Real estate investing, whether through real estate stocks or directly in properties, is all about income. You buy real estate, sometimes you fix it up or completely develop it, and then you rent it out. Over time, the combination of leverage and rising rents produces plenty of profit.
Unsurprisingly, the most popular type of real estate stocks, real estate investment trusts, or REITs, typically sport high dividend yields -- sometimes in the double digits. Knowing that, many investors avoid real estate stocks with low dividends, so if a REIT doesn't have a high dividend, what's it doing wrong?
The three stocks we're going to look at, Weyerhaeuser (WY -0.54%), Farmland Partners (FPI 1.63%), and Howard Hughes Corp. (HHH 2.15%), all occupy different niches of the real estate market and for one reason or another have (relatively) low dividend yields. Let's take a look at each one and discuss whether they may still be good buys.
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1. Weyerhaeuser
Frederick Weyerhaeuser founded the company in 1900 with 900,000 acres of timberland. At that time, it was the largest purchase of timberland in U.S. history. Today, Weyerhaeuser is a timberland REIT that holds 11 million acres of timberland in the U.S. and leases to operate another 14 million in Canada.
The REIT harvests about 2% of its forests per year and replaces each tree that is cut down. The company's manufacturing units produce engineered lumber, plywood panels, and other wood products. According to the company's investor presentation, each of these subsidiaries is the top one or two in EBITDA (earnings before interest, taxes, depreciation and amortization) margin in its industry.
The dividend yield is 1.80%, above average for a normal company but probably a little lower than you'd be looking for with a REIT. The good news is that number doesn't really reflect the actual payout. The company understands that wood prices are volatile, and it sets a low base dividend that it can meet at all times. When wood prices are up (as they are right now), it pays additional special dividends to make up for the low base dividend. This means Weyerhaeuser and its investors alike benefit from inflation.
The REIT's 2021 net income was up 226% over 2020, and on the heels of its earnings report, it declared a $1.45 a share supplemental dividend. For comparison, its regular dividend in 2021 amounted to $0.68 a share on the year, and the supplemental dividend was just $0.50 a share. So as long as wood prices stay high, Weyerhaeuser shareholders will benefit.
2. Farmland Partners
Farmland Partners is also an inflation beneficiary. It is a farmland REIT that owns and leases land to farmers. Investors are very aware of the benefits of investing in real goods, like lumber and farmland, when inflation is high, and Farmland Partners' stock price has responded. It's up about 15% since December, and the dividend yield of 1.52% is relatively low. The question is whether the REIT is still a buy after the run-up in stock price.
The REIT's low dividend is actually nothing new. It first reduced its dividend in 2018 to prepare for a lawsuit against an institution perpetrating a short sale scheme against the company.
That doesn't mean the dividend will be rising any time soon, however. The company won the lawsuit and recently announced that it would be transitioning away from the REIT model, leasing land and paying high dividends with its net income, to a more growth-focused model. It did this by acquiring Murray Wise Associates (MWA).
MWA is the world's largest institutional farmland manager and will allow Farmland Partners to branch into farm management, farmland auctions, and farm brokering, in addition to leasing farmland.
Farmland Partners hopes to move on from the lawsuit-related drama that held its stock price down and become a "one-stop shop" for farmland. Investors who want exposure to the asset class should consider Farmland Partners as a horizontally integrated option.
3. Howard Hughes Corp.
Our last real estate niche is master-planned communities. In these developments, everything from your house to the gym to the fire department and elementary school are planned ahead of time and on land owned by the company. This approach has been compared to real-life SimCity.
Howard Hughes Corp. manages seven of these communities over five states. It starts with significant raw land that is parceled out and sold to residential home developers. As the homes are built and sold, HHC uses the cash flow to develop commercial properties. As the community is developed, the established commercial properties lead to higher sale prices for the next tier of homes, which in turn allows HHC to invest more in the next tier of commercial properties.
The company's model is proven and self-sustaining. It currently owns 8 million square feet of office space, 2.8 million square feet of retail space, and 5,234 multifamily units. Its average return on equity is 23%, and it still has plenty of room to grow.
So why is there no dividend? Years ago, Howard Hughes Corp. was spun out of General Growth Properties under pressure from hedge fund activist Bill Ackman. At that time, Ackman had control of the board and steered the company away from REIT classification.
Becoming a REIT is great for a lot of real estate companies, but the structure restricts future investment and growth. Howard Hughes Corp. was structured as a real estate operating company (REOC) instead. This structure allows the company to reinvest at will and focus on growth. It won't be appealing to investors who are in search of income alone, but for investors who want diversification into real estate with some growth prospects, it could be an ideal position.
Investing is about trade-offs
There is rarely a perfect investment. Super-high-quality growth stocks usually look expensive. Super-cheap value stocks usually come with low-quality business or management. Real estate stocks are the same way.
Weyerhaeuser trades a low base dividend for the potential of windfall special dividends. Farmland Partners cut its dividend to fund a lawsuit and likely won't raise it anytime soon as it expands its business horizontally. And Howard Hughes Corp. completely forsakes paying a dividend in exchange for investment in future growth. It's up to you to decide what your personal investing philosophy is and how much consistently high dividends matter.
