As we approach 2024, the economic landscape is set to undergo significant changes - particularly with the Federal Reserve expected to pivot from its long rate-hike campaign. After a lengthy stretch of raising interest rates to battle stubbornly entrenched inflation, policymakers signaled after the December meeting that three quarter-point cuts could be on the horizon for the next year.
That should bode well for dividend-paying stocks, which have underperformed this year as high interest rates and surging bond yields made alternate investments more appealing. In particular, the Fed's pivot could benefit Real Estate Investment Trusts (REITs), considering the industry tends to rely heavily on debt to acquire more real estate.
In a lower interest rate environment, high-yield investments like REITs become increasingly attractive. Lower rates reduce the cost of borrowing, potentially boosting profits for these trusts. Moreover, the high dividends that REITs offer can provide a steady income stream, making them a compelling choice for investors in a time of lower returns on other types of investments.
Against this backdrop, let's take a look at three high-yield REITs worth scooping up at current levels - Innovative Industrial Properties Inc. (IIPR), Apple Hospitality REIT Inc. (APLE), and Redwood Trust Inc. (RWT).
IIPR: The Cannabis REIT with a 7% Yield
Innovative Industrial Properties (IIPR) is a specialized REIT that's been making some serious moves in the cannabis industry, leasing primarily industrial space (and some retail) to state-licensed operators. IIPR's portfolio includes 108 properties leased to 29 tenants across 19 states, covering a massive 8.86 million rentable square feet.
And they're not just expanding their real estate holdings; they're also growing their dividends. They've increased dividends for five consecutive years, and now pay out $1.82 quarterly - which translates to a healthy yield of 7.31%.
When it comes to earnings, IIPR has been hitting it out of the park, exceeding analysts' bottom-line estimates for four consecutive quarters. While the stock is up just 2.6% year-to-date, it's reasonably valued at current levels. The shares are priced at 11 times adjusted forward funds from operations (FFO), which is a discount to the real estate sector median.
Analysts are moderately bullish about IIPR. They have a consensus target price of $107.80, suggesting a potential 7% upside from the current price. Out of four analysts offering recommendations, one suggests a “strong buy,” while three more call it a “hold.”
APLE: Tap Into High-End, High-Yield Travel
Apple Hospitality REIT (APLE) has been getting its groove back in 2023. This hotel-focused REIT has watched occupancy, revenue, and earnings start climbing compared to last year across its portfolio of upscale U.S. hotels - which is heavily skewed toward higher-end brands like Hilton (HLT) and Marriott (MAR).
Investors seem to prefer APLE over some of its other high-yield stock peers, bidding up the stock price by 9% year-to-date - though the stock's performance still falls considerably short of the broader S&P 500 Index ($SPX) this year.
What's fueling the relative outperformance? The broader economic and travel recovery has helped fill more hotel rooms, while APLE's brand mix and locations have proven resilient. They've got a strong balance sheet and cash reserves. And the team is running a tight operational ship, putting capital to work strategically.
On the earnings front, APLE has met or exceeded analyst's bottom-line estimates in three of the past four quarters. And at 12.9x forward AFFO, the shares still trade at a discount to the real estate sector median. For fiscal year 2024, Wall Street is targeting 4.3% growth in both revenue and FFO.
In other recent headlines, APLE snagged a 192-room Hilton Embassy Suites in the Salt Lake City metro area for $36.8 million, further expanding their upscale footprint. The Board also declared a monthly dividend of $0.08 per share, plus a special $0.05 dividend - a nice bonus for shareholders this January. Right now, APLE offers a forward dividend yield of 5.67%.
Out of eight analysts tracking APLE, four say “strong buy” and four recommend a “hold.” The average price target is $18.33, about 8.3% above current levels.
RWT: The Mortgage-Backed REIT Under $10
Redwood Trust Inc. (RWT) is a REIT that manages a portfolio of residential and commercial mortgage-backed securities, loans, and other real estate assets - and it's had a bit of a bumpy ride in 2023. The stock is up about 6.4% on a year-to-date basis, lagging the broader equities market.
RWT's Q3 results fell short of expectations on both the top line and bottom line, and the company's GAAP book value per common share was $8.77 as of Sept. 30 - a decline of 5% year-over-year, but a premium to both current trading levels and the average analyst price target. RWT currently offers a quarterly dividend of $0.16, for an annual yield of 8.58%.
Looking ahead to fiscal 2024, analysts are targeting bottom-line growth of 43.6% for RWT, coupled with a 19% increase in revenue.
And in terms of the share price, the consensus target price of $8.30 represents upside potential of 11.6% from here. Out of 10 analysts, 7 have “strong buy” recommendations, with 1 more deeming the stock a “moderate buy,” and 2 suggesting “hold.”
Conclusion
These three high-yield REITs offer diverse real estate exposure, paired with high dividend yields and the prospect of meaningful growth in the year ahead. Declining interest rates should further boost the appeal for these REITs going into 2024, as the Fed finally prepares to shift away from its hawkish stance. For investors seeking high-yield returns, these stocks are worth a look at current levels.
On the date of publication, Ebube Jones did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
