Real estate has long been a traditional haven for investors seeking reliable returns. Ownership of real property brings with it control of the structures on the land, and the ability to develop or improve the property. And real estate is always in demand – whether its people looking for homes, or business needing office or factory space, properties will always have customers.
Bring on the real estate investment trust (REIT). These are companies formed to acquire, own, and operate real properties. REITs are frequently constituted as publicly traded companies, as acquisition of property requires access to liquid capital, which they raise through the sale of stock. Partly to attract investors, and partly in adherence to tax regulations on investment trusts, REITs routinely pay out high dividends on their stock.
In this article, we take a look at three REIT companies. All three make their money from the value of land and its development, and all three are clobbering the S&P 500 average dividend return of 2%. It also doesn’t hurt that each of the stocks has amassed support from analysts over the last three months to earn a “buy” rating. Let’s open up the TipRanks database and get the lowdown.
Colony Capital (CLNY)
Colony is an investment firm, based in Los Angeles. The company’s main focus is on two property portfolios in gaming and resorts. Colony owns casino and hotel properties in Atlantic City and Las Vegas, as well as luxury hotels in the Raffles and Fairmont chains. In recent months, Colony has been selling off some properties and acquiring others, as part of a plan to divest itself of non-core portfolio item.
For the third quarter, CLNY reported an FFO (funds from operations – a measure of operational cash flow sometimes used by REITs instead of reporting earnings per share) of 19 cents, 26% higher than the forecasts. Revenues showed a mixed picture – at $40 million, they beat the forecast by 16%, but still came in significantly lower than the year-ago figure of $60 million.
This firm currently pays out a dividend of 11 cents per quarter, so the 19 cents FFO is more than enough to maintain the payment. The annualized payout, 44 cents, is equivalent to a yield of 8.94%, four and a half times the S&P average.
Writing from JMP Securities, 4-stary analyst Mitchell Germain is impressed by Colony’s recent portfolio moves. He notes particularly “Acquisition of Digital Bridge for $329M, brought on a well-regarded investment manager, erected a leadership transition plan, as the head of Digital Bridge is set to become CLNY’s CEO in 18-24 months, and initiated a strategy to evolve to a digital-heavy investment strategy.”
Germain rates CLNY an Outperform (i.e Buy) along with an $8 price target, which suggests over 60% upside for the stock. (To watch Germain’s track record, click here)
Randy Binner, of B. Riley FBR agrees, both on the bullish stance and the $8 price target. Binner writes, “There has been a series of recent shareholder-friendly moves including the NRE and industrial sales and the Digital Bridge acquisition/CLNY 2.0 pivot. These structural changes will remain the main focus and will determine where the dividend settles out… there is significant intrinsic value in CLNY’s balance sheet…”
Germain and Binner have given Colony its only recent analyst evaluations, explaining the stock’s Moderate Buy status. Shares are selling for a low $4.92, and the price target is $8. (See Colony stock analysis on TipRanks)
Landmark Infrastructure Partners (LMRK)
Landmark takes a slightly different approach to the REIT niche. It buys up land and properties that are in demand for wireless communication, billboards, and green energy infrastructure. In other words, Landmark owns the ground under a cellular tower or a windfarm power station. The company has properties across the United States as well as in Canada, the Caribbean, and Australia.
Landmark is always engaged in expanding its property portfolio. In the recent Q3 report, the company noted that it spent $42 million acquiring 134 assets which are expected to contribute $3.4 million in annual rents. The company is also expanding into retail kiosks, from which vendors will pay rent. There are some 300 such kiosks in the Dallas Area Rapid Transit region. LMRK generated $14.4 million in rents in Q3, down 18% year-over-year and 4% sequentially, but still sufficient to give a 20 cent per share FFO. Total rental income is described by the CFO as “stable and predictable.” LMRK stock is up 30% year-to-date.
LMRK pays out an annualized dividend of $1.47 per share, or 49 cents per quarter. This makes the yield an impressive 9.77%. While much higher than the FFO per share, it’s important to note here that REITs are subject to tax regulations requiring them to pay out a higher share of income in dividends than other publicly traded companies. Landmark has kept its dividend steady at 49 cents per share quarterly for the last two years, regardless of FFO fluctuations. The company depends on the predictability of its rent income to keep the dividend sustainable.
Liam Burke, analyst from B. Riley FBR, sees a turnaround in LMRK’s overall profitability in the near future. He writes, “Third quarter 2019 will be the final quarter of negative Y/Y rental revenue growth and the company should report traditional organic rental growth rates of low single-digits beginning 4Q19… Management is keeping keep the payout constant until distributable cash catches up to distributions, which should occur in 2020…” Burke’s $20 price target suggests a 32% upside for LMRK shares. (To watch Burke’s track record, click here)
With three “buys” set in recent weeks, LMRK holds a Strong Buy from the analyst consensus. The average price target of $18.67 is 24% higher than the current share price of $15. (See Landmark stock analysis on TipRanks)
MFA Financial (MFA)
MFA focuses on residential mortgage assets. This includes mortgage-backed securities as well as whole loans. Residential mortgages are considered a low-risk security, as the loan is backed by the value of the home and property.
In its most recent earnings report, for Q3, MFA showed an EPS of 20 cents per share. This was 11% higher than expected, and 1 cent higher than the year-ago quarter. Revenues were listed at $56.9 million, below both the quarterly forecast and the year-ago quarter. Despite the downer news for Q3, MFA shares are up 14% in 2019. While below the S&P gain of 24%, this is still considered a ‘slow and steady’ appreciation.
MFA has been paying out a steady 20 cent quarterly dividend for the last three years. The ratio is 100%, meaning that as of the current quarter, the company’s full earnings are returned to shareholders. This is an attractive feature for potential investors. In theory, it should be difficult for the company to sustain – but as an REIT, MFA is required to maintain the high payout ratio. The dividend yield is a robust 10.47%, more than 5x the average of S&P listed companies.
Wedbush analyst Henry Coffey started coverage of this stock recently, noting, “This is another quarter where MFA has been able to cover their dividend and demonstrated the benefit of their focus on managing credit risk over speeds and spread risk, and their focus on the whole loan/performing loan purchase program. Their success at this, in comparison to many of the mREIT peers, is notable.”
Coffey rates the stock a Buy and his $8.25 price target suggests a modest 8% upside to the stock. (To watch Coffey’s track record, click here)
MFA Financial has slipped under most analysts’ radar; the stock’s Moderate Buy consensus is based on just two recent ratings. With shares trading at $7.64, the $8.13 average price target suggests room for a 6% upside. (See MFA stock analysis on TipRanks)