An Income Opportunity for the Long-Term

Check out the video above, which is from my live stream for traders and active investors, to learn why I like this company and residential real estate in general.

If you’ve followed the live stream lately, you know I’m bearish on the stock market.  Most stocks are priced at lofty valuations right now, and it’s likely we’ll see a hard landing as deflationary pressures resume.  Therefore, I’m currently net short the market.  I’ve sold short more stocks than I own.

Despite the bearish forecast, I’m still on the hunt for long-term portfolio holdings that can give me a reliable yield.  Residential real estate is an area that should hold up much better than most commercial real estate (especially retail and office buildings) going forward.  I also feel I’m personally underinvested in residential real estate.  I recently found a company in this space that I liked enough to take a position in: Bluerock Residential REIT (BRG).

This company owns interests in many apartment complexes, most of which are in the southeastern United States.  They also own a bunch of developments that are currently under construction.  Their target areas for investments are premium locations in and around “second-tier cities”: those that are smaller than New York, Los Angeles, etc. but big enough that they are attracting substantial corporate investment and/or residential demand.  We’re talking Austin, Houston, Charlotte, Atlanta, and Orlando, for instance.

The company is structured as a real estate investment trust, or REIT.  Find out more about investing in REITs on this episode of my free investing podcast.

They’ve got several series of preferred stock with different yields and terms attached to them.  I actually chose to invest in the common stock though.  The common stock pays a yield of 9.2%, whereas the preferreds are in the 7%-8% range and two of the three series are priced at a premium over par.

Whenever you see a yield over 5%, you’ve got to do extra diligence to figure out why the yield is so high.  In the case of BRG, I think there are two reasons:

  • They plan to internalize their management in 2017, which may involve an up-front payment.  The managers are currently employed by Bluerock, not by the REIT itself.
  • The recent trend in earnings hasn’t been stellar, but I see this as largely a byproduct of rapid growth.

Upon reviewing the financials, I believe that the majority of the dividend is secure going forward.  Maintaining the dividend is a stated priority of the management team.  Although a slight reduction is possible (along with a temporary disruption in the quarter during which they internalize management), I think they are well-positioned overall to deliver on their goal of maintaining the full dividend.  If you’re more concerned about this than I am, consider buying the preferreds instead.  Preferred stockholders have to be paid before common stockholders, plus the preferred dividends accumulate forward if they are not paid.

As with any investment, make sure to review the company’s annual report and other SEC filings to get a good understanding of the company before investing.  Pay particular attention to the disclosures of potential risks in those filings.  You can find investor info for Bluerock Residential REIT here.  Just because this company is right for me right now doesn’t mean it is necessarily right for you.

As I disclosed above, I own shares of BRG as of the publishing of this post.  View other important disclaimers on this page.

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