Avoid the Role of a Landlord and Gain a 12% Yearly Return through REIT Investment.
Avoid the Role of a Landlord and Gain a 12% Yearly Return through REIT Investment.
Needing a higher dividend yield in 2025? Contemplate investing in real estate investment trusts (REITs), which are legally bound to function as dividend-dispensing machinery. The focus here is income, guaranteed by law.
Some REITs even present yields of 10% or more. Can you imagine the payout? In the following paragraphs, we'll explore seven such REITs and their potential prospects for 2025.
But be cautious when selecting REITs. Despite an impressive 3% yield offered by the larger real estate sector (as represented by the Real Estate Select Sector SPDR (XLRE)), the average yield among this special seven-REIT selection stands at a staggering 12.4%. That's four times what the sector offers!
That level of income could potentially allow one to retire on dividends alone. However, not all REITs are a guaranteed success heading into 2025.
The Federal Reserve provided a boost to the real estate sector in 2024, with three cuts to its benchmark rate. This has encouraged equity REITs to make the most of the improved cost of equity capital by issuing new shares to raise capital.
However, the Fed also tempered expectations for further rate cuts in 2025, with its official "dot plot" indicating that it expects to reduce its benchmark rate by only half a percentage point throughout 2025—a significant drop from its earlier expectation of a full point in rate cuts.
Now, let's delve into this group of REITs yielding between 10.4% and 15.3%, paying particular attention to their business and financial quality.
This REIT Portfolio Yields 12.4%
Community Healthcare Trust (CHCT, 10.4% yield) is a prominent healthcare real estate owner with a diverse portfolio of roughly 200 properties, including medical office buildings, urgent care centers, surgical centers, dialysis clinics, and more, across 35 states. The properties are leased out to 315 tenants.
The company has mirrored the strategy of REIT giant Realty Income (O) by delivering dividend increases each quarter for years, clocking in an impressive 37 quarters of uninterrupted dividend growth. However, these increases have been steady and conservative, with CHCT raising its dividend by a small 0.25 cents quarterly for most of its growth streak.
Despite its successful history, CHCT's funds from operations (FFO) are currently below 2020 levels. Most of the stock's negativity stems from CHCT having to navigate various tenant challenges. One tenant, GenesisCare, declared bankruptcy in 2023, resulting in lease adjustments and partial or late rent payments from other tenants.
The situation stabilized recently, and the Fed's rate cuts should improve CHCT's cost of capital. Most earnings models predict a rebound for the company after its challenging 2024, but watch for potential tightening of dividend coverage in the short term.
Global Medical REIT (GMRE, 10.8% yield) is another high-yielding REIT in the healthcare sector. The company owns 187 medical office and post-acute facilities, leased out to 275 tenants, with an occupancy rate exceeding 96%.
GMRE faced several challenges earlier in 2024 when one tenant, Pipeline Health System, filed for bankruptcy protection. The company has since recovered, acquiring a 15-property portfolio for $80.3 million and recently agreeing to acquire five more properties for $69.6 million, with the deal expected to close in 2025.
However, the dividend remains a concern. GMRE pays out 21 cents per quarter and is projected to deliver 90 cents per share in adjusted funds from operation (AFFO). This is a rather tight 93% payout ratio, indicating that GMRE will need to revive its growth if it wishes to maintain its current dividend levels.
Innovative Industrial Properties (IIPR, 10.8% yield) is an atypical REIT, not dealing with traditional real estate investments like residential properties or office buildings; instead, it focuses on the rapidly growing cannabis industry.
IIPR provides capital for the cannabis industry through a sale-leaseback program, buying industrial and retail properties primarily used for marijuana cultivation and leasing them back to cannabis operators. The company currently owns 108 properties across 19 states, leased out to 30 tenants.
IIPR was once the darling of the REIT industry's growth, delivering an impressive 900% in total returns between 2018 and its peak in 2021. However, it has since experienced a significant downfall, losing around 70% of its value. This decline also includes a rollercoaster 2024, with shares peaking at a 40% gain before plummeting to a 20% loss for the year-to-date.
The shares of IIPR have experienced a rapid decline in value during two notable events. The first was in November, when shares dropped following the company's failure to meet revenue and normalized funds from operations (FFO) expectations. This dip was significant enough to spark class-action lawsuits, and the shares dipped further a few days later due to the defeat of Florida's recreational-marijuana amendment in a vote.
The second event was more concerning, as Innovative Industrial Properties announced that PharmaCann, a tenant responsible for 11 properties and 17% of IIP’s total rental revenues for the first nine months of 2024, had defaulted on rent payments for six of its 11 properties. According to cross-default provisions, this default extended to all of PharmaCann's leases.
While IIPR now trades at less than 8 times its annualized FFO, this setback is emblematic of the marijuana industry's difficulty in turning a profit despite the boom in marijuana trade.
Now, let's switch gears to Brandywine Realty Trust (BDN, 11.1% yield), an office-focused REIT that has diversified into a hybrid REIT with properties primarily in greater Philadelphia and Austin, Texas. Its current pipeline projects a net operating income of 42% office, 32% life science, and 26% residential.
After reducing its dividend by 21% in 2023, Brandywine enjoyed a stable and outperforming 2024. Despite facing some challenges in Austin, its Philadelphia portfolio is performing well. Its most promising projects are Philadelphia's Schuylkill Yards and Austin's Uptown ATX, which could contribute to long-term FFO growth. It also trades at a modest 6 times next year's FFO estimates, given the recent dividend cut, although its dividend coverage has improved.
Next up, we have Global Net Lease (GNL, 15.3% yield), a commercial REIT operator with 1,223 properties in 11 countries, leased out to 723 tenants in 89 industries. It generates around 80% of its straight-line rents from the U.S., with additional presence in Canada and western European nations.
GNL is one of the highest-yielding equity REITs, despite management's efforts to keep the dividend low. GNL has significantly reduced its payout in three stages since 2020, including a 22% cut in 2024. Currently, GNL is selling off properties to reduce its leverage, with projected dispositions of nearly $1 billion in 2024. Its net debt to adjusted EBITDA ratio, which began at 8.4x at the start of 2024, is projected to decrease to 7.8x-7.4x by the end of the year.
While its healthier financial position is promising, its dividend track record remains concerning, and its sensitivity to interest rates could be a concern should the Fed curb interest rates in 2025.
Double-digit yields are relatively uncommon in equity REITs, but they are common amongst mortgage REITs (mREITs), which invest in "paper" real estate instead of physical properties. Examples include New York Mortgage Trust (NYMT, 13.7% yield), which invests in various mortgages and other securitized products, such as residential mortgage loans, agency residential MBSs, non-agency RMBSs, structured multifamily investments, and more.
30-year mortgage rates have skyrocketed from less than 3% in mid-2021 to the high-6% range today, negatively impacting the mREIT's residential securities and causing both the shares and dividend to halve—the latter resulting from two dividend cuts announced in 2023.
The company has nearly completed unwinding a multifamily joint venture that has impacted its book value, and its shares currently trade at just 54% of its adjusted book value. However, the company's undepreciated earnings, a non-GAAP financial metric, have not covered the dividend for at least three years. Despite management's confidence that earnings will approach the dividend in time, caution is advised.
The final mREIT in focus is Dynex Capital (DX, 14.4% yield), which is heavily invested in agency debt. The market's longest-tenured mREIT is a specialist in agency MBSs, with residential agency MBSs accounting for 97% of its portfolio, and commercial agency MBSs accounting for another 2%. Non-agency CMBSs represent the remaining fraction.
Agency-backed Mortgage-Backed Securities (MBS) are often viewed as more secure than their non-agency counterparts, yet they usually offer lower returns. Consequently, Real Estate Investment Trusts (REITs) concentrating on agency MBS will often employ substantial debt to boost returns and income. Dynex, for instance, reduced its debt-to-equity ratio to 7.6 times in the latest quarter, an impressive level of financial strength.
I stated in the summer of 2024 that if the yield curve flattened out (short-term rates approaching long-term rates), Dynex would stand to benefit. Fortunately, the curve evolved as projected.
This development represents a step in the right direction. Dynex's dividend payout history has been marred by declines – in 2012, the REIT distributed 87 cents per share (adjusted for reverse splits), but a series of reductions reduced it to a mere 13 cents until the most recent increase.
Brett Owens serves as Chief Investment Strategist for Contrarian Outlook. You can learn about more lucrative income opportunities by getting your free copy of his current special report: Your Early Retirement Portfolio: Generous Dividends – Every Month – Forever.
Disclosure: I have no vested interests in this matter.
In the realm of dividend investing, considering high yield stocks like mortgage REITs such as New York Mortgage Trust (NYMT) with a yield of 13.7% could provide attractive returns. However, be aware that their dividends can be significantly influenced by changes in mortgage rates.
For those interested in dividend growth stocks, Realty Income (O) is a notable example, having delivered dividend increases every quarter for years, making it a reliable choice for income investors.
Moreover, equity REITs like Global Net Lease (GNL) offering a yield of 15.3% could also be attractive for income-focused investors, even though they may need to keep an eye on interest rates and company finances to ensure sustainable dividends.