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Aug 27, 2023

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A REIT (Real Estate Investment Trust) is one very effective way for investors to

A REIT (Real Estate Investment Trust) is one very effective way for investors to access exposure to real estate and real estate finance investments. REITs are companies that invest in, or lend to income producing real estate across the spectrum of assets. This includes retail, industrial, multi-family, storage, land, debt, and all other forms of real estate.

Investing in REITs and real estate in general is a useful way to diversify returns from other assets like bonds and stocks. REITs can also offer large dividends, in the form of tenant rent, making owners of REITs like a landlord, and providing regular income.

Using the Zacks Rank I have identified three REITs with a high rank, and dividend yields greater than 10%.

Arbor Realty Trust

Arbor Realty Trust ABR invests in a portfolio of structured finance assets in the multi-family, single-family rental, and commercial real estate markets in the U.S.. ABR is an investor in various real estate products including bridge, mezzanine, and mortgage debt, as well as preferred equity. Additionally, ABR is not be subject to federal corporate income taxes if it distributes at least 90% of its taxable income to its stockholders

Arbor Realty Trust is part of a subset of REITs that act as portfolio managers of various real estate financial products, rather than actual managers of physical real estate. All the REITs in the article are debt and financial product managers.

ABR currently earns a Zacks Rank #1 (Strong Buy), indicating positive earnings revisions trend. Because of the rapid rise in interest rates over the last year ABR, along with many other real estate finance businesses, are now earning more interest on their loans.

Currently trading at 8x one-year forward earnings, ABR is below its 10-year median of 10x and well off its high of 18x. To further sweeten the deal, Arbor offers a 10.5% dividend yield, padding the pockets of its investors.

Image Source: Zacks Investment Research

ABR has been raising its dividend consistently for a decade, and has increased the payment by an average of 11% over the last five years.

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Apollo Commercial Real Estate Finance

Apollo Commercial Real Estate Finance ARI is a $1.6 billion market cap REIT with a 12% dividend yield. ARI operates under the well-known private equity and alternative asset management Apollo Global Management.

ARI is a real estate investment trust that primarily originates and invests in senior mortgages, mezzanine loans and other commercial real estate-related debt investments collateralized by properties throughout the United States and Europe. ARI offers financing across the spectrum of commercial real estate types.

ARI boasts a Zacks Rank #1 (Strong Buy), indicating a strong earnings revision trend. Apollo Real Estate Finance has, and continues to benefit from the rising interest rates environment. In the chart below we can see the 2023 EPS estimates have shot up over the last 30 days. Current quarter sales growth is projected to grow 33% to $74 million, and current quarter earnings are expected to grow 23% to $0.43 per share.

Image Source: Zacks Investment Research

ARI trades at a one-year forward earnings multiple of 7.5x, which is in line with the industry's average, and below its 10-year median of 10x.

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Two Harbors Investments Corp

Two Harbors Investment Corp TWO is a Real Estate Investment Trust that focuses on investing in, financing and managing residential mortgage-backed securities and mortgage loans. Two Harbors invests in a portfolio of mortgage-backed securities, focusing on security selection and the relative value of various sectors within the mortgage market.

It is worth noting that TWO stock hasn't performed very well over the last decade, down -38% over that period, underperforming its industry average. So, while the 14.4% dividend yield is extremely appealing, it should be noted how the stock has performed historically.

Image Source: Zacks Investment Research

TWO currently has a Zacks Rank #1 (Strong Buy), indicating upward trending earnings revisions. Additionally, the stock is trading at a one-year forward earnings multiple of 11x. This is above the industry's average of 8x, and above it's 10-year median of 9x.

Image Source: Zacks Investment Research

Bottom Line

REITs are a great way for investors seeking high dividends to build passive income. Because of the new economic environment of higher interest rates, real estate, and its associated debt is going to be earning higher cap rates and yields. It should be noted that when interest rates increase, assets prices, which are inversely correlated to rates, will go down.

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