The allure of owning rental property often stems from the potential for a steady income stream. Tack on the potential returns you can reap by using leverage via a mortgage, and you’ve got a nice little combo of gains going.
To put it simply, when you buy a property with a mortgage, you’re essentially using borrowed money to control a large asset. As the property appreciates in value, you stand to gain not just on your initial down payment but on the entire property’s value, supercharging your potential returns.
However, the 2023 economic landscape has witnessed a sustained surge in interest rates. This makes taking on mortgages riskier, especially if property values stagnate or decline, leaving potential investors with a dilemma.
For those who either can’t accumulate a substantial down payment or who are hesitant to shoulder the risks associated with a high-interest mortgage, there’s another option: real estate investment trusts, commonly known as REITs.
“REITs are companies that own, operate or finance income-generating real estate properties,” says Rohan Reddy, director of research at Global X ETFs, which operates the Global X SuperDividend REIT ETF (ticker: SRET). “They are required to distribute at least 90% of their taxable income as dividends to shareholders, which makes them a popular choice for investors seeking regular income.”
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Within the vast realm of REITs, some are especially enticing due to their high yields. However, it’s crucial to approach high-yield REIT investing with cautious optimism. While a high yield might seem attractive, it can sometimes be a red flag, indicating that a REIT is in potential distress.
“Investors need to be very careful with high-yield REITs,” says Sam Adams, CEO and co-founder of Vert Asset Management. “Some could be considered high yield simply because their stock price has fallen so much that the dividend yield looks high.”
When a REIT offers a dividend yield that seems too good to be true, it can often mean the market believes there’s a risk to the REIT’s future earnings and dividends. Essentially, a higher yield could be compensation for potential future risks, or an indication that excessive leverage is being used.
Thus, it’s paramount for investors to do their research and ensure that the enticing high yield isn’t masking underlying issues. This means assessing other fundamental REIT metrics, such as funds from operations, or FFO, occupancy rates and debt-to-equity ratios.
Respectively, these metrics help investors understand a REIT’s cash flow from its primary business activities, the demand for its properties and its financial leverage relative to shareholder equity. Investors should evaluate these ratios closely when considering a high-yield REIT.
Here are eight possible high-yield REITs that investors can buy in 2023:
| REIT | Dividend yield |
| Hannon Armstrong Sustainable Infrastructure Capital Inc. (HASI) | 9.2% |
| Boston Properties Inc. (BXP) | 7.3% |
| Omega Healthcare Investors Inc. (OHI) | 8.1% |
| Healthpeak Properties Inc. (PEAK) | 7.7% |
| EPR Properties (EPR) | 7.7% |
| Annaly Capital Management Inc. (NLY) | 16.7% |
| Blackstone Mortgage Trust Inc. (BXMT) | 12.4% |
| KKR Real Estate Finance Trust Inc. (KREF) | 16.5% |
Hannon Armstrong Sustainable Infrastructure Capital Inc. (HASI)
“For high yield at a steeply discounted price, check out HASI, a hybrid REIT that designs, builds and finances renewable energy projects,” Adams says. “Demand for renewable energy isn’t going away, so this is a REIT for those who like their investments green and clean but can hold on through the higher volatility.” HASI is currently paying a 9.2% yield.
HASI’s portfolio has a much greater focus on energy efficiency and sustainable infrastructure projects compared to traditional REITs. It focuses on buildings deploying modern heating, ventilation, air conditioning, lighting and power systems that prioritize clean energy sources like solar power, giving the REIT an environmentally conscious focus.
Boston Properties Inc. (BXP)
“BXP is a good example of a REIT that owns desirable downtown properties but had their stock knocked down about 15% in the last three months,” Adams says. “We hold BXP in the Vert Global Sustainable Real Estate Fund because they are a leader in sustainability, which we consider to be an additional benefit.” Currently, BXP is paying a 7.3% yield.
Office REITs like BXP are currently still grappling with lower occupancy rates in urban locations due to lingering work-from-home trends resulting from the COVID-19 pandemic. Should a return-to-office trend become the new norm, BXP’s properties in metropolitan locales like New York, Boston, San Francisco and Washington could benefit from tailwinds.
Omega Healthcare Investors Inc. (OHI)
Investors looking to avoid the unpredictability of office REITs can opt for a high-yield pick like OHI, which owns, operates, and leases a portfolio of nursing, rehabilitation, acute care and assisted living facilities, along with medical offices. The REIT’s price was hard-hit as a result of the COVID-19 pandemic and has yet to recover to pre-January 2020 highs. Currently, OHI is paying an 8.1% yield.
“OHI’s long-term, triple-net lease structures combined with fixed rates on 99% of its outstanding debt have helped shield it from the forces impacting the real estate sector,” Reddy says. “Built-in annual rent escalators on its agreements also help outstanding leases keep pace with inflation, and the weighted average length of its outstanding lease terms at 9.4 years reduces the likelihood of short-term turnover.”
Healthpeak Properties Inc. (PEAK)
“Long-term care facilities comprise a historically stable sector of the real estate market, which has held up well in the backdrop of rising rates and market volatility,” Reddy says. “This can be attributed to tight supply buoyed by a delayed construction pipeline, increased investor interest in alternative asset classes and strong secular tailwinds from an aging population.”
Another health care REIT to consider is PEAK, which not only operates retirement community spaces, but also provides laboratories and medical office space for pharmaceutical, biotechnology and medical device manufacturers. Shares of this REIT are currently down around 36% year to date as of Oct. 31. As a result, PEAK’s annual dividend yield currently sits at around 7.7%. Investors will want to digest the just-announced Oct. 30 merger with Physicians Realty Trust (DOC) in a $21 billion tie-up. While the companies said they expected synergies from the deal, it’s not been approved yet and those cost savings will take time to materialize. PEAK is best played by investors with a long-term focus.
[10 Best Health Care Stocks to Buy for 2023]
EPR Properties (EPR)
Instead of trying to pick the best high-yield REITs by their affiliated sector, investors can opt to take a broad approach via a diversified REIT like EPR. This REIT owns properties leased to entertainment tenants, generally consisting of megaplex theaters, retail centers, resort lodging and fitness clubs. Notable tenants include Six Flags Entertainment Corp. (SIX) and AMC Entertainment Holdings Inc. (AMC).
“EPR benefited from strong consumer spending tailwinds in the wake of the pandemic and saw its revenue exceed pre-pandemic levels in early 2023,” Reddy says. “It also capitalized on shifting preferences among younger consumers for ‘experiential’ spending, as travel spending drove growth among discretionary sectors.” Right now, investors can expect a dividend yield of 7.7%.
Annaly Capital Management Inc. (NLY)
NLY is a unique type of REIT called a mortgage REIT. These REITs do not typically own, lease or operate a portfolio of properties. Instead, they usually invest in mortgage-backed securities. This investment approach can offer higher yield potential, especially in environments where the spread between short-term borrowing costs and the yield from these securities is favorable. Right now, NLY yields 16.7%.
“Going forward, mortgage REITs may continue to face challenges in the face of rate uncertainty, but they do offer an interesting opportunity should rates begin to stabilize,” Reddy says. Year to date, NLY has fallen around 18%, largely due to the narrowing of the spread between borrowing costs and the returns on its mortgage-backed securities, which reduced its profit margins.
Blackstone Mortgage Trust Inc. (BXMT)
BXMT, another mortgage REIT, falls under the Blackstone Inc. (BX) umbrella, the largest owner of commercial real estate globally. Currently, the firm owns a portfolio of 185 senior loans totaling $22.1 billion worth of principal, backed by diversified holdings across the U.S., Western Europe and Australia. Investors in BXMT can currently expect a 12.4% yield.
“BXMT’s loan portfolio remains resilient, reflecting the strong credit quality of its underlying holdings,” Reddy says. “Ninety-five percent of its loans continue to perform in 2023, despite a nearly 300-basis-point jump in rates since September 2022.”
According to Reddy, BXMT manages cash flow, interest rate and currency risk effectively via debt-asset maturity matching, index options and currency hedging techniques.
KKR Real Estate Finance Trust Inc. (KREF)
“Mortgage REITs came under pressure in 2022 due to the exposure of their underlying portfolios to rising rates,” Reddy says. “However, some mortgage REITs holding floating-rate assets saw their earnings grow, particularly on loans connected to high-quality, class-A real estate.” A great example is KREF, which owns a portfolio of senior loans that are virtually all floating rate.
KREF’s loan portfolio is mostly backed by multi-family residential properties, with the next-highest exposures being commercial offices and industrial properties. Geographically, the majority of the REIT’s portfolio is held in Florida, California, New York and Massachusetts. KREF is down around 17% year to date, but as a result it now pays a high dividend yield of 16.5%.
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8 Best High-Yield REITs to Buy originally appeared on usnews.com
Update 11/01/23: This story was previously published at an earlier date and has been updated with new information.
