2 High Yield Real Estate Stocks for Income Investors

The real estate sector is an attractive investment option for income investors, thanks to high dividend yields. Many real estate companies are incorporated as Real Estate Investment Trusts (REITs), which enables companies to take advantage of a special tax status and deduct dividends from taxable income.

During the pandemic, REITs were significantly impacted, due to lockdowns that weighed on commercial real estate. Since then, the industry has rebounded and continues to be a compelling option for income investors.

Today, I will analyze two REITs: Realty Income Corp. (O) and New Residential Investment Corp. (NRZ).  O has a 4% dividend yield and NRZ has a 8.65% dividend yield, which makes them attractive for dividend investors.

Realty Income Corp. (O)

O is a Real Estate Investment Trust (REIT), specialized in acquiring and managing freestanding commercial properties under a long-term net lease agreement. The company owns and operates a diversified portfolio of 6,592 properties with an occupancy rate of 97.9. O is operating in 51 separate industries located in 49 the United States (U.S), Puerto Rico, and the United Kingdom (U.K.) with approximately 110.8 million square feet of leasable space. O’s property types include Retail, Industrial, Office, and Agriculture.

Since the beginning of the year, O has gained 14%, however it has significantly underperformed the Vanguard Real Estate ETF (VNQ), which has rallied more than 28% year-to-date.

O’s fundamentals remain robust after the pandemic, as its financials have been only marginally impacted by the COVID-19 crisis. According to the consensus of analysts, O is expected to maintain a healthy top-line growth rate, with net sales advancing 16.2% this year to $1.81b, but should decelerate moderately in 2022, up only 10.1M year-on-year to $1.99b.

On the other hand, after the moderate drop of O’s bottom line in 2020, down 9.4% year-on-year to $395m, the company’s net income should advance rapidly, up 43.3% to $566m, but is expected to slow down in 2022, up 21.4% to $687m. This double-digit growth should, however, provide a compelling net margin of 34.4% in 2022, which is one of the highest of the company in the past years.

Nevertheless, the company’s financial structure is better balanced than its peers. Even if O’s net debt has increased rapidly this year, up 24% to $9.91b, it is expected to maintain a leverage ratio of 5.38x in 2022, which is low for the REIT industry.

Moreover, at its actual price, O provides a moderate annual dividend yield of 4%. The company is trading at a 2022e P/B ratio of 2.2x and posts a 2022e EV/Revenue of 20.1x, which is quite expensive compared to its peers.

New Residential Investment Corp. (NRZ)

New Residential Investment Corp. is a provider of capital and services to the mortgage and financial services industry. The company operates through six segments: Origination, Servicing, MSR Related Investments, Residential Securities and Loans, Consumer Loans, and Corporate. The Company’s investment portfolio includes servicing related investments, operating entities, servicing related businesses, mortgage servicing rights (MSRs), servicer advance investments, servicer advances receivable, residential securities and loans, residential mortgage loans, and consumer loans. 

NRZ advanced 16.3% in 2021, underperforming its iShares Mortgage Real Estate Capped ETF (REM) which is up almost 20% YTD.

NRZ’s top-line performance is expected to improve, as the REIT’s net sales are estimated to surge 58.6% this year to $3.08b, but should decelerate steeply in 2022, up only 0.9% to $3.11b.

However, the company has suffered significantly from the pandemic, as it saw a substantial loss of $1.46b in 2020, after the reporting of a massive non-cash item of $3.5b over the year. However, NRZ’s net income is expected to jump this year to $693m and continue to accelerate in 2022, up 9.4% year-on-year to $758m.

NRZ’s balance sheet is highly levered, with net debt of $26.24b in 2020 and a massive debt on equity ratio of 473.56x, the REIT is highly-leveraged and is prone to a higher default risk than its comparable.

Despite that, the capital provider offers a compelling dividend yield of 8.65% per year, which is very attractive to income investors. Moreover, its valuation metrics are cheaper than O’s, as the company is evolving at a 2022e P/B ratio of 0.95x, representing a discount of 5% compared to its book.