Interest rates are on the rise, but the S&P 500 Index still yields just 1.6% on average. For many investors, such as retirees, this simply is not enough income. Investors looking for higher levels of income should consider real estate investment trusts, otherwise known as REITs.
REITs typically own real estate properties that are leased out to tenants. With the cash flow from rents, REITs invest the proceeds in acquiring new properties. This creates a steady stream of growth over time, which then allows REITs to distribute a high level of cash to shareholders.
The following three REITs have strong business models, and currently have dividend yields above 6%.
SL Green Realty
Owner of Manhattan commercial properties, SL Green (SLG) is Manhattan's largest office landlord, owning over 70 buildings totaling 35 million square feet. The coronavirus pandemic was especially challenging for SL Green, as the shift to working from home caused many companies to vacate their office space. But SL Green continued to pay its dividend as the company managed its cash flows.
Fortunately, the recovery from the pandemic has lifted SL Green's financial results. In the 2022 first quarter, SL Green's same-store net operating income grew 9.3% over the prior year's quarter, but its occupancy rate slightly decreased, from 93.0% at the end of the previous quarter to 92.7%. As a result, its funds from operations (FFO) per share dipped 5% over the prior year's quarter, from $1.73 to $1.65. The REIT exceeded the analysts' consensus marginally (by $0.01).
Growth should return in the future, as the economy steadily recovers from the pandemic. In the first quarter, SLG signed 37 Manhattan office leases for a total of 820,989 square feet. The REIT pursues growth by acquiring attractive properties and raising rental rates in its existing properties. It also signs multi-year contracts of seven to 15 years with its tenants to secure reliable cash flows.
SLG has grown its funds from operations per share at a 3% average annual rate in the last decade. Due to the effect of the pandemic on its business, funds from operations decreased last year. However, thanks to the massive distribution of vaccines, the pandemic has begun to subside.
We expect SLG to grow its funds from operations per share at a 5.0% average annual rate over the next five years off this year's low expected level. This should be enough growth to sustain the company's dividend, while also providing for modest increases to the dividend over time. For example, thanks to expected improvement in its business, SLG announced a 2.5% dividend raise in December. SLG stock currently yields 8%.
Innovative Choice: IIPR
Innovative Industrial Properties (IIPR) is a unique REIT, because it operates in the emerging cannabis industry. The company owns properties that are used to cultivate medical cannabis. The REIT owns 109 properties in 19 states.
The booming cannabis industry has led to excellent growth for IIPR. In the most recent quarter, revenues and normalized AFFO/share were $64.5 million and $2.04, an increase of 50.4%, and 38.7%, respectively. In fact, AFFO/share growth accelerated from 33.6% in the previous quarter.
The company delivered another quarter of very high growth, with an additional six acquisitions since the beginning of the year, and recorded contractual rental escalations at certain properties. As of May 4, 100% of IIPR's properties were leased with a weighted-average remaining lease term of approximately 16.4 years, close to the previous quarter, which is once again very impressive. With its tenants enjoying resilient marijuana demand amid growing consumption, the company once again collected 100% of its contractual rent due for first quarter.
In turn, shareholders have benefited from rapid increases to the company's dividend. In March, IIPR increased its dividend by 16.7% to a quarterly rate of $1.75. The company has increased its dividend multiple times in the past year. On a year-over-year basis, the new quarterly dividend is 32% higher than the same quarterly payout last year. Shares currently yield 6%.
A UNIT of Growth
Uniti Group (UNIT) is a Real Estate Investment Trust that focuses on acquiring, constructing, and leasing out communications infrastructure in the United States. In particular, it owns millions of miles of fiber strand along with other communications real estate. In its recent past it has faced challenges due to its largest tenant filing for bankruptcy and renegotiating its lease with Uniti. The REIT, however, is now on firmer footing and is pursuing growth opportunities.
In the 2022 first quarter, AFFO per share increased 9% to $0.43 from $0.41 year-over-year. Net income stood at $0.21 per diluted share, up by $0.23 per diluted share year-over-year. Revenue grew 2.0% to $278.03 million year-over-year. Adjusted earnings before interest, taxes, depreciation, and amortization
increased 4.9% to $224.8 million from $214.2 million in the year-ago period. Uniti reported total costs and expenses of $227.8 million, down from $280.0 million in the year-ago period. Moreover, unrestricted cash and cash equivalents, and undrawn borrowing availability under its revolving credit agreement stood at around $386.6 million at quarter-end.
Meanwhile, the company raised its fiscal 2022 adjusted EBITDA guidance from $881 to $899 million, up to a new range of $884 million to $902 million.
Going forward, Uniti is primarily working to drive this growth through refinancing its debt at significantly lower rates to generate increased cash flow from existing revenue streams while also leasing up its under-utilized assets. By adding leasing to its assets, it can generate extremely high returns on investment capital as additional customers require minimal additional capital expenditures, but bring in strong cash flows.
Uniti's fiber assets are critical infrastructure in the regions in which it operates and therefore the REIT should enjoy fairly stable cash flows in the face of a recession. The main source of total returns will be a combination of its stable cash flowing business model and multiple expansion to compensation for the current deep discount in shares.
Given the low payout ratio (approximately 35% expected for 2022), significant growth upside, and the mission-critical and recession-resistant nature of Uniti's assets, the dividend looks quite safe for the foreseeable future. Shares currently yield 6.2%.