Jul 13, 2022
For most investors, real estate is synonymous with housing.
Residential real estate is arguably the most valuable and accessible segment of this asset class. Its popularity has driven a disproportionate amount of capital into residential real estate — particularly from institutional funds — pushing up valuations and pushing yields lower.
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Real estate investment giants like Blackstone and iBuyers such as Opendoor Technologies continue to buy up homes — something that is likely here to stay, even with higher mortgage rates.
The gross rental yield for a typical New York apartment is just 2.9%. The dividend yield on residential REITs is also mediocre.
Low single-digit yields are tough to swallow in an environment where interest rates are rising and inflation is at 9.1%.
Investors need to look beyond residential properties. Here are some niche REITs that offer better returns.
Healthcare properties
Healthcare is the most defensive sector. Recessions and credit cycles don’t have much impact on emergency healthcare services, which makes hospitals and clinics ideal real estate targets.
Omega Healthcare Investors (OHI) focuses on nursing homes and assisted-living facilities across the US and UK. The company focuses on triple-net leases with 64 operators across these two countries.
The rapidly aging population across the Western world is a significant tailwind for Omega. The company expects consolidation in the market and organic growth for the foreseeable future.
This niche REIT offers a 9.1% dividend yield and trades at 1.7 times book value per share.
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Cannabis Warehouses
Legal cannabis has been a volatile sector. It’s still a highly regulated and intensely competitive industry. In aggregate, cannabis stocks have disappointed investors. By comparison, leasing warehouse space to cannabis producers has been a better business model.
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Innovative Industrial Properties (IIPR) owns and operates one of the largest networks of cannabis warehouses across the US. As of June 2022, the company had 111 properties comprising an aggregate of approximately 8.4 million rentable square feet with 100% leased out to state-licensed cannabis operators.
The REIT offers a 6.2% dividend yield and trades at 1.9 times book value.
Mortgage REITs
Most REITs focus on the equity portion of the properties they acquire. In other words, they put money down to buy properties, pay interest on the mortgage and collect rents — a traditional landlord model.
However, some REITs focus on acquiring mortgages and collecting rents. This is a capital-light model that could lead to better yields if managed properly.
Starwood Property Trust (STWD) is the largest mortgage REIT in the country. The Greenwich, Conn. company specializes in commercial mortgages. Since its inception, it has deployed over $83 billion to multifamily investors, oil and gas producers, hotel managers, retail stores, and enterprises for their property purchases.
Mortgage REITs like Starwood are more vulnerable to rising interest rates. That’s because the business model hinges on the net interest margin — the gap between borrowing and lending money. As interest rates rise in 2022, Starwood could see its net margin compress. Its portfolio of outstanding loans could also see lower valuations.
At the moment, the REIT offers an 8.9% dividend yield and trades at just 1.05 times book value per share. It’s clearly out of favor now but could deliver exceptional returns if interest rates plateau next year.
Starwood is an ideal target for investors with an appetite for high-risk, high-reward wagers.
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Vishesh Raisinghani is a financial journalist covering personal finance, investing and the global economy. He's also the founder of Sharpe Ascension Inc., a content marketing agency focused on investment firms. His work has appeared in Moneywise, Yahoo Finance!, Motley Fool, Seeking Alpha, Mergers & Acquisitions Magazine and Piggybank.
