In most years, a stock that is up 10% or so over three months wouldn't count as sizzling. But in a year when many growth stocks are down 60%, 70%, or even 80%, and the majority of REITs are down 30% or more, having any level of momentum is impressive.
These three REITs, Agree Realty (ADC 1.18%), Omega Healthcare Investors (OHI 0.07%), and W.P. Carey (WPC 2.13%), have all shown strength while the rest of the industry hasn't, and each has a strong dividend yield (the lowest of the three is 3.8%). Let's talk about what their prospects are and if the stocks are just getting started.
1. Agree Realty
Agree Realty is a retail REIT that owns 1,510 properties in 47 states. The properties are predominantly big-box retailers -- 9.9% of properties are leased by grocery stores, 9.4% by home-improvement warehouses, and the rest by assorted other retailers. Agree also owns 186 properties (included in the 1,510 total) that are ground-leased to the same types of retailers. That means Agree owns the land, and the retailer or another business owns the building and leases the land.
Agree's stock is up almost 5% on the year. Normally that return would be lackluster, but in 2022, it qualifies as full-blown sizzling. So, what has driven the stock price this year?
It's a combination of great performance and aggressive expansion. Agree posted strong fourth-quarter 2021 and first-quarter 2022 results and announced in a recent investor presentation that it would acquire $1.4 billion to $1.6 billion worth of new properties in 2022, an increase in acquisitions for the eighth year in a row.
Meanwhile, it pays a consistent monthly 3.8% dividend yield, has a strong balance sheet with almost twice as much equity as debt, and revenue has been up more than 300% since 2016. There are pretty good reasons that Agree has provided steady returns, even this year, and it likely will continue to do so going forward.
2. Omega Healthcare Investors
Healthcare REITs are traditionally touted as recession-resistant. Healthcare has inelastic demand -- that is, customers or patients will generally pay what it takes -- so healthcare providers and their landlords should be resistant to short-term economic issues and inflation. Despite that theory, many healthcare REITs have fallen 30% or more this year. Not Omega Healthcare Investors.
Omega is up about 3% on the year and almost 10% over the past month. Part of the reason for Omega's resistance this year is its massive dividend yield. Right now, the stock yields over 9%. It's hard to sell a stock if you may be able to count on a 9% dividend to bolster your returns. The question is whether that dividend payment is reliable.
Omega Healthcare owns and leases nursing homes. Its business was hit hard early in the pandemic. Occupancy fell 13% from 2020 to 2021. 15% of its tenants couldn't meet their entire contractual obligation in 2021. Omega chose to work with its operators, and by April 2022, it had collected 91% of its rent and mortgage obligations.
Omega hasn't cut its dividend since October 2003. The market had already priced in some level of skepticism that the REIT would continue churning out hefty shareholder payments, but its balance sheet strength and discipline have kept the dividends coming. If they can keep it going in the future, expect the stock to respond.
3. W.P. Carey
W.P. Carey's stock is little changed on the year. Of course, if you include its 5.13% annualized dividend, the total return is close to 5%. Again, that is well above the poor returns of the S&P 500 and the REIT industry. Like the other two REITs, W.P. Carey has a long history of paying out dividends. In fact, it has increased its dividend every year since 1998.
W.P. Carey is a diversified REIT that specializes in long-term net leases in the U.S. and Northern and Western Europe. It owns 1,304 properties, and they are leased to 352 different tenants in 24 different countries. About 35% of the properties are located outside of the U.S.
W.P. Carey's stock strength is likely due to its incredible dividend consistency. It owes that dividend consistency to its internal diversification. Its biggest property type concentration is industrial at just 25.8%. Its biggest tenant industry is retail stores at just 21.9%. And while 65% of its leases are in the U.S., those are spread around the country, and there is no material tenant concentration.
Additionally, the REIT has contractual rent increases built into 99% of its leases, 58% of which are based on the consumer price index. And remember, it specializes in net leases. That means the tenant pays for all of the variable costs like utilities, taxes and maintenance. As inflation rages, its costs stay around the same, and its rents go up. If you put "safe REIT" into a search engine, W.P. Carey would be the result.
