Real estate investment trusts (REITs) can adddiversification ,
stability and generous yields to any portfolio. This is
particularly true this year, with the REIT sector returning nearly
18%, as a result of the improving real estate market .
The fact that REITs have no risk ofdividend tax hikes related to
the "fiscal cliff" makes them even more appealinginvestments . This
is because REITs never qualified for the Bush-era dividendtax cuts
. Instead, REITs benefit from no corporateincome tax , which
results in higher dividend payments for investors. This also
reduces thecost basis of the initial investment, since the
dividends aren't taxed untilshares are sold.
A downside to the strong performance in the REIT sector this
year has been gradually-declining yields. At present, retail
REITsyield only about 3.5%, while office REIT yields are just
slightly better at roughly 4%. These are better than the 2% yield
of the S&P 500Index , but not that exciting for yield-hungry
But I know a way to own REITs without sacrificing high yields:
Preferred REIT shares. This year is shaping up to be a record year
for preferred REIT stocks. U.S. REITs have raised about $7.02
billion through preferredequity sales so far in 2012, according to
SNL Financial. Yields on recent preferredissues range as high as
7%, which is nearly twice the average yield for REIT common shares.
The best part about these preferred stocks is that yields are
fixed, so they don't fluctuate according to the
REIT's earnings .
If you're looking for steady high yields, then here are three
high-yielding REITpreferred stocks you should consider:
SL Green Realty Corp. (
Coupon Rate on Series I Preferred: 6.5%
SL Green is New York City's largest office property
owner and is the only REIT that focuses on Manhattan's
business district properties. The REIT owns interests in 77
Manhattan buildings, totaling more than 39.3 million square
feet of leasable space. SL Green also owns stakes in New
York suburban areas totaling 5.4 million square feet, and
California properties representing 4.5 million square
The company'sfunds from operations (FFO) , a key
REITcash flow metric, improved 9.2% to $4.14 per share in
the first nine months of 2012 and SF Green signaled its
confidence in future growth by increasing its dividend 32%
to a new annualized rate of $1.32 a share. So far this
year, the REIT has signed 240 leases covering nearly 3.9
million square feet, or roughly 8% of its portfolio.
SL Green Series I preferred stock has a 6.5% coupon
and a "B+" rating. This is a huge spread given that common
shares yield just 1.7%.
National Retail Properties (
Coupon Rate on Series D Preferred: 6.6%
This is the country's second-largest single-tenant
properties REIT and one of only four REITs that have
produced dividend growth for 23 or more consecutive years.
National Retail owns free-standing, net-leased properties
characterized by long-term leases and low risk. Tenants are
responsible for covering maintenance, utilities,taxes and
other expenses. The REIT rents to about 300 different
tenants. Their average lease term is 12
years. National Retail Properties Series D preferred
stock was priced to yield 6.6%, well above the common
shares yield of 5%.
National Retail owns 1,530 properties in 47 states with
a gross leasable area of about 18.3 million square feet.
This includes an investment of $452.6 million to acquire
124 properties so far in 2012. The portfoliooccupancy rate
is high at 97.9% and never fell below 93% during the worst
years of therecession .
National RetailsFFO increased 11% to $1.32 per share
during the first nine months of 2012, and the company
increased its full-year FFO guidance from $1.69 to $1.72 a
share. That's more than enough to cover the per-share $1.55
annual dividend. National Retail targets roughly 4% FFO
growth next year.
In addition, only a handful of the REIT's properties are
encumbered by mortgages and thebalance sheet is solid with
about $1.5 billion in debt, representing roughly 42% of
Healthcare REIT (
Coupon Rate on Series J Preferred: 6.5%
Healthcare REIT is the nation's third-largest medical
property REIT. The company's $16.5 billion medical properties
portfolio includes senior living communities, medical office
buildings, inpatient and outpatient medical centers and life
science facilities. Healthcare REIT owns 1,030 properties and
has established a presence in 46 states, the United Kingdom
This REIT is focused on expansion and has grown its real
estate portfolio 28% a year for the past five years.
Healthcare REIT is closing theacquisition of 125 properties
from former competitor Sunrise Senior Living. It has acquired
$8.9 billion worth of health care real estate in the past two
years. This REIT still has plenty of acquisition capacity
with about $1.4 billion ofcash on hand and $2 billion
available on its bank line of credit. The balance sheet is
strong.Long-term debt is $7.3 billion, which is just 31%
ofenterprise value .
Healthcare REIT increased FFO 6.8% in the first nine
months of this year to $2.67 per share, which more than
covered the $2.22 per share annualized dividend. The REIT
anticipates full-year 2012 FFO to come in at $3.49 to $3.53
per share. Except for two quarters six years ago, Healthcare
REIT has consistently raised the dividend. The latest
increase was 3.5% in September to a new annualized rate of
$2.96 per share, yielding 5.1%. The REIT plans another 3.4%
dividend hike next year.
Risks to Consider:
REIT preferred coupon payments are fixed, but yields vary based
on whetherpreferred shares are trading above or belowpar value .
For that reason, I would think twice before purchasing any REIT
preferred shares trading significantly above par value. Also, while
preferred shareholders have no risk from dividend cuts, they also
don't participate in the benefits from dividend hikes. There is
somereinvestment risk for preferred share investors, since REITs
generally can redeem preferred stock. Almost all REIT-issued
preferred stocks have a five-year redemption period.
Action to Take -->
Given the huge spread between the yield on itscommon stock and
preferred shares, SL Green mayoffer the best deal of the group, but
all three of these REIT preferred shares provide safety and
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