Real estate investing has been one of the most talked about ways to increase one's wealth, allowing investors to diversify their holdings with real-world assets. However, real estate investing isn’t for the faint of heart. Some of its biggest challenges are market volatility due to economic and global conditions, and negative cashflow from taxes, insurance, and expenses to name a few. For an average investor, that is a big detraction. This is where REITs solve the problem.
What are REITs?
A Real Estate Investment Trust (REIT) is a company that owns, operates, or finances income-generating real estate. These properties range from apartment complexes to office buildings, hotels, and even shopping centers. REITs provide investors with a way to invest in real estate without the same responsibilities of a real estate owner.
REITs pool capital from multiple investors and use that money to purchase properties. Investors who then own a share of the REIT are entitled to a portion of the rental income generated by the properties. Other REITs can also engage in financing or property development to increase the potential return on their investment.
Lastly, unlike traditional real estate investments, REITs are usually highly liquid. This means that an investor can buy and sell shares in a REIT, just they would with stocks or bonds. This liquidity makes REITs an attractive investment option for investors who want exposure to real estate but need the flexibility to liquidate their investment quickly.
What Are the Types of REITs?
REITs generally have three main types, equity REITs, hybrid REITs, and mortgage REITs.
- Equity REITs - they own and manage their income-producing real estate properties. Income is generated from rent paid by tenants.
- Mortgage REITs - they invest in mortgages and other real estate loans in which they earn interest as their primary income.
- Hybrid REITs are a combination of equity and mortgage REITs wherein they operate and own properties while also investing in mortgages and real estate loans.
Why REITs?
REITs are attractive as they must distribute at least 90% of their taxable income to shareholders annually in the form of dividends and in exchange, REITs typically do not pay corporate taxes. As a result, many REITs have higher-than-average dividend yields. That said, investors should still assess the fundamentals of the REIT to ensure that dividends are sustainable before hitting the buy button. Just because the yield is attractive, it is still susceptible to market influence and risk.
With that in mind, let’s look at some high-yielding REITs that investors can include in their portfolios.
Ares Commercial Real Estate Corp (ACRE)
Dividend Yield: 15.28%
Ares Commercial Real Estate Corporation is a specialty finance company primarily engaged in originating and investing in CRE (commercial real estate) loans and related investments. Its operations are focused on originating and managing a diversified portfolio of CRE debt-related investments for the Company’s account. Its target investments include:
- Senior mortgage loans
- Subordinated debt
- Preferred Equity
- Mezzanine loans
- Other CRE investments
The Company’s portfolio is externally managed by Ares Commercial Real Estate Management LLC (the Manager). Its dividend yield is 15.28%, with a 5-year dividend growth rate of 29.63%.
Analyst Recommendation
Analysts rate ACRE as a “Moderate Buy” based on 2 Strong Buys, 1 Moderate Buy, and 2 Holds. The mean target price for ACRE is $12.17, and a high target of $14.00, an upside of 70.94%.
KKR Real Estate Finance Trust Inc (KREF)
Dividend Yield: 15.47%
KKR Real Estate Finance Trust Inc. is a real estate finance company focused on originating and acquiring transitional senior loans secured by institutional-quality CRE (commercial real estate) properties owned and operated by sponsors located in top markets with good underlying fundamentals. The company also invests in preferred equity, mezzanine loans, and other debt-oriented instruments with similar characteristics. It aims to provide its shareholders with an attractive risk-adjusted total return to its stockholders through capital appreciation and dividends over the long term. Its current dividend yield is 15.47%, with a whopping 73.74% 5-year dividend growth rate.
Analyst Recommendation
Analysts rate KREF as a “Moderate Buy” based on 2 Strong Buys, 1 Moderate Buy, and 2 Holds. The mean target s $14.30 with a high target of $18.00, an upside of 72.41%.
Granite Point Mortgage Trust (GPMT)
Dividend Yield: 18.52%
Granite Point Mortgage Trust Inc. is a real estate finance company focused primarily on directly originating, investing in, and managing senior floating-rate commercial mortgage loans and other debt and debt-like commercial real estate investments. Its investments focus on generating attractive risk-adjusted returns over the long term while preserving its stockholder's capital. The company's primary source of income for its shareholders is through dividends derived from its current income-producing investment portfolio. Granite Point also provides other services such as an intermediate-term bridge or transitional financing for various purposes, including recapitalizations, acquisitions, refinancings, and a range of business plans. Its dividend yield is 18.52%, with a 5-year dividend growth rate of 35.71%.
Analyst Recommendation
Analysts rate GPMT as a “Moderate Buy” based on 1 Strong Buy, 1 Moderate Buy, and 1 Strong Sell. The mean Target for GPMT is $8.33, and a high target of $10.00, representing a potential upside of 134.19%.
Brandywine Realty Trust (BDN)
Dividend Yield: 18.75%
Brandywine Realty Trust is a self-managed and self-administered real estate investment trust focused on acquiring, developing, developing, managing, and operating a portfolio of different properties. It owns approximately 77 properties in its portfolio, and its operations are focused in:
- Philadelphia Central Business District (Philadelphia CBD)
- Pennsylvania Suburbs
- Austin, Texas
- Metropolitan Washington, D.C.
- Other(Camden County, New Jersey, and New Castle County, Delaware.)
Its current dividend rate is 18.75%, with a 5-year dividend growth rate of 18.75%.
Analyst Recommendation
Analysts rate Brandywine Realty Trust a “Hold” based on 1 Strong buy, 2 Holds, 1 Moderate Sell, and 1 Strong sell. The mean target for BDN is $6.81 and the High target is $9.00, an upside of 137.47%.
Final Thoughts
Investing in REITs can be an excellent way to diversify any investor's portfolio, generate passive income, and gain exposure to the real estate market minus the complexity of owning the real asset. However, due diligence is still necessary for any investor looking to bet on the real estate markets, as any potential return always carries an inherent risk.
On the date of publication, Rick Orford 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.
