It's been a good year for real estate investment trusts. The Vanguard Real Estate ETF (VNQ) -- one of the largest REIT-focused ETFs -- has been in a strong rally since February, rising 15.3% intraday since Feb. 9. Let's check out one REIT I especially like -- TPG RE Finance Trust Inc. (TRTX) .
Now, investors are undoubtedly flocking to REITs for the sector's generous dividend yields at a time when the 10-Year U.S. Treasury bond's yield is fluctuating right around a paltry 3%. That works out to less than 1% once you factor in inflation.
So, I recently ran a screen of "diversified" REITs (those that aren't required by their operating agreements to invest in a single real estate class like hospitals or apartments) and looked for:
-- 5% or higher yields;
-- At least 500,000 shares of daily volume (to make sure there's liquidity).
Let's check out TPG RE Finance, which passed both criteria. But first, let's make clear that there are two different types of REITs out there.
The first invests in physical properties, which is what most people normally envision when they think of REITs. These entities are basically giant publicly traded landlords who own and manage big portfolios of properties.
But there's also a second kind of REIT that originates loans or invests in mortgage securities. Think of these less as REITs and more like mortgage ETFs.
Many investors and financial advisers are gun-shy about this second type of REIT, largely because these firms' finances are complex and often use leverage. But that's a shame in my view, because these mortgage-like REITs usually offer juicy yields -- like what you can get from TPG.
This REIT combines an 8.53% dividend yield with a $1.37 billion market capitalization. It's also one of the cheapest such REITs around, with a modest 12.47 trailing price-to-earnings ratio.
The company invests in mortgage loans with what I view as a well-though-out set of parameters. Loans must be at least $50 million in size, have a loan-to-value ratio lower than 70% and carry floating interest rates that are 300-500 basis points above the London Inter-Bank Offered Rate (LIBOR).
In other words, TPG only invests in large projects that are well-capitalized (hence the sub-70% loan-to-value ratio). And this is the best part - the firm only buys floating-rate securities, which is perfect right now because we're in a rising interest-rate environment.
According to TPG's latest annual report, the company currently owns 57 loans with a generous 6.5% "all-in" yield. The reason for this high yield is that 51.7% of these loans come from so-called "bridge financing," or loans that act as a "bridge" between a borrower's short- and longer-term funding.
TPG's loans represent a good mix of multifamily, condominium, office, hotel and mixed-use properties, with holdings skewed to the Southern United States (42.9%) and the Eastern part of the country (30.8%). But it's the firm's latest income statement that really shows the importance of floating-rate investing in this environment.
We have just three years or so of financials because TPG only went public in 2015. But for the fiscal years 2015 through 2017, interest income increased from $129 million to $199 million, while income available for distribution increased from $59 million to $94 million.
These numbers should placate any investor who likes TPG's yield but is concerned about the payout's viability. And because TPG is organized as a REIT, the company must by law distribute at least 90% of its income to shareholders.
The bottom line -- as long as TPG continues to post the types of numbers it has since going public (which it should barring a fundamental change in its corporate charter), we can expect solid income streams here.
(This article was originally sent Sept. 18 to subscribers of TheStreet's Income Seeker, a product presenting the world of opportunities in fixed income and dividend stocks. Click here to learn more about Income Seeker and to receive articles like this each day from Nick McCullum, Hale Stewart, Jonathan Heller and others.)