By nature, real estate investment trusts (REITs) are required to pay at least 90% of taxable income in the form of dividends. This has helped REITs become well known for their reliable and often higher-than-average dividend returns. But not all REIT dividends are considered safe. High payout ratios, as they relate to the company's earnings, debt ratios, or growth opportunities, can put dividends from even the best REITs into question.
Gladstone Commercial (GOOD -0.23%) is one of the higher-yielding equity REITs at the time of this writing, at 6.90%. Given most equity REITs have a dividend yield of about 3% or lower, a return of almost 7% is quite appealing. Here's a closer look at the recent history of Gladstone Commercial's dividend yield.
Gladstone Commercial Corporation Dividend Yield data by YCharts.
Gladstone's business
Gladstone Commercial is a diversified REIT specializing in the ownership and management of single-tenant and multitenant net lease properties. The company owns 129 properties across 27 states, with most of the assets -- roughly 91% of rents -- coming from industrial and office properties. Unlike most other REITs, which focus on owning properties in top-tier markets, Gladstone focuses on secondary growth markets primarily across the Northeast, Midwest, and Southeast but also in select markets of the Southwest.
During the past five years, revenue has increased 6.37%, which isn't stellar growth, but it is a move in the right direction. Occupancy is strong for its portfolio, just over 97%, which is great when you consider office space is still battling COVID-19-related impacts. Same-store rents increased 2% year over year (YOY), which, again, isn't amazing when other REITs are seeing double-digit growth for industrial rents.
Gladstone's attractive dividend isn't without risk
For the full-year 2021, core funds from operations (FFO), a common metric to illustrate a REIT's profitability, increased 6.4% while revenue also improved. An increase in expenses negated the jump in revenue, particularly after the company redeemed its Class D shares for a total of $88.3 million. This lowered its net operating income YOY, creating a net loss of $4.55 million for the full year of 2021.
The redemption of shares isn't an ongoing expense, so there's hope that net operating income will trend positive again in 2022, as it did in 2020. However, its debt obligations, including its high dividend payout ratio of 94%, give cause for concern.
Image source: Getty Images.
It has roughly 14.4% of its mortgage maturities due in 2022, equating to $95.17 million. Given it only has $8 million of cash and cash equivalents on hand, it's either going to have to restructure that debt; issue shares to raise more capital, diluting the value of existing shareholders; or sell assets to help pay its debt obligations. Issuing more shares is a common practice for Gladstone and it's one of the reasons its per-share FFO hasn't grown much, despite the company's increase in revenue over the years.
While its high dividend attracts many investors, it needs to improve its dividend payout ratios and address major debt obligations to make it a safe buy. High dividends often mean more risk, making them among the least safe dividends to invest in. If safety is the goal, there are other diversified REITs -- like W.P. Carey, for example -- that offer similar portfolio exposure as Gladstone Commercial but with far safer returns.
