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This Real Estate Portfolio Yields More Than 12%

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Select real estate may be the income investing play for 2024. As I write, seven real estate investment trusts (REITs) are dishing dividends from 8.7% all the way up to 15.4%.

These REITs—and their ilk—are literally designed to deliver dividends. That’s how Congress wrote the rules when they legislated these real estate investments into existence back in 1960.

REITs avoid taxes at the corporate level. But in exchange, they need to pony up at least 90% of their taxable income and redistribute it to investors as dividends.

As a result, our average REIT yields somewhere around 2x to 3x the market. But we can do much better than simply “average.” The 7-pack of REITs we’ll review today pays 12.1%—or roughly 8x the S&P 500!

That level of income would allow us to retire on dividends alone. But we need to be careful.

On the one hand, the Federal Reserve—whose hawkish rate policy has been going against REITs for years now—finally looks primed to take its boot off of real estate’s collective neck. The Fed not only paused at its most recent Federal Open Market Committee (FOMC) meeting, but indicated (via the “dot plot”) that we could see three rate cuts in 2024.

REITs trade like bonds. When rates rise, REITs drop. Which is why these stocks are so far down over the past two years. Rising rates have hurt REIT prices.

Now, however, it’s time for rates to “reverse skate” thanks to the Fed. That said, an economic slowdown isn’t ideal for all landlords. Be must be picky.

Let’s start with a pair of mortgage real estate investment trusts (mREITs), which rather than holding physical real estate, instead hold “paper”—typically securitized mortgages and other loans. mREITs represent some of the fattest dividends you’ll ever find, but you have to be particularly choosy in this space.

Armour Residential (ARR, 15.2% dividend yield) primarily invests in mortgage-backed securities (MBSs) issued or guaranteed by U.S. government-sponsored entities such as Freddie Mac, Fannie Mae or Ginnie Mae. Right now, 92% of the portfolio is invested in 30-year fixed-rate pooled mortgages, 5% is in agency commercial MBSs, and the rest is in “TBAs” (literally “to be announced,” which are contracts to buy or sell MBSs at some future date).

In general, the mREIT business is an exceedingly difficult one, but the past few years have done Armour and other REITs no favors. That’s because rising mortgage rates mean new loans pay more, thus shrinking the value of existing loans. But perhaps you could be optimistic about Armour with the Fed expected to pursue rate cuts in 2024—an accommodating environment for mREITs.

But perhaps not.

That middle chart is what makes Armour an absolute no-go for me. The stock has been in a perpetual state of dividend decline since 2011. So as juicy as the current yield might be, there’s no precedent to support the idea that our future earnings will be nearly so sweet.

Ready Capital (RC, 13.6% yield) is a more palatable choice. This mREIT originates, acquires, finances and services small- and medium-sized balance commercial loans. Roughly half its core earnings are derived from bridge loans, while the rest is a combination of construction loans, fixed-rate CMBSs, Freddie Mac loans, small business lending and residential mortgage banking.

It’s also a bigger company than it was just a year ago; in May, it announced the completion of a merger with Broadmark Realty Capital, a specialty real estate finance company that originated and serviced residential and commercial construction loans.

Ready’s dividend is hardly pristine, but it has been much more stable across the mREIT’s publicly traded life. While it did drop from 40 cents earlier in 2023 to 30 cents to start 2024, it’s expected to be temporary—it’s largely a result of absorbing Broadmark’s tighter-margin portfolio. But when and if the merger starts to yield fruit, the payout should rise again—an appealing prospect for a stock that’s already yielding nearly 14%.

Now, I want to jump into more tangible equity REITs. And I’ll start with Highwoods Properties (HIW, 8.7% yield), an office REIT focused on southern and southeastern markets such as Atlanta, Charlotte, Dallas, Nashville and Orlando.

You can tell just how awful office real estate has been just by looking at this PR job on its website: “We’re in the work-placemaking business, creating environments that spark experiences where the best and brightest can achieve together what they cannot apart.”

When they don’t even want to say the word “office,” you know it’s bad.

Following COVID, Highwoods actually managed to get back around its pre-pandemic highs by 2021—but after treading water for a year or so, the Fed started to hike rates, and shares are down by about 40% since then, severely lagging the broader real estate sector.

There’s little reason to be bullish on office real estate broadly. While a return-to-the-office mentality has gained steam, many tenants are still downsizing. Where there is opportunity, however, is that many of these tenants are simultaneously upgrading into better-quality (and higher-priced) real estate. That bodes well for HIW, which is generally a good operator whose cash, FFO, and other important metrics have largely trended in the right direction for a decade or more.

Service Properties Trust (SVC, 9.7% yield) is a rarity in the REIT space, featuring a dual focus of hotel real estate and retail assets. Its portfolio consists of 221 largely extended-stay hotels across most of the U.S., Puerto Rico and Canada, as well as 761 service-focused retail net-lease properties. The latter is heavily tied to TravelCenters of America / Petro Stopping Centers, which make up more than two-thirds of annualized minimum rent, as well as other tenants including The Great Escape and Life Time Fitness.

A couple of months ago, I said I was curious about whether SVC could keep up its momentum after October 2022’s massive dividend increase. But its October 2023 dividend announcement came and went without a hike.

That’s not to say SVC won’t raise the dividend at some other point in the future, but it’s not building a habit. That’s not shocking. As I mentioned, while SVC has excellent dividend coverage, it also has more than $1 billion in debt maturities to address in each of the next two years. It’s also sinking a lot of money into upgrading its Hyatt (H) and Sonestra hotels. Patience is a must with this one.

Uniti Group (UNIT, 10.9% yield) is a REIT that provides telecommunications infrastructure. It’s a top-10 fiber provider in the U.S., boasting more than 139,000 fiber route miles and more than 8.4 million strand miles of fiber, connecting 300 metro markets and providing high-speed and networking services to more than 28,000 customers.

While Uniti’s infrastructure powers effectively what are basic necessities at this point, the REIT—a spin-out from regional telecom carrier Windstream—just hasn’t been as reliable as other comm infrastructure names like American Tower (AMT) and Crown Castle International (CCI).

Rate cuts would be most welcome to Uniti, but even lower-but-still-high rates don’t bode well given high leverage—the company currently boasts $5.6 billion in debt compared to just $34 million in cash. That could very well pressure the high dividend—currently the only thing UNIT stock really has going for it.

Less than two months ago, Brandywine Realty Trust (BDN, 11.5%) looked like dead money—it had lost more than a quarter of its value and was in desperate need of a rebound. Fast forward just a few weeks, and it’s actually sitting on modest gains.

Not much has changed for this hybrid REIT, which owns a mix of properties—more than 40% residential, life science at 27%, 24% office, and the remainder peppered throughout various real estate types—in scattered markets including Philadelphia, the greater Washington, D.C. area, and Austin, Texas. It’s still just a few months removed from a 21% dividend cut. It’s also still dealing with below-expectation occupancy and hundreds of millions of dollars of notes and JV debt maturing in 2024.

But the fact that it’s still dirt-cheap, at roughly 4.5 times next year’s estimates for funds from operations (FFO), makes it difficult to bet against.

Global Net Lease (GNL, 15.1%) is also an extremely high yielder despite its dividend heading in the wrong direction—again.

Global Net Lease is a commercial REIT operator with assets not just in the U.S., but also in 10 other nations, including the U.K., Netherlands, Finland and France. It boasts more than 1,300 properties leased out to 815 tenants spanning some 96 industries. It’s an enormous step up for the real estate portfolio, courtesy of its merger with The Necessity Retail REIT, which was completed in September. That combo made it the third-largest publicly traded net lease REIT.

While GNL says the deal should be 9% accretive to annualized adjusted FFO per share during the first quarter after closing, and meaningfully reduce net debt to adjusted annualized EBITDA, I’d like to see something a little more concrete.

For now, Global Net Lease is on my watch list. The big event circled on my calendar is the company’s Q4 earnings release, due out in February 2024, when we should also get its first earnings guidance for the combined entity.

Brett Owens is chief investment strategist for Contrarian Outlook. For more great income ideas, get your free copy his latest special report: Your Early Retirement Portfolio: Huge Dividends—Every Month—Forever.

Disclosure: none

 

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Here are some facts about British Columbia’s housing market

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Housing affordability is a key issue in the provincial election campaign in British Columbia, particularly in major centres.

Here are some statistics about housing in B.C. from the Canada Mortgage and Housing Corporation’s 2024 Rental Market Report, issued in January, and the B.C. Real Estate Association’s August 2024 report.

Average residential home price in B.C.: $938,500

Average price in greater Vancouver (2024 year to date): $1,304,438

Average price in greater Victoria (2024 year to date): $979,103

Average price in the Okanagan (2024 year to date): $748,015

Average two-bedroom purpose-built rental in Vancouver: $2,181

Average two-bedroom purpose-built rental in Victoria: $1,839

Average two-bedroom purpose-built rental in Canada: $1,359

Rental vacancy rate in Vancouver: 0.9 per cent

How much more do new renters in Vancouver pay compared with renters who have occupied their home for at least a year: 27 per cent

This report by The Canadian Press was first published Oct. 17, 2024.

The Canadian Press. All rights reserved.

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B.C. voters face atmospheric river with heavy rain, high winds on election day

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VANCOUVER – Voters along the south coast of British Columbia who have not cast their ballots yet will have to contend with heavy rain and high winds from an incoming atmospheric river weather system on election day.

Environment Canada says the weather system will bring prolonged heavy rain to Metro Vancouver, the Sunshine Coast, Fraser Valley, Howe Sound, Whistler and Vancouver Island starting Friday.

The agency says strong winds with gusts up to 80 kilometres an hour will also develop on Saturday — the day thousands are expected to go to the polls across B.C. — in parts of Vancouver Island and Metro Vancouver.

Wednesday was the last day for advance voting, which started on Oct. 10.

More than 180,000 voters cast their votes Wednesday — the most ever on an advance voting day in B.C., beating the record set just days earlier on Oct. 10 of more than 170,000 votes.

Environment Canada says voters in the area of the atmospheric river can expect around 70 millimetres of precipitation generally and up to 100 millimetres along the coastal mountains, while parts of Vancouver Island could see as much as 200 millimetres of rainfall for the weekend.

An atmospheric river system in November 2021 created severe flooding and landslides that at one point severed most rail links between Vancouver’s port and the rest of Canada while inundating communities in the Fraser Valley and B.C. Interior.

This report by The Canadian Press was first published Oct. 17, 2024.

The Canadian Press. All rights reserved.

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No shortage when it comes to B.C. housing policies, as Eby, Rustad offer clear choice

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British Columbia voters face no shortage of policies when it comes to tackling the province’s housing woes in the run-up to Saturday’s election, with a clear choice for the next government’s approach.

David Eby’s New Democrats say the housing market on its own will not deliver the homes people need, while B.C. Conservative Leader John Rustad saysgovernment is part of the problem and B.C. needs to “unleash” the potential of the private sector.

But Andy Yan, director of the City Program at Simon Fraser University, said the “punchline” was that neither would have a hand in regulating interest rates, the “giant X-factor” in housing affordability.

“The one policy that controls it all just happens to be a policy that the province, whoever wins, has absolutely no control over,” said Yan, who made a name for himself scrutinizing B.C.’s chronic affordability problems.

Some metrics have shown those problems easing, with Eby pointing to what he said was a seven per cent drop in rent prices in Vancouver.

But Statistics Canada says 2021 census data shows that 25.5 per cent of B.C. households were paying at least 30 per cent of their income on shelter costs, the worst for any province or territory.

Yan said government had “access to a few levers” aimed at boosting housing affordability, and Eby has been pulling several.

Yet a host of other factors are at play, rates in particular, Yan said.

“This is what makes housing so frustrating, right? It takes time. It takes decades through which solutions and policies play out,” Yan said.

Rustad, meanwhile, is running on a “deregulation” platform.

He has pledged to scrap key NDP housing initiatives, including the speculation and vacancy tax, restrictions on short-term rentals,and legislation aimed at boosting small-scale density in single-family neighbourhoods.

Green Leader Sonia Furstenau, meanwhile, says “commodification” of housing by large investors is a major factor driving up costs, and her party would prioritize people most vulnerable in the housing market.

Yan said it was too soon to fully assess the impact of the NDP government’s housing measures, but there was a risk housing challenges could get worse if certain safeguards were removed, such as policies that preserve existing rental homes.

If interest rates were to drop, spurring a surge of redevelopment, Yan said the new homes with higher rents could wipe the older, cheaper units off the map.

“There is this element of change and redevelopment that needs to occur as a city grows, yet the loss of that stock is part of really, the ongoing challenges,” Yan said.

Given the external forces buffeting the housing market, Yan said the question before voters this month was more about “narrative” than numbers.

“Who do you believe will deliver a better tomorrow?”

Yan said the market has limits, and governments play an important role in providing safeguards for those most vulnerable.

The market “won’t by itself deal with their housing needs,” Yan said, especially given what he described as B.C.’s “30-year deficit of non-market housing.”

IS HOUSING THE ‘GOVERNMENT’S JOB’?

Craig Jones, associate director of the Housing Research Collaborative at the University of British Columbia, echoed Yan, saying people are in “housing distress” and in urgent need of help in the form of social or non-market housing.

“The amount of housing that it’s going to take through straight-up supply to arrive at affordability, it’s more than the system can actually produce,” he said.

Among the three leaders, Yan said it was Furstenau who had focused on the role of the “financialization” of housing, or large investors using housing for profit.

“It really squeezes renters,” he said of the trend. “It captures those units that would ordinarily become affordable and moves (them) into an investment product.”

The Greens’ platform includes a pledge to advocate for federal legislation banning the sale of residential units toreal estate investment trusts, known as REITs.

The party has also proposed a two per cent tax on homes valued at $3 million or higher, while committing $1.5 billion to build 26,000 non-market units each year.

Eby’s NDP government has enacted a suite of policies aimed at speeding up the development and availability of middle-income housing and affordable rentals.

They include the Rental Protection Fund, which Jones described as a “cutting-edge” policy. The $500-million fund enables non-profit organizations to purchase and manage existing rental buildings with the goal of preserving their affordability.

Another flagship NDP housing initiative, dubbed BC Builds, uses $2 billion in government financingto offer low-interest loans for the development of rental buildings on low-cost, underutilized land. Under the program, operators must offer at least 20 per cent of their units at 20 per cent below the market value.

Ravi Kahlon, the NDP candidate for Delta North who serves as Eby’s housing minister,said BC Builds was designed to navigate “huge headwinds” in housing development, including high interest rates, global inflation and the cost of land.

Boosting supply is one piece of the larger housing puzzle, Kahlon said in an interview before the start of the election campaign.

“We also need governments to invest and … come up with innovative programs to be able to get more affordability than the market can deliver,” he said.

The NDP is also pledging to help more middle-class, first-time buyers into the housing market with a plan to finance 40 per cent of the price on certain projects, with the money repayable as a loan and carrying an interest rate of 1.5 per cent. The government’s contribution would have to be repaid upon resale, plus 40 per cent of any increase in value.

The Canadian Press reached out several times requesting a housing-focused interview with Rustad or another Conservative representative, but received no followup.

At a press conference officially launching the Conservatives’ campaign, Rustad said Eby “seems to think that (housing) is government’s job.”

A key element of the Conservatives’ housing plans is a provincial tax exemption dubbed the “Rustad Rebate.” It would start in 2026 with residents able to deduct up to $1,500 per month for rent and mortgage costs, increasing to $3,000 in 2029.

Rustad also wants Ottawa to reintroduce a 1970s federal program that offered tax incentives to spur multi-unit residential building construction.

“It’s critical to bring that back and get the rental stock that we need built,” Rustad said of the so-called MURB program during the recent televised leaders’ debate.

Rustad also wants to axe B.C.’s speculation and vacancy tax, which Eby says has added 20,000 units to the long-term rental market, and repeal rules restricting short-term rentals on platforms such as Airbnb and Vrbo to an operator’s principal residence or one secondary suite.

“(First) of all it was foreigners, and then it was speculators, and then it was vacant properties, and then it was Airbnbs, instead of pointing at the real problem, which is government, and government is getting in the way,” Rustad said during the televised leaders’ debate.

Rustad has also promised to speed up approvals for rezoning and development applications, and to step in if a city fails to meet the six-month target.

Eby’s approach to clearing zoning and regulatory hurdles includes legislation passed last fall that requires municipalities with more than 5,000 residents to allow small-scale, multi-unit housing on lots previously zoned for single family homes.

The New Democrats have also recently announced a series of free, standardized building designs and a plan to fast-track prefabricated homes in the province.

A statement from B.C.’s Housing Ministry said more than 90 per cent of 188 local governments had adopted the New Democrats’ small-scale, multi-unit housing legislation as of last month, while 21 had received extensions allowing more time.

Rustad has pledged to repeal that law too, describing Eby’s approach as “authoritarian.”

The Greens are meanwhile pledging to spend $650 million in annual infrastructure funding for communities, increase subsidies for elderly renters, and bring in vacancy control measures to prevent landlords from drastically raising rents for new tenants.

Yan likened the Oct. 19 election to a “referendum about the course that David Eby has set” for housing, with Rustad “offering a completely different direction.”

Regardless of which party and leader emerges victorious, Yan said B.C.’s next government will be working against the clock, as well as cost pressures.

Yan said failing to deliver affordable homes for everyone, particularly people living on B.C. streets and young, working families, came at a cost to the whole province.

“It diminishes us as a society, but then also as an economy.”

This report by The Canadian Press was first published Oct. 17, 2024.

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