3 Unique High-Yielding REITs

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Investors starved for income have been reaching further and further out on the risk spectrum for yield. Here are a few real estate investment trusts (REITs) that offer decent yields and solid business models.

What's a REIT?

Real Estate Investment Trusts are pass through entities that allow ordinary investors to benefit from the income stream of institutional level properties. REITs aren't taxed at the corporate level and must pass along 90% of their earnings to shareholders. Shareholders pay taxes as if the dividends were income.

The hot REIT sector today is the highly risky mortgage REIT industry. These REITs are essentially a carry trade, benefiting from buying mortgages with borrowed money. The business model works well until it doesn't. And when it doesn't work anymore, things go south fast. Thornburg Mortgage, a once proud name in the mortgage REIT space, is painful evidence of that—Investors lost everything.

Better options

No investment is without risk. However, there are some REITs that have compelling yields without the risk of a mortgage REIT. Income investors should take a look at Whitestone REIT (NYSE: WSR), Hospitality Properties Trust (NYSE: HPT), and Government Properties Income Trust (NYSE: GOV).

Whitestone REIT

Whitestone owns and re-develops shopping centers and office buildings. It is a small REIT and differentiates itself by focusing on what management calls Community Centered Properties. Such properties are “visibly located properties in established or developing culturally diverse neighborhoods.”

It generally buys properties that have been neglected in some way. This gives the company the opportunity to re-develop them to increase their value, desirability to tenants, and rent roll. Its primary markets are Arizona and Texas, though it also has a small presence in Illinois.

The shares yield over 7% and the dividend is paid monthly. Although there is a risk in owning a company that focuses on improving down and out properties, the hefty yield is more than ample compensation.

Hospitality Properties Trust

Hospitality Properties Trust owns hotels and travel centers. The deep 2007 to 2009 recession took a material toll on the company's business and led to a dividend cut. And the quarterly payment is still well below what it was prior to the recession.

However, Hospitality owns worthwhile properties. Its 280 plus hotels are generally in good locations and operated by solid tenants. Moreover, the company has historically had very conservative leases. This gives what can be a volatile asset class a bit more stability.

The travel centers are a newer addition to the company's business model and came with a complicated purchase and spin off. Effectively, Hospitality bought Travel Centers of America, kept the property, and spun off Travel Centers as a standalone company focused on managing its former properties. This process, unfortunately, took place when the economy was heading south. Still, the travel centers are basically truck stops that dot the country's highways and would be difficult, if not impossible, to replace.

With the economy slowly picking up, both the hotels and the truck stops are likely to see increasing demand. This should lead to increasing rents for Hospitality and increasing dividends for shareholders. The recent yield, at around 7% or so, is notable from a company with a long history of solid property management.

Government Properties Income Trust

Government Properties owns exactly what it sounds like. Its 84 properties are leased to the U.S. Government (62 properties), state governments (18), and the United Nations (1).

The company came to market at the tail end of the 2007 to 2009 recession. Indeed, the recession and slow recovery have been noteworthy because of the massive increase in the debt carried by governments at all levels. That would seemingly make this REIT look like a risky investment as the country has refocused on reducing debt and spending cutbacks.

Despite those headwinds, 2012 was a decent year for the company. It was able to raise rents on new leases by over 16% in the fourth quarter, its year over year rents were up despite a slight occupancy drop, and it increased its quarterly dividend by a penny. Moreover, it continues to fine tune its portfolio, selling two properties and replacing them with larger ones over the last few months.

Despite the obvious risks, the company appears to be managing quite well. With a near 7% yield, income investors should find this stock of interest. In fact, as governments at all levels look to generate revenue, property sales may actually allow Government Properties to expand more rapidly.

REIT income

While 10% plus mortgage REIT dividend yields are enticing, most investors would be better off looking slightly lower on the risk scale. The three REITs above are good places to start.

Reuben Brewer has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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