High Yield and Safety in a REIT? Believe It!
September 03, 2009 – by Richard Band
Income investors have had a tough time of it the past two years. First, the financial industry imploded (banks, insurers, etc.), wiping out more than 20% of the dividends paid by companies in the Standard & Poor’s stock index.
Then Ben Bernanke slashed interest rates. Yields on a wide spectrum of fixed-rate paper collapsed — from CDs and money market funds to government bonds.
Many investors have concluded, ruefully, that yield and safety don’t mix. But that’s a mistake.
Granted, it’s difficult to find safe, high-yielding income investments in an ultra-low-yield world. Difficult, however, isn’t the same as impossible. After searching high and low, I’ve come up a surprisingly safe vehicle that offers an 8% yield going in (with the prospect of “pay hikes” to offset inflation in the years ahead).
This 8 percenter earns its bread from real estate. At first blush, you might think, “Real estate? Safety? Are you kidding?” As you’ll see, though, this outfit is anything but a typical landlord. They’ve put up a castle-thick financial wall around their business to protect against just the sort of storm we’re living through today.
Earn 8% With Corporate Property Associates 15
Sponsored by W.P. Carey & Co., this non-publicly traded REIT owns 367 properties in 38 states as well as eight foreign countries. Office buildings, industrial facilities, shopping centers and warehouses predominate.
Approximately 24% of CPA 15’s holdings are in France and Germany, two of the stronger economies in the European Union. If you worry, as I do, about the long-term outlook for the dollar, it makes sense to own a few tangible assets like real estate — and especially, real estate that generates rents in a (relatively) hard currency like the euro.
To limit risk, Carey leases the properties to creditworthy tenants on a long-term, “triple net” basis (the tenant pays for taxes, insurance and upkeep). As a result, the portfolio is 98% occupied, despite the economic slump. In addition, CPA 15 — like all the offerings in the CPA series, going back to 1979 — maintains a conservative leverage structure. Debt amounts to a little over half the appraised value of the properties, with the great majority of the loans at fixed rates (5.9% average rate).
Back in 2003, when CPA 15’s public offering closed, the shares sold for $10 apiece. Today, you can buy them on the “secondary” (resale) market for $8.56, including brokerage commissions — a 25% discount to the REIT’s December 31, 2008 appraisal of $11.50 per share. Quarterly distributions, well covered out of operating cash flow, work out to an 8.4% current yield.
I first recommended buying discounted CPA units on the secondary market way back in 1992. My Profitable Investing subscribers earned solid, double-digit annualized returns on those original deals, and now — courtesy of another real estate crash — we’re back for more.
What to Do Now
Because CPA 15 units don’t trade on an organized exchange, you must buy them through a broker with access to the informal secondary market. I recommend Bob Condon or Jerry Kohn of Foundation Investment Group in Berkeley, Calif. (800/899-8779). The minimum purchase is $10,000.
In the September issue of Profitable Investing (online now) Richard Band recommends another 8 percenter that deserves a place in the portfolio of anyone who wants to build a comfortable retirement. This undiscovered gem went public only two months ago, and not many analysts are covering it. Get complete details, plus Richard’s specific buy instructions, by joining Profitable Investing risk-free today.