Rising Rates Are a Problem, but This 6.8% Yielder Is Making the Best of It

 Rising rates are a problem, but this 6.8% yield makes the best of it

Rapidly rising interest rates make it more expensive to buy real estate because financing transactions is more expensive. The solution is a fall in asset prices, but the math isn't that simple because human beings are involved in the mix.That's why Broadstone Net Lease (NYSE: BNL ) is biding its time right now. But he wastes no time. Here's what you need to know about this 6.8% dividend yielding stock.

Modestly large and careful to grow

Broadstone owns around 800 net leasehold properties. Compared to a giant like Realty Income (NYSE: O ), with more than 13,000 properties, Broadstone is a piece of cake. This means that the small REIT has grown rapidly. Between 2015 and 2019, the REIT purchased between $500 million and $680 million in new assets annually. In 2020, that number dropped to just $100 million, but given the uncertainty surrounding the coronavirus pandemic, it made sense. In 2021, spending rises to $655 million and in 2022, it rises to $900 million. Unfortunately, the growth rate is expected to slow down again in 2023 thanks to rising interest rates.

In fact, in the first half of 2023, Broadstone actually sold $120 million worth of assets, while only buying about $80 million. It's effectively shrinking its portfolio, which isn't necessarily a good thing for investors who bought into it hoping for steady growth. And yet, the decision to withdraw makes a lot of sense from a risk/reward perspective.

Adaptation to the environment

One of the biggest uncertainties is interest rates. They have increased dramatically, which increases acquisition costs. Real estate prices have to come down for deals to make economic sense. But there's a problem: People who own real estate tend to be slow to respond to changes of this kind. They know what the property was worth and will stick to that price as long as possible. This may mean not selling the property or selling only when they are forced to. This can happen if the owner is a developer and needs cash for another project. 

Or it can happen if the owner has a loan coming due and needs cash to pay it off. But for now, real estate prices are too high for Broadstone, and the REIT has no plans to chase assets it sees as overpriced. Instead, it takes advantage of industry's slow response to higher rates.While some investors are still willing to pay premium prices for assets, Broadstone sells at what it considers attractive prices. This cash is used to build some dry powder as property prices adjust more to the prevailing interest rate environment.

Meanwhile, it is entering construction lending as banks and other traditional lenders exit the market at least in part thanks to the bank runs that took place earlier in 2023.That is not the company's core business, nor does management really want it to be. But if there's value to be created while waiting for a better use for the cash (like buying real estate at a reasonable net rental price), he'll be making hay while the sun shines.

He has one particular deal that is close to the mark, which is remarkable in this area. The temperature-controlled warehouse in Florida is likely to end up in the portfolio once it is completed in late 2024. However, management noted that it would likely not be able to afford the property at that point if it did not close the deal. Thus, an early investment in a construction loan is likely to pay off handsomely for investors, provided the loan agreement is fulfilled as expected.

Deliberately attractive

The current clean rental environment is tough and investors have soured on the sector, with particular resistance to smaller REITs such as Broadstone. However, this pure rental REIT is responding in an intelligent, risk-aware manner while still seeking to create value for shareholders. This is exactly what an investor should want to see. Add in a hefty 6.8% yield (by comparison, Realty Income's yield is roughly 5.1%), and more aggressive income investors might be tempted to jump on board.

When our team of analysts has a stock tip, it can pay to listen. After all, the Motley Fool Stock Advisor newsletter they've been running for over a decade has tripled the market.*They just revealed what they believe are the ten best stocks investors can buy right now... and Broadstone Net Lease wasn't one of them from them! That's right - he thinks these 10 stocks are an even better buy.

In the ever-evolving world of finance, rising interest rates can often spell trouble for investors. However, there is a hidden gem in the market that not only weathers the storm but also delivers an impressive 6.8% yield. Let's dive into the details and explore why this investment opportunity is attracting attention in today's challenging environment.

Impact of rising rates:

With interest rates rising, many traditional investment avenues may face significant headwinds. For example, bonds may lose value because their yields are less attractive compared to newer issues with higher rates. Similarly, stocks may face increased pressure as businesses' borrowing costs rise, affecting their growth prospects.Finding Opportunity Amidst Challenges:Amid this uncertainty, the 6.8% yield in question has managed to stand as a beacon of stability and opportunity. It is not immune to the effects of rising rates, but its unique features set it apart.

 Diversification across sectors:

Diversifying across different sectors can be a savvy strategy in times of rising rates. Our profitable 6.8% yield understands this well and has a portfolio that spans a variety of industries and mitigates the impact of rate hikes on any single industry.One of the most significant benefits of this yield is its ability to generate robust cash flows. These cash flows act as a buffer during periods of economic uncertainty, providing stability and supporting its attractive return.

 Adaptive risk management:

A fundamental aspect of dealing with rising rates is the ability to adapt and effectively manage risk. This 6.8% return uses sophisticated risk management strategies that have helped it navigate various market cycles. High Quality Assets:The quality of an investment's underlying assets can make a significant difference in times of economic turbulence. This yield boasts a portfolio of high-quality assets that provide a level of resilience that is key when facing the challenges of rising rates.

While rising interest rates are indeed a problem for investors, it is essential to recognize that there are opportunities that can thrive in such an environment. The 6.8% yield we discussed demonstrated a remarkable ability to make the most of these challenges. Its diversification, strong cash flows, adaptive risk management and high quality assets make it an attractive choice for those seeking stability and yield in an uncertain market.

When considering your investment strategy, it's important to monitor the market's reaction to rising rates and identify assets that have the potential to outperform against the odds. The resilience of this 6.8% yield makes it a strong contender for investors looking to navigate the complex environment of today's financial world.