Real estate investment trusts (REITs) have gotten crushed because of rising interest rates. That's due to a couple of factors. REITs borrow a lot of money to acquire and develop real estate. That debt has gotten a lot more expensive. Meanwhile, rising rates drive up the yields on income-producing investments like bonds and bank CDs. As a result, REIT share prices have fallen, increasing their yields to compensate investors for their higher risk profiles.
Several REITs offer very enticing dividend yields these days, including Community Healthcare Trust (CHCT 2.65%) and EPR Properties (EPR -0.32%). Their big-time yields make them stocks that income-seeking investors should buy hand over fist.
However, investors need to be careful, because not all high-yielding REITs are worth buying. Despite its lofty yield, income-focused investors should avoid Medical Properties Trust (MPW -1.10%).
A healthy dividend
Community Healthcare Trust currently offers a 6.4% dividend yield. That's several times above the 1.6% dividend yield of the S&P 500 index. It's also higher than the average REIT's yield of around 4.4%.
The healthcare REIT backs that payout with a diversified portfolio of healthcare-related real estate. It owns medical office buildings, physician clinics, specialty centers, behavioral facilities, and hospitals. It leases these properties to tenants in the healthcare industry. Those leases supply it with relatively steady income to pay dividends.
Community Healthcare Trust generated $0.63 per share of adjusted funds from operations (FFO) in the second quarter, easily covering its $0.4525 per-share dividend payment (72% dividend payout ratio). That gives it a healthy cushion while allowing it to retain cash flow to fund new investments. The REIT also has a conservative balance sheet, giving it more financial flexibility.
The REIT has increased its payout every quarter since going public. Driving its steadily rising payout is a steady diet of acquisitions. Community Healthcare Trust routinely acquires income-producing healthcare properties. It bought three medical office buildings and an inpatient rehab facility for $35.6 million after the second quarter ended. It had 11 more acquisitions in its pipeline, totaling over $200 million. These deals will help drive future dividend increases.
Visible growth ahead
EPR Properties currently offers an 8%-yielding dividend that it pays monthly. The REIT focuses on experiential real estate, like theaters and attractions. It leases those properties back to the operators under long-term net leases.
The REIT expects to pay out 65% of its FFO in dividends this year. That enables it to retain lots of cash to fund new investments. EPR also has a strong investment-grade credit rating with lots of liquidity.
The company invested $98.7 million into acquiring and developing additional experiential real estate during the first half of this year. Meanwhile, it committed to investing $224 million into additional experiential development and redevelopment projects over the next two years. It can fully fund that investment level with post-dividend free cash and its balance sheet capacity. These investments will increase its rental income, which should enable the REIT to boost its dividend in the future.
Still not healthy
Medical Properties Trust currently offers an eye-popping dividend yield of 13.2%. That's despite cutting its payout by nearly 50% earlier this year. Investors remain worried that another cut could be forthcoming.
The hospital-focused healthcare REIT is battling a barrage of issues. A key tenant is struggling to pay rent while others are facing financial troubles. That's weighing on Medical Properties Trust's cash flow. Meanwhile, the REIT has lots of debt maturing, which is difficult to refinance at an attractive rate given the surge in interest rates and the REIT's current headwinds.
That led the company to sell assets to repay debt. While it has the liquidity to address its maturities through next year, the market is already looking ahead to the even more sizable maturities of 2025 and 2026. The company is working to get ahead of this looming issue by cutting its dividend to retain more cash. It's also looking to sell additional assets.
Given Medical Properties Trust's current issues, the company might have to cut its dividend even further. It could even suspend its payout entirely to free up even more cash flow to repay debt. That high risk of another cut is why income-focused investors should avoid this high-yielding REIT right now.
Focus on the healthier high-yielding REITs
While Medical Properties Trust's double-digit yield might seem appealing, income-focused investors should avoid that REIT at this time since its payout remains on shaky ground. Instead, they should scoop up shares of Community Healthcare and EPR Properties. Their high-yielding payouts are on much firmer foundations these days.
