Get +10% return from various properties

Co-authored by Treading Softly

A quick look at human history has shown us that owning land is one of the most common and popular means of accumulating and growing wealth. For any commodity, its value is great It is based on the fact that there is a limited supply of that good available. This is one of the reasons why there is a limited amount of Bitcoin (Bitcoin-dollar) available makes it more valuable. This is the same reason why gold and silver are long-held units of value – because there is a limited supply of them, and you can value other things against them. Before we started trading coins or cryptocurrencies, there was something a little more tangible – Earth. Land has long been a way to show wealth, as owners have been able to use that land to produce food or other goods Which they sold and were able to pay their employees. Owning land, and thus owning real estate, remains a proven means of generating wealth. Many develop their wealth and wealth through land ownership by being a landlord and renting out homes.

You don’t necessarily have to buy individual homes, rent them out, and deal with tenants, toilets, and taxes. Instead, through the financial markets, you have many options to own and gain exposure to different types of properties, all while generating a great income from them. Today, I want to take a look at two real estate ownership options that I find to be great deals today.

Let’s dive in!

Pick #1: GHI – 10.3% yield

Greystone Housing Impact Investors (GHI) reported a quiet quarter, giving us a clear look at how much its MRB (mortgage revenue bond) business is producing. GHI has separated its investments into two core companies. MRBs are mortgage bonds issued by government housing agencies to encourage the development of affordable housing. These bonds are exempt from federal taxes, and this benefit is passed on to investors through the partnership structure – yes, GHI issues a Schedule K-1 at tax time. GHI’s investment strategy is to save capital and profit from the difference between the return it receives and the interest it pays on its leverage. As a result, profits from this section of the business are interest rate sensitive and reasonably predictable. GHI’s MRB business generally benefits from lower interest rates. So, the past few years have not been the best for her.

The second part of GHI’s business is what we call “Vantage” investments. — Although GHI has added additional partners outside of Vantage over the past year. The strategy in this sector is to provide preferred equity investment in the construction of multi-family residential buildings. The partner is responsible for building and managing the properties. Once construction is completed, it is rented out, and GHI receives a portion of the revenue. However, the real gains come when the rental property is sold.

We can see this clearly when comparing the first quarter of 2024 with the first quarter of 2023: source

Note the $15.366 million profit on the sale. This was driven by the Vantage strategy. This extends to CAD (cash available for distribution), which we can see was about $13 million higher in Q1 2023 than it was in Q1 2024. This is primarily because GHI recognized a gain in 2023, But not in the 2024 Vantage JV.

So when we look at the CAD headline of $0.23, failing to cover the $0.368 distribution, some may panic. However, if we withdraw the gains from the put, the CAD produced by the MRB investment strategy is roughly the same year over year. Investment income is about the same, and interest expenses are lower in 2024.

GHI’s joint venture strategy creates a conglomerate in CAD. It’s always a good idea to start the year off right with a big win, but the real estate selling process is not a process that should be rushed. To get the highest price, it takes time to market the property and negotiate with buyers, and even after a price is agreed upon, there is a period of due diligence before closing.

Here’s a look at GHI’s current characteristics among its joint ventures that follow this strategy: source

Two of them are ready to sell now, the question is when the deal can be negotiated and when the buyer is ready to close. Until sold, the properties provide approximately $1.1 million in revenue each. Unless the real estate market completely collapses like it did in 2020, we can expect them to sell sometime this year. Two other properties are currently being rented. These properties could be sold this year, or the joint venture may choose to hold them for a little longer, depending on market conditions.

GHI has a good pipeline, with 10 more properties under construction or in planning. From 2021 through 2023, GHI sold three properties per year. That was enough to fund the current distribution and generate so much excess gain that GHI was paying special and supplemental distributions on top of it. We expect to see 2-3 properties sold this year, which should be more than enough to cover current distribution with the potential for more supplements/specials if they sell three. However, in the coming years, we could see an increase in the annual pace from 2-3 to 3-4 properties per year. This would either make supplementary distributions more frequent, or, if management believes the pace is stable enough, an increase in regular distribution.

Pick #2: ONL – 11.3% yield

Orion REIT Office Inc. (ONL) is a real estate investment trust that specializes in office space, and it’s no secret that office space is going through a tough period. We have seen several dividend cuts in the office sector, as even well-established REITs have suffered from weak demand, declining property values, and rising interest rates. Onl It escaped downgrade risk because it set its dividend very conservatively after its spin-off from Realty Income (O). At $0.10/quarter, ONL’s payout ratio in Q1 was 34% of FAD.

Core FFO for the first quarter was $0.36, slightly higher than the $0.33 for the fourth quarter. However, management has warned us that it will decline in the second quarter, so don’t be surprised when a “loss” in AI revenue is reported next quarter. Management has warned that this will come in Q4 2023 earnings. However, many will be “surprised” that they didn’t make it up!

ONL faces headwinds from a glut of lease expirations at a time when many tenants are reevaluating their need for office space. It has made great progress but still has 22.7% of its leases due this year. After this year, ONL lease expirations will occur at a much more reasonable pace. source

The second quarter is expected to be difficult because leases are expiring, and tenants have informed ONL that they intend to vacate the property. In the current environment, ONL does not rely on the ability to quickly refill.

When renting, the tenant pays various costs at the property level such as insurance, taxes, utilities, etc. – either paying them directly or as an expense built into the rental amount. When a property is vacant, it still incurs expenses, and it is the owner’s responsibility to ensure they get their money’s worth. In the first quarter, vacant properties cost approximately $3.5 million.

Over $0.06 per share is spent just maintaining vacant properties that produce no income. This stresses ONL’s Core FFO. The good news is that it is fixed as soon as the property is sold or rented. Even if ONL gave properties away for free, Core FFO would rise by more than $0.06 per share per quarter.

Fortunately, ONL doesn’t give them away for free. The REIT currently has 14 vacant properties, and 8 of them are under contract to sell for $48.1 million. Management has indicated that they do not expect to close these sales until late in the year or even early 2025. Therefore, for 2024, these properties will continue to be a drain on earnings in the form of direct maintenance costs and in a form of trapped capital that produces no earnings.

The office space market was weak. While there are signs of stabilization in many markets, fundamentals are not strong enough to support rapid leasing and aggressive selling. The administration is dealing with the situation with patience. The dividend is so well covered that, even with the expected decline in FFO, it will still be one of the best covered dividends among publicly traded REITs.

Conclusion

With GHI and ONL, we are able to invest in two very different types of properties, from multifamily homes to office space, both of which still play valuable roles in the economy.

ONL continues to have a very conservative dividend payout ratio, while managing market-wide issues with office space by pursuing a sale due to lack of interest in the current period.

GHI continues to own the MRB associated with multifamily homes and collect tax-exempt income from it while developing multifamily properties for rental and eventual sale.

In the long term, these two property ownership opportunities can provide us with a solid income today while producing value from the land they own in the long term.

When it comes to your retirement, I don’t want you spending your time juggling tenants or dealing with complicated taxes. Instead, I want you to spend every moment enjoying your hobbies and time with your loved ones. Would you rather figure out your taxes or sit back and enjoy your favorite drink while watching the sunset at the end of another glorious day? I will always choose the second option.

That’s the beauty of my income method. That’s the beauty of income investing.