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There are a few sectors and industries that income investors can turn to, virtually without fail, to find above average dividend yields. Real estate investment trusts, commonly referred to as REITs, are one such industry (others include utilities and limited partnerships).

The high dividend payouts in the REIT sector relate to two aspects of these securities. First, REITs, as their name implies, own real estate or real-estate related securities (in the case of mortgage REITs). This asset type is known for its cash flow generation. Second, REITs are structured as pass through entities for tax purposes. This allows these companies to avoid corporate taxation, but requires that the vast majority of earnings be “passed” on to shareholders as dividends. Potential investors should note that dividends shareholders receive from a REIT are taxed as ordinary income.

Just because REITs, in general, have a tendency to pay material dividends, doesn’t mean that all REITs do. Just as with other sectors, some REITs are geared toward growth and others toward income. To highlight those that fall into the latter category, we used the online screening tools of The Value Line Investment Survey to highlight those REITs with yields above the current median of 4.14% (see list below).

It is important to keep in mind that an above-average yield can be an indication that the market believes the dividend payment is at risk. That said, a high yield could also present a good buying opportunity if a company is merely misunderstood. The screen turned up several interesting REITs (see list below), including Hospitality Properties (HPT) Mack-Cali Realty (CLI).

Hospitality Properties

Hospitality Properties Trust is a real estate investment trust that presently owns 289 hotels and 185 travel centers in 44 states, Puerto Rico, and Ontario, Canada. The company spun-off TravelCenters of America (TA) to shareholders in January of 2007. Major hotel tenants/managers include TA, Marriott, InterContinental, Sonesta, Hyatt, Wyndham, Carlson, and Morgans.

Hospitality Properties posted respectable comparisons during the June period. Funds from operations (FFO) were a penny above our expectation, at $0.78 a share, equivalent to a 4% increase from the year-before tally. Hotel business fundamentals improved, as the daily rate for the company’s 287 comparable hotels rose almost 2% from last year. Hence, revenues per available room climbed mid-single-digits, to $80.69. Renovations completed helped to increase occupancy and rate improvement. Nevertheless, these comparisons include 42 hotels under renovation for at least part of the quarter, which limited profits.

Hotel performance post renovation should continue to counteract revenue decreases from revamped hotels. We look for 65 to 70 hotels to be renovated during the latter stages of this year. In aggregate, hotel overhauls are likely to cost about $228 million in 2013, with an additional $35 million for travel center improvements. However, this activity is likely to slow down, as the number of renovations will probably be cut by half next year.

Hospitality has further boosted its pipeline. We look for healthy cash flow to result in increased acquisition activity over the 3- to 5-years ahead. This should enable share net to more than double by 2016-2018 from its current level, and result in a well-covered payout. Income-oriented accounts should note that the dividend is above average compared to its REIT peers.

Mack-Cali Realty

Mack-Cali Realty is a real estate investment trust providing leasing, management, acquisition, development, construction, and tenant-related services. As of the end of 2012, it owned or had interests in 259 properties (mainly office and office/flex buildings) totaling 30.8 million square feet. Individual properties range from 6,216 to 1,246,283 square feet, and are located primarily in the northeast United States.

Mack-Cali Realty is selling its noncore assets in an effort to consolidate its business and boost shareholder value. These properties include Mack-Cali Airport, and the Liberty Corner Corporate Center in New Jersey. Rather than waste resources on developing markets where CLI has a limited presence and limited ability to grow market share, the company has chosen to redirect resources toward multifamily residential units in attractive markets. This new business might well provide more stability and growth over the long pull, but overall performance may likely take a hit in the near term as the company transitions.

Looking long term, brand development will be vital as the company expands into the multifamily segment. Even though Mack-Cali will experience sharp near-term top- and bottom-line pressure resulting from this endeavor. We think the company will need to take a measured approach so that its brand appeal is enhanced long term. Hence, though we are optimistic regarding our 3- to 5-year earnings forecast, any setback in the company’s execution could alter our outlook.

These shares have been under some pressure in recent weeks. Hence, those that have high hopes in the company’s turnaround efforts will want to take advantage of this opportunity to hop on board. Even taking into account a fairly recent dividend cut, this stock still has an attractive yield relative to other REITS under our coverage. That said, conservative accounts should note that the company is undergoing a significant overhaul and, thus, share-price volatility may be above average until the restructuring is completed.

 

Company

Ticker

Dividend Yield

Annaly Capital Mgmt.

NLY

11.35

Hospitality Properties

HPT

6.74

Digital Realty Trust

DLR

6.19

Geo Group (The)

GEO

6.09

Realty Income Corp.

O

5.6

Mack-Cali R'lty

CLI

5.57

Corrections Corp. Amer.

CXW

5.49

HCP Inc.

HCP

5.48

W.P. Carey Inc.

WPC

5.37

Liberty Property

LRY

5.35

Healthcare R'lty Trust

HR

5.27

Health Care REIT

HCN

5.16

Washington R.E.I.T.

WRE

4.78

Duke Realty Corp.

DRE

4.43

Kimco Realty

KIM

4.42

Weingarten Realty

WRI

4.38

At the time of this article's writing, the author did not have positions in any of the companies mentioned.