3 High-Yield REIT Picks For December 2017, Dividends Up To 14%

This research report was jointly produced with High Dividend Opportunities co-authors Jussi Askola and Philip Mause.

During the year 2017, investors have favored "growth stocks" which have strongly outperformed at the expense of "value stocks", and notably "value dividend stocks". Investors have been under-allocating Property REITs, BDCs, and Midstream MLPs in favor of growth and momentum stocks such as Technology and FANG stocks (FANG being Facebook (NASDAQ:FB), Apple (NASDAQ:AAPL), Netflix (NASDAQ:NFLX), and Google (NASDAQ:GOOG) (NASDAQ:GOOGL)). This has resulted in very high, and even excessive valuations, for many of these stocks.

The good news is that today, Property REITs, BDC Companies, and Midstream MLPs are trading at their lowest valuations in years and currently offer investors a unique entry point.

In the recent months, we have been very busy with the REIT sector (as well as with other High Yield sectors) which presented a large number of new opportunities. The market sentiment is today turning more and more pessimistic on certain specific names as a result of concerns over many factors. This includes the state of the retail industry, interest rate hikes, and even potential changes to tax policies. This led to large sell-offs, causing many REITs to drop to levels where the risk-to-reward outcomes appear increasingly interesting.

In this article, we aim to shortly outline our buy theses for 3 picks that we have covered in detail at "High Dividend Opportunities", whereby many of our subscribers and followers are today invested in these names and enjoying high dividend yields, along with other high dividends from other sectors that we cover.

Source

Pick #1: SOHO, High Yielding Hotel Opportunity, 7.6x FFO, 6.5% Yield

• Sotherly Hotels (NASDAQ:SOHO) is a small cap hotel REIT with a particularly strong and convincing buy thesis. It combines extreme value with share buybacks, positive guidance, a high yield and a favorable track record.


• Trading at 13% AFFO yield, the REIT pays out 6.5% dividend yield (which is covered at 200%), and reinvests the remaining in growth. This appears particularly inexpensive in a market where the broad REIT market at 19x FFO. There is more risk as a result of the small size and higher leverage, but the valuation gap is way excessive, in our opinion.


• The Price to NAV provides additional evidence that Sotherly may be grossly undervalued. Rough estimates indicate up to a 50% discount to NAV at the current share price, making the recent share buybacks very accreditive.


• Despite trading at a deep value share price, the track record has been relatively favorable with impressive growth. Moreover, the 2017 guidance is very encouraging. The management team is expected to generate an AFFO per share with a midpoint $0.92 - or a 2% increase in AFFO compared to 2016. This is despite the hurricane season which had a one-time effect on the REIT"s bottom line. Guidance prior to the hurricanes was at $1.05 (mid-range) or an increase in AFFO by 16.7%. Therefore, 2018 FFO is likely to grow at a faster rate, barring another hurricane disaster.


• The dividend yield stands currently at 6.5% and represents only about 50% of its expected 2017 cash flow. Many high-yield stocks come with low/no growth, and yet, Sotherly has more than doubled its payout in the last three years alone.

Conclusion: There is a lot to like in Sotherly at today"s price. Despite the price having already increased by 15% since publishing our initial thesis, it remains one of the cheapest REITs out there as measured by its low AFFO multiple and high discount to NAV. Yet it owns a well performing portfolio and is being well managed. The market is today focused on short-term issues and high debt load and seems to forget the big picture. Sotherly has issued a positive guidance, owns good assets, and the high dividend is very well covered.

Pick #2: WPG, High-Yielding Mall REIT, 4.3x FFO, 13.9% Yield

• Washington Prime Group (NYSE:WPG) is a Class B mall REIT that has gotten way oversold because of extreme fears over the growth of e-commerce. The market is highly pessimistic today and is pricing WPG at only 4.3 times FFO, while the company is not seeing any "major" fundamental issue.


• It is clear that e-commerce will keep on growing and certain tenants will suffer. That said, WPG is much better positioned than the retailers themselves as it can replace poorly performing tenants with superior ones and keep on collecting rent checks. So far, WPG has had no problem doing so as demonstrated by the stable occupancy rate, relatively resilient Net Operating Income (or NOI), and attractive returns on redevelopment projects.


• Despite not showing any "major" fundamental flaws, WPG is one of the cheapest REITs today based on NAV discount, FFO multiple, and dividend yield. It is trading at an estimated 40-50% discount to NAV, 4.3 times its FFO, and a 13.9% dividend yield, which is covered at 165%.


• One could point out that the cash flow is expected to keep declining a bit in the near term, but this is not due to "operational" difficulties; rather it is due to the "strategic" decision to sell lower quality malls and reduce debt. Moreover, this should not put the current dividend in danger.


• WPG has an investment grade rating and ample liquidity to keep on executing its strategic plan of redeveloping certain properties and improving its portfolio quality which should eventually lead to a higher FFO multiple. Trading at 4.3 times its FFO, even a small upward adjustment would result in sizable gains.

Conclusion: the mismatch in fundamental performance and share price performance is what makes WPG a compelling investment. While the market has seen panic selling of the shares at each negative news, WPG has been consistently collecting its rental income and has managed to maintain fairly consistent profitability. Shares are down over 60% in the past 3 years, but the cash flow and fundamentals have not deteriorated nearly that much. We expect strong price recovery eventually as the market reevaluates its extremely pessimistic sentiment.

Pick #3: LADR, Mortgage REIT Opportunity, 8x Core Earnings, 9.2% Yield

• What matters the most in the REIT space is the quality of the management team. We consider Ladder Capital (NYSE:LADR) to be one of the best managed mREITs.


• Its business model is diverse and allows it to adapt to changing market conditions. It results in superior returns to equity ("ROE"), but this comes at the expense of more volatility over the short run.


• Despite the higher ROE, LADR has maintained strong discipline in its lending as it has not experienced ANY credit loss since its inception.


• The complex business model of LADR has resulted in a cheap valuation which is only pricing the firm at about 8x its 2Q 2017 Core Earnings. As such, the market is currently not factoring in any premium to LADR"s superior management and business model.


• The 9.2% dividend yield is well covered at 130% and leaves room for further dividend growth as well as superior liquidity to the management.


• It is an internally managed mREIT with significant insider ownership. Senior management has on average 28 years of industry experience and owns $175 million (or 11.6%) of the market cap of the Company.


• A high single digit dividend yield + good potential for growth + superior management = Great shot at outperforming the market, in addition to a potential for double-digit return annually.

Conclusion: Ladder Capital sticks out as one of the highest quality mREITs as measured by its superior management and business model. Yet, it keeps trading at an attractive valuation and high-yield due to complexity risk and higher volatility in its earnings. We expect long term oriented investors to be well rewarded as long as they are patient and ignore the short-term volatility.

Final Thoughts

High yield often comes with high risk, and this is why it is always crucial to perform proper due diligence and to properly diversify your holdings. At High Dividend Opportunities, subscribers have access to 3 different portfolios with a "Core Portfolio" totaling 40 high-yield picks with an overall yield of 9.7%.

Lately, we have highlighted many deeply undervalued opportunities in the REIT sector and will continue to present the newest high yielding names to our readers. Just because the broad REIT index sells at a relatively low yield does not mean that high-yielding REITs have disappeared. Our job is to discover them and with proper due diligence, seek to identify the future outperformers in the high yield space.

In this sense, we believe that Sotherly, Washington, Ladder are set to deliver strong results going forward. In all three cases, the dividend yield is significantly above average and well covered. Moreover, given the currently low valuations, we expect strong price recovery to occur sooner or later. There is clear risk, but we consider the current risk-to-reward ratios to be very positively asymmetrical here.

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Note: All images/tables above were extracted from the Company"s website, unless otherwise stated.

Disclosure: I am/we are long SOHO, WPG, CBL, SRC.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Editor"s Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.