The stock market has been under tremendous pressure this year. The Federal Reserve is trying to get inflation under control by ramping up interest rates and that's weighing on stock prices, which pushes up dividend yields. One sector that has gotten hit particularly hard due to its sensitivity to rates is the real estate investment trust (REIT) industry.
Because of that, income-seeking investors can snag some pretty attractive yields these days. However, given the volatility in the market, the current pricing and dividend yields might not last long. Three Fool.com contributors think Medical Properties Trust (MPW -0.54%), Macerich (MAC -2.48%), and Gladstone Commercial (GOOD -1.20%) look like compelling buys at this moment.
Finding alternative means to fund growth
Matt DiLallo (Medical Properties Trust): Shares of Medical Properties Trust have tumbled 45% so far this year. That's driven the healthcare REIT's dividend yield up to nearly 9%.
Weighing on shares are rapid and dramatic changes in the capital markets and global economic environment over the past few months. The Federal Reserve has significantly increased interest rates to combat inflation and that's having two major impacts on Medical Properties Trust.
First, REIT stock prices tend to fall when the Fed raises interest rates because that makes lower-risk income alternatives like bonds more attractive. As REIT stock prices fall, that boosts dividend yields to compensate investors for their higher risk profile relative to bonds.
The other issue caused by rising rates is they increase the cost of capital. Higher rates make it more expensive to borrow money, while a falling stock price makes it costlier to issue equity. That situation is hampering Medical Properties Trust's ability to access outside capital to fund new acquisitions. Because of that, the REIT has reduced its 2022 acquisition target from between $1 billion and $3 billion to the low end of that range.
Despite these issues, the REIT has taken steps to allow it to continue making value-enhancing deals. It has started focusing more on recycling capital by selling mature assets and reinvesting the proceeds into higher-returning new investments. The REIT recently unlocked $600 million of liquidity through its capital recycling strategy, giving it the funds to make accretive acquisitions. These deals should enable Medical Properties Trust to continue growing its dividend, something it has done for the past eight years.
While shares are down sharply this year, Medical Properties Trust has an excellent track record of creating value for shareholders over the long term. Because of that, now looks like a great time to buy before the market realizes it drove shares down too far.
Retail sales have been holding up despite rising rates
Brent Nyitray (Macerich): Macerich is a retail REIT that focuses on regional town centers, which generally contain one or two anchor tenants, with space for additional retailers in a strip mall or urban environment. The company will often include big-box stores as part of its developments.
The REIT sector has been hit hard this year as rising interest rates are generally bad news, since REITs carry a lot of debt and rising interest rates mean debt service costs will increase. Second, rising rates have caused many investors to fret about a potential recession and a decline in consumer spending. So far, there hasn't been evidence of a decline. The government has estimated that August retail sales rose 9.1% year over year. August and September retail sales represent the back-to-school shopping season, which are often a good indicator for the holiday shopping season.
On its second-quarter earnings conference call in July, Macerich guided for 2022 funds from operations (FFO) per share to come in between $1.92 and $2.04. At current prices, this puts Macerich at a multiple of 4.4 times guided FFO per share. To put that number into perspective, Simon Property Group, a high-quality mall operator, is trading at 8.4 times its guided FFO per share.
Macerich currently pays a quarterly dividend of $0.15 per share, which works out to a dividend yield of 6.7%. Note that its guidance of FFO per share more than amply covers the dividend, which makes it reasonably safe. Investors may be worrying about a potential recession, but Macerich is trading as if we will see another Great Recession. The risk/reward profile seems to be favorable at these levels.
Gladstone Commercial is a dividend machine
Marc Rapport (Gladstone Commercial): Gladstone Commercial has long been a rock-solid provider of dividend income. It pays a dividend monthly and is currently yielding about 8% annually.
In fact, this owner of industrial and office space has paid monthly dividends 212 times without fail since January 2005 and it's positioning itself to continue. Industrial properties now account for 52% of the REIT's 136 properties in 27 states, but it plans to grow that to 60% in the next 18 months.
CEO David Gladstone told The Motley Fool in a recent interview that he has serious doubts about the office sector but there's strength in manufacturing. So far this year, the REIT has sold two office properties and bought nine industrial properties.
At this writing, Gladstone is down a whopping 31% year to date, selling for $17.76 a share and yielding 8.29% annually, about five times that of the S&P 500. Analysts have given it a consensus target price of $24.50. That's some pretty significant upside and the company's history shows that the ultra-high yield is not just the result of a depressed share price.
Gladstone says his focus is on providing a predictable passive-income stream. I like where the company is going. I'm a shareholder who plans to add to my stake yet again this month.
