Written by Bob Ciura for Sure Dividend
Investors who purchase Real Estate Investment Trusts, otherwise known as REITs, typically do so for dividends. There is good reason for this, as many REITs provide significantly higher dividend yields than the market average. The S&P 500 Index yields just ~1.3% right now, which is not a very attractive yield for income investors.
In addition to their steady yields, some REITs also offer investors outsized growth potential. These 3 REITs in particular have market-beating dividend yields, but also have compelling long-term growth prospects. This could lead to high total returns over the years, through a combination of dividends and capital appreciation.
Growth REIT #1: Innovative Industrial Properties (IIPR)
Innovative Industrial Properties is a unique REIT because it operates in the emerging cannabis industry. In fact, it is the only publicly traded cannabis REIT in the U.S. The company owns properties that are used to cultivate medical cannabis. As of the most recent quarter, Innovative Industrial Properties owned 73 properties in 18 states, representing approximately 6.6 million rentable square feet, which were 100% leased with a weighted-average remaining lease term of over 16 years.
The booming cannabis industry has led to excellent growth for IIPR. In the 2021 second quarter, revenue doubled compared with the same quarter last year, while adjusted FFO-per-share increased 45% year-over-year.
As of August 4, 100% of IIPR’s properties were leased with a weighted-average remaining lease term of approximately 16.7 years, which is utterly impressive. With its tenants enjoying resilient marijuana demand amid the stay-at-home economy leading to IIPR collecting 100% of its contractual rent due for Q2.
Along with its FFO growth, the company has rewarded shareholders with strong dividend growth. IIPR has increased its dividend for six quarters in a row. The most recently declared quarterly dividend of $1.50 per share represented a year-over-year dividend growth rate of 28%. IIPR shares currently yield 2.6%.
Acquisitions are a major long-term growth catalyst for IIPR. The company delivered another quarter of explosive growth, with five more acquisitions since the beginning of April and contractual rental escalations at certain properties.
With more states legalizing cannabis with each passing year, IIPR has a fantastic medium/long-term expansion trend. Because of how new the cannabis sector is, its recession resiliency is untested to the passage of time and remains to be seen.
Still, its average lease duration of 16.7 years is unparalleled to the industry. Not even the highest-quality, most mature REITs in the world get to enjoy such a lengthy lease profile, which adds to the safety of IIPR’s dividend payout.
Growth REIT #2: SL Green (SLG)
SL Green is an integrated REIT that is focused on acquiring, managing, and maximizing the value of Manhattan commercial properties. It is Manhattan’s largest office landlord, and currently has an interest in 77 buildings totaling 35 million square feet.
SL Green continues to be affected by the weak environment for office real estate, due to the lingering coronavirus pandemic. These difficult continues continue to have an impact on SL Green’s financial results, but the company is making notable progress over the course of 2021.
In the 2021 second quarter, same-store net operating income decreased-2.7% over last year’s quarter and its occupancy rate decreased from 94.2% at the end of the previous quarter to 93.6%. Its funds from operations (FFO) per share decreased by 6% over the prior year’s quarter, from $1.70 to $1.60, but only due to higher lease termination income in last year’s quarter.
Excluding this factor, FFO per share would have edged up 2%. During the quarter, SLG signed 42 Manhattan office leases at -1.1% lower rates compared to previous leases.
Although the current climate remains challenging, SL Green is an industry leader with a long track record of growth. SLG benefits from reliable growth in rental rates in one of the most popular commercial areas in the world, Manhattan.
The REIT pursues growth by acquiring attractive properties and raising rental rates in its existing properties. It also signs multi-year contracts (7-15 years) with its tenants in order to secure reliable cash flows. SLG has grown its funds from operations per share at a 4.5% average annual rate in the last decade and at a 2.2% annual rate in the last five years.
We expect the company to generate 5% annual FFO-per-share growth over the next five years. In the meantime, shares of SLG have a 5.3% dividend yield. This creates the potential for 10%+ annual returns.
Growth REIT #3: Pennymac Mortgage Investment Trust (PMT)
PennyMac Mortgage Investment Trust invests in residential mortgage loans and mortgage–related assets. The trust focuses on creating mortgage–related assets through their correspondent production activities, which includes mortgage servicing rights.
PennyMac operates as a mortgage real estate investment trust (mREIT). Pennymac has $2.3 billion of equity invested in three strategies: credit sensitive strategies, interest rate sensitive strategies and correspondent production. PMT has $2.3 billion of equity invested in three strategies: credit sensitive strategies, interest rate sensitive strategies and correspondent production. PMT had assets of $11.5 billion at the end of last year. The stock has a $1.9 billion market cap.
As a mortgage REIT, PMT has unique risk factors that investors should consider before buying. But for investors comfortable with the risks, quality mortgage REITs such as PMT could generate strong returns. The primary reason is the extremely high dividend yield of 9.5%.
2021 has seen improving fundamentals for PMT. In the 2021 second quarter, PMT reported net income of $31.9 million, or $0.32 per diluted share for the second quarter. Net income per share of $0.32 was highly unfavorable compared to its $0.67 earned in the same prior year period. Net investment income earned in the second quarter totaled $121.6 million, down 39% year-over-year.
The book value per share grew from $20.30 on December 31, 2020 to $20.77 on June 30, 2021. In the second quarter, the company added $413 million in new MSRs. This bodes well for future growth. The payout ratio has historically been volatile for PMT, and this increases the risk of the dividend being in danger once again in the future. Expectations for 2021 place the dividend in safe territory for now.
The mortgage-backed security industry is highly dependent on interest rates and leverage, and thus with lower rates earnings can be somewhat muted for the near term. PennyMac’s competitive advantage is in its position as the largest correspondent aggregator, which will help the trust in increasing sales of mortgage servicing rights (MSR) as mortgage banks continue reducing their cash-intensive retention of MSRs.