investment Corp
Two Harbors Investment Corp (NYSE:TWO) is pretty straightforward to wrap your head around. The partnership borrows money on short-term loans at a low interest rate, and management then turns around and invests those funds in higher-yielding mortgages backed by real estate.
The model is very much akin to old-fashioned banking. For example, say the trust buys a 30-year mortgage that pays four percent per year and finances it with debt that costs two percent per year. The two-percent difference, or the spread, represents the partnership’s profit. Of course, investors won’t get out of bed for a two-percent return, so these trusts juice their yield through a great deal of leverage.
In the case of Two Harbors, management invests most of their portfolios in residential mortgage-backed securities. Executives borrow about $5.00 in debt for every $1.00 in equity. This modest use of leverage explains how the trust can pay out a 12.2% yield.
For this reason, I consider Two Harbors Investment Corp the more speculative name of this list. If interest rates spike, the partnership’s profits could get squeezed. But for investors who understand the risks ahead of time, it can make a nice supplement to a well-balanced income portfolio.
