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REITs: Playing Landlord Never Paid So Well

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REITs, Real Estate Investment Trusts, are one of the stock markets best sources of high yield. REITs investing in real estate capture income from rents and mortgages to deliver returns to shareholders. With property value and rents on the rise, REITs are going to see big gains in the next few years. Find out what you need to know in this article. Click Here To Go Straight To The Top REIT’s of 2018

REITs Investing isn’t as simple as owning traditional stocks. They have different tax implications than traditional stocks that should be considered before purchasing. We’ll help you understand what you need to know so you can profit with REITs 2018 and for years to come.

REITs stock are included in the real-assets asset class and a good choice for investors looking to diversify. REITs, as a real asset, also have some protection from inflation as their values are closely linked to the dollar. Real assets include natural resources and infrastructure along with real estate.  We’ll explore the world of REITs in this article and give you our top picks for 2018.

REITs

REIT Investing Is Actually An Unparalleled Opportunity

Are REITs a good investment in 2018? Only if you are looking for diversification, a hedge against inflation and market beating returns. REITs fit all three but are not an asset class investors should flock to without due diligence. Not all REITs are the same and there are tax factors to consider.

REITs investing

What are REITs and REITs investing? REITs are Real Estate Investment Trusts, a trust fund whose sole purpose is to invest in real estate and pay profits to shareholders. Because they are incorporated and listed on the public equities market (the New York Stock Exchange or NASDAQ) their shares are tradable just like an ordinary stock.  

A question many investors ask is do REITs pay dividends, and the answer is a resounding yes. The whole point of a REIT is to deliver returns to its shareholders. The problem is that each REIT is focused on a specific segment of the real estate economy, such as apartments, retail or health care, which makes choosing the right ones at the right time very important.

Not every portion of the real estate economy does well at the same time and the retail sector is only one example. The retail sector, and specifically the brick & mortar retailers, have been under increased competition from online shopping and pose a risk to REITs focused on that sector.

Since we’re talking about high-yield investments, taxes are an inevitable part of the conversation. Are REITs tax efficient when compared to traditional stocks? Not exactly but they offer above average dividends when compared to the broad S&P 500 and could easily fit into any income-based investment strategy.

REITs Investing And The Tax Man

REITs are less tax-efficient than qualified dividend paying equities but this is not a reason to avoid them.  REITs pay out about 65% of their earnings as ordinary income which makes the effective tax-rate closer to 20% compared to the lower rates (0%-15%) for qualified dividends. Qualified dividends are dividends from US listed equity companies that meet IRS criteria to be taxed at the advantageous long-term capital gains rate. Most dividends from S&P 500 companies are qualified dividends.

The trade off is that REIT funds receives tax advantages they can use to reinvest or pass on to shareholders. The choice between qualified dividends and REIT dividends is getting lower yield with lower taxes or higher yield with higher taxes. What investors need to remember is that a 6% yield taxed at 20% results in a 4.8% effective return, a full percent higher than the average S&P 500 dividend yield, and many REITs yield well above 6%.

Under the new US tax laws capital gains are taxed as follows. There are two categories for taxes, short term capital gains and long term capital gains. Short-term capital gains are, profits made on stocks held less than one year, long term capital gains are profits made on stocks held more than one year. The lowest two tax brackets will pay 0% long-term capital gains tax on their qualified dividends compared to dividends from a REIT. The next four tax brackets, 25%, 28%, 32% and 35%, will all pay 15% long-term capital gains on qualified dividends, still a 5% savings over a REIT, and the top tier will pay 20% so there is no difference for those investors.

Can REITs investing make you rich? They sure can but the answer may depend on what you mean by rich. If you mean can REITs make you rich by regularly investing in a high-yield sector with a long-term investment plan then yes, they will, and we’re here to help you do that.

REITs investing

The Top REITs To Boost Your Portfolio Returns

What REITs to invest in depends on their dividend but more importantly on the health of the dividend payment. REITs stocks with income troubles like Boardwalk REIT, an owner of apartment complexes in Alberta, Canada, can leave shareholders out in the cold. Boardwalk recently slashed its dividend by more than 50% after a protracted downturn in the Alberta economy left them with low occupancy rates and dwindling cash flow. Not only did shareholders too slow to exit the investment have their distributions cut, the value of their shares fell sharply as well. In 2018 REIT investors are advised to avoid the higher-yield (above 9%) funds in favor of those with solid portfolios, high quality tenants and potential for growth.

High Yield And Growth For Your REITs Portfolio

1 – Apple Hospitality REIT (APLE) – Apple Hospitality REIT is a well-diversified hospitality REIT with operations focused in North America. It has strong partnerships with leading brands like Marriot and Hilton driving its growth. The company’s is one of the best managed in the industry, operating margins are among the highest in the sector, providing a healthy dividend. The distribution yields about 7% at current share prices, near $17.35, well above the average 2.75% paid by the broad market S&P 500.

REITs

Apple Hospitality REIT is a great choice for those looking for recurring monthly income and capital appreciation. The company owns and operates more than 240 hotels under the Marriot and Hilton brand umbrella’s, the largest portfolio of its kind. The average of portfolio properties is only 4 years, very young for the hotel industry, which equates to lower costs and higher profits for Apple Hospitality investors.

The stock has paid a regular dividend since the funds inception and there are no expectations the distribution will be but or cancelled. In fact, based on forecast increases in demand, room availability and RevPAR (revenue per available room) Apple Investors should expect to see 2018 revenue grow in the mid-single digits. Demand for hotel rooms is expected to increase by 1.8%, Apple projects they will have 1.9% more available rooms and will grow RevPAR by 2%.

Looking forward there is every expectation that Apple will continue to grow year-over-year revenues beyond 2018. The hotel and hospitality sector is cyclical in nature, doing well when the general economy is doing well, and the general economy is doing very well. GDP growth expanded faster than expected in 2017 and is projected to grow at an average pace above 3% for the next 3 to 5 years. This will provide the fuel for sustained revenue growth and profits for holders of Apple Hospitality shares.

Share prices for Apple Hospitality recently took a dive providing an unprecedented opportunity for this investment. Share prices fell in tandem with the broad stock market correction which occurred in February. The correction was sparked by a hot Average Hourly Earnings figure that led to fear of inflation and rising interest rates. Because the real estate sector is interest rate sensitive, higher rates means lower profits on new portfolio investments, the REITs were hit extra hard. This has left shares of APLE REITs trading at historic lows despite positive performance and outlook.

When looking at new REIT stocks, or any high-yield investment, we consider the potential for total returns, not just dividend returns. Total returns are a combination of dividend distributions and capital gains. Our 12 month price target for Apple Hospitality is just over $20 which, when added to dividend distributions, means total returns near 25%.

Re-development Is Your Key To Superior Profits

2 – Federal Realty Investment Trust (FRT) – Federal Realty Investment Trust is a fund which primarily operates in the shopping center segment of the market. I say primarily because they are also making a name for themselves in the redevelopment of old shopping and industrial spaces into those trendy, self-contained, multi-use facilities that have sprung up across America. You know the ones I mean, those instant communities that mix condominiums, office, retail and hospitality space into a destination location for homeowners and consumers. This is important because the fund is shifting away from pure retail in a time when retailers are having a hard time.

REITs

At first glance Federal Realty Investment Trust may not be all that attractive. It is one of the lower yielding REITs 2018 has to offer but there is a mitigating factor. The company has a long history of dividend increases, over 50 years, and is one of the 51 Dividend Aristocrats. The Dividend Aristocrats REITs are stocks that have raised their dividends every year for at least 25 years. Not only that, Federal Realty Investment Trust is also one of only 22 Dividend Kings, those with 50 years or more of dividend increases.

With this in mind investors can expect two things. The first is that their distribution going to be increased this year and, most likely, every year hereafter. The second is that with each increase new investors will come into the market to help support share prices and drive capital gains, both of which equate to exponential growth of annualized total returns.

Federal Real Estate Trust is also supported by the cyclical nature of today’s stock market. With the US economy expanding at the fastest pace in a decade and the creation of new households at an all-time high there will be no shortage of tenants for Federal Real Estate Trust or clientele for those tenants engaged in business, retail and services.

The Federal Real Estate Trust share price has recently hit a 2 year low and is now bouncing from a strong support level near $110. This level was reached on underperformance relative to the broad market S&P 500, the company was growing revenues but not as fast as the average S&P 500 company, and has created an historical opportunity for new investors. Our twelve month price target is near $150 for an annualized total return of 35%.

Focus On Growth Markets To Boost Your REITs Returns

3 – Welltower (WELL)  – Welltower is a healthcare REIT and one that is well-supported by demographic trends. The company specializes senior care, post-acute community rehabilitation and outpatient medical facilities, segments that are all seeing robust demand growth. Considering that the US population is the largest it has ever been (and growing), that there are more outpatient procedures being performed than ever before and more than a third of the total population is nearing or above the retirement age that growth should continue unabated for many years.

REITs investing

Welltower has been working hard over the past 8 years to restructure itself and those efforts are paying off. In 2010 about 60% of income came from private-pay sources, the preferred source as insurance, Medicaid and Medicare payments are often much lower. Now private-pay is over 90%. The increase in private-pay ratio is due to a shift in focus that will drive returns for investors. The company was originally focused on post-acute facilities but is now diversifying into the higher-demand senior care segment of the market.

According to recent data the average 85+ individual is spending $34,000 annually, double what the average 65-84 is spending, and that figure is expected to increase substantially over the next five years. The 85+ age bracket is expected to double over the next 20 years providing ample tailwinds for this stock.

The company REITs pays an annualized dividend of $3.48 per share, or just over 6.35% with share prices trading nea $55. The payout is secure, the ratio of distribution to FFO (funds from operations) is just over 82% leaving plenty of extra cash the fund can use to re-invest in new properties, or to increase the distribution. The dividend history is sound as well, the company has a ten year history of regular annual dividend increases making it a Dividend Achiever.

Shares of Welltower have been in a downtrend since mid-2017 but the move grossly undervalues the company’s earnings, distribution and outlook. The primary driver of price decline are repeated earnings and revenue misses. Not to say that Welltower has not been growing revenue and producing profits because it has. The declines are due to Welltower’s inability to meet market expectations, a condition that has created opportunity today. We expect to see Welltower shares reverse in the first half of 2018 and begin moving higher. Our twelve month price target is near $67.50 with total returns in the range of 25%.

Superior Income And Capital Gains For Your REIT Portfolio

REITs are a great source for superior income and capital gains for your portfolio. You can supercharge your total returns by following our research and stick with the sectors poised to profit from cyclical upswings and demographic trends. Our picks not only pay a great dividend, the distributions are safe and far more likely to be increased than not, as revenues and profits for these REIT stocks are going to grow over the next three to five years at least.