Real estate stocks got bludgeoned last year as higher interest rates weighed on their values. The average real estate investment trust (REIT) shed a quarter of its value last year, with some falling even further.
One of the silver linings to falling REIT share prices is that their dividend yields rose. Some of them now offer much more compelling income streams. Two REITs currently providing big-time payouts are EPR Properties Trust (EPR 0.61%) and Medical Properties Trust (MPW 1.43%). It makes them tantalizing options for investors seeking to maximize their income yield on a $1,000 investment.
In a solid position despite a tenant issue
EPR Properties Trust currently offers an 8.36% dividend yield. That level implies the REIT, which focuses on owning experiential real estate like movie theaters and other attractions, can turn $1,000 into $83.60 of annual passive income. That's a lot more income than an investor can earn by investing that same amount into an S&P 500 index fund. With the broader market's current yield at 1.68%, this investment would only produce about $16.80 of annual passive income over the next year.
NYSE: EPR
Key Data Points
EPR Properties offers an alluring payout because its shares plunged nearly 30% from their peak last year. That decline is partly due to concerns about one of its largest tenants, Regal Entertainment, after its parent, Cineworld Group, filed for bankruptcy last year. While that company made its rental and deferral payments in October and November, it's unclear whether it will continue paying rent on time.
EPR Properties is in a solid financial position to weather that issue. It ended the third quarter with $160.8 million of cash on hand, no borrowings on its $1 billion credit facility, and fixed-rated debt with no maturities until 2024. Meanwhile, it's retaining significant earnings after paying its dividend because of its conservative payout ratio. The company expected to produce $4.50 to $4.68 per share of funds from operations (FFO) as adjusted, which easily covers its $3.30 per share dividend outlay.
Meanwhile, the company continues to take steps to reduce its exposure to the theater industry. Last year, it planned to invest up to $425 million in various acquisition and development projects, including fitness and wellness properties, ski properties, and other attractions. Those and other future investments should help diversify and grow the company's rental income, putting its sizable payout on an even more sustainable foundation.
Getting back to full health
Shares of Medical Properties Trust have fallen more than 45% from their peak at the beginning of last year. That slump has pushed the healthcare REIT's dividend yield to almost 9%.
NYSE: MPW
Key Data Points
Two issues plagued Medical Properties Trust last year. Because of surging interest rates, the REIT needed to pivot from offense to defense by shoring up its balance sheet. That led it to execute $1.8 billion of capital recycling transactions to help fund accretive acquisitions and reduce its leverage ratio.
The company has another $650 million of transactions in the pipeline that should close in early 2023. That will help it further strengthen its balance sheet and fund additional accretive investments as opportunities arise. The company only has a small $446.8 million debt maturity to address this year, which it could pay off with asset sale proceeds if it can't refinance that debt at an acceptable rate.
The other big weight on Medical Properties Trust last year was concerns about the health of its largest tenant, Steward. However, the company made great strides in improving its financial situation in recent months. It repaid a COVID-related advancement, received a past-due reimbursement, and extended a loan for one year. Those moves put it in the position to generate positive and sustainable free cash flow, which should ease concerns about its ability to continue paying rent to Medical Properties Trust.
Enticing options for investors willing to take on the risk
EPR Properties and Medical Properties Trust offer investors high-yielding dividends. While they're facing some headwinds, which is why the yields are so high, they're taking steps to address their issues. They're growing more attractive for investors willing to take on a bit more risk in return for a higher yield.
