Golden dollar key and keyhole.
Stay with me for a reflection on “next level” dividends. We have a potential opportunity right away to buy five payers with a yield of up to 14.9% as the economy heads into recession.
Wait what? For what Would we want to buy stocks while the economy is slowing?
Well we don’t want to own any of them names. We’ll leave out the dizzying AI, darling NVIDIA Corp (NVDA). Give us cheap REITs (real estate investment trusts), because they are likely to rise as rates fall.
Yes, that’s what happens in a recession. Investors are flocking to fixed income. Interest rates are falling and REITs, whose rates tend to move in the opposite direction, are rising.
These homeowners are already picking themselves up from the rug after two difficult years during which rates rose relentlessly. It was an unforgettable November for the sector, with the sector benchmark up 8.1%:
I called this rally REIT a few months ago and, well, it arrived earlier than expected and in full force. Still, these stocks are by no means expensive thanks to a two-year bear market. In fact, they pay a lot plus the stock market average:
Comp. yield VNQ
But be careful. The bucket is full of landlords who will struggle to collect rent in a recession. We want to avoid office sellers and retail owners.
Consider a pack of five REITs paying a terrific 10.3% today. Even after their lovely month of November, these dividends remain generous:
REIT 5 Actions
Outfront Media (OUT, 9.6% yield) is one of the most specialized real estate games you can find: it mixes in advertisements.
More specifically, it targets where advertisers want to place their ads. That is, billboards, train stations and public transport vehicles, as well as “mobile assets”: in reality, mobile advertising campaigns linked, for example, to the store visit of a customer or their presence in a specific area.
Outfront, like other REITs, has been hampered by rising interest rates, but its struggles are a bit more severe because of weak transit. Specifically, post-COVID, ridership on subway systems like the MTA and WMATA has rebounded somewhat, but still does not match pre-COVID numbers. Continued recovery, including return to office policies, should help slowly but surely.
In the meantime, she remains severely depressed. Even with a recent stock rally, Outfront stock trades at just 7 times adjusted funds from operations (AFFO) estimates, and its yield is close to 10%. This is a fairly safe dividend, at just 72% AFFO.
Despite room for growth in payments, it is difficult to say whether this distribution will increase at some point in the near future. OUT management suspended its quarterly dividend of 38 cents per share amid COVID, then cut it to just 10 cents in 2021 before tripling it to 30 cents in early 2022. The dividend has remained stable since then.
SL Green Realty (SLG, 9.7% yield) is billed as “New York City’s largest office landlord.” It has an interest in 59 buildings totaling 32.5 million square feet, including 28.8 million square feet of Manhattan buildings. The business is predominantly office real estate, accounting for 92% of net operating income (NOI), although it also has traces of exposure to the retail and residential sector.
SLG is not just a high yield producer, but a monthly yield producer – a practice it began in 2020. What it didn’t do in 2020 was cut its dividend like very many other retail REITs.
Unfortunately, it looks like SL Green came late to the game. It cut its payout by about 13% at the end of 2022 – and while that did indeed provide a tailwind, as SLG cut the dividend to improve liquidity and pay down more debt, that tailwind was short duration.
SLG has rebounded somewhat in the face of more aggressive moves by U.S. companies to bring employees back to the office. But fundamentally, that’s still insufficient: The company recently announced that it likely won’t hit the 92%-plus occupancy target it set for 2023 last year.
If there’s a positive side to SL Green right now, it’s the value proposition. Shares yield nearly 10% at current levels and trade modestly, at less than 6 times next year’s FFO estimates.
Brandywine Realty Trust (BDN, 14.9% yield)— which has an odd geographic footprint that includes Philadelphia, the greater Washington, D.C., area, and Austin, Texas — also deals in office buildings, but that represents less than a quarter of its real estate portfolio. Residential represents the largest share, with 42%, followed by life sciences with 27%; the remaining 9% is spread across other property types.
Brandywine gets very little love from analysts. Earlier this year I highlighted it as one of the most hated stocks on Wall Street, and the pros have only warmed up slightly to the name since then. Although interest rates have hit hard, occupancy rates have also fallen. The situation is also unlikely to improve much in 2024, with estimates lower than 2023 projections.
BDN is among the worst REITs of 2023, losing about a third of its value. The somewhat unexpected dividend cut didn’t help matters. Even though Brandywine’s distribution coverage was clearly tight, management was confident earlier this year that it could continue to fund its dividend at current levels – a position it abandoned in September when it reduced the company’s distribution. 21% to strengthen liquidity.
If there’s any reason to like Brandywine now (besides the hope of stable or lower interest rates), it’s a very cheap valuation. Not only is BDN still yielding 15%, even after reducing its payouts, but it’s trading at less than 4x next year’s FFO estimates.
Healthcare Realty Trust (HR, 8.7% yield) owns and operates outpatient medical buildings, typically located around hospital campuses. It owns more than 700 properties totaling more than 40 million square feet, most of which are concentrated in 15 growing markets, much larger than before, due to its recently completed merger with Healthcare Trust of America.
You might think medical offices would be a healthy business, but human resources is one of the few REITs that was dented by COVID — and has been bleeding ever since.
HR challenges are countless. Beyond its own challenges with rising interest rates, COVID has depressed elective and non-emergency procedures, which are essential for Healthcare Realty tenants. Additionally, very few (read: 6%) of HR’s leases feature inflation-based escalators, which has severely limited the REIT’s ability to weather soaring consumer prices.
Healthcare Realty forecasts a significant increase in occupancy rate (from 85.1% currently to 87% in 2H24). But you could probably find better recovery opportunities to wait for. Even though HR offers a delicious yield of almost 9%, you’re not getting gaudy value here: shares trade at about 11 times next year’s AFFO estimates.
Global Medical REIT (GMRE, 8.6% yield) owns an off-campus medical practice and inpatient post-acute care medical facilities. It currently owns 185 buildings representing 4.7 million leasable square feet for 268 tenants.
If GMRE has performed much better than HR since the start of 2020 – the former is roughly in balance and on par with the sector, the latter has lost almost half its value – , it has undergone a checkered evolution. It hit its lowest point in late 2022 when one of its tenants, Pipeline Health System, entered Chapter 11 bankruptcy protection.
It has rebounded slightly since then, but I am more encouraged by some of the steps taken since then. On the one hand, it has locked in much of its financing at interest rates of around 4% for the coming years. It has also managed to sell properties at surprisingly low capitalization rates given the current pricing environment.
The shares still have some value, at around 10 times AFFO. One notable red flag here, however, is dividend coverage. Its dividend of 21 cents per share is a little higher than AFFO 2023 projections. This pressure should ease – GMRE is expected to increase AFFO in each of the next two years. But any obstacles to its growth could put its dividends in the crosshairs of skeptics.
Brett Owens is chief investment strategist for Contrarian perspectives. For more great income ideas, get your free copy of his latest special report: Your early retirement portfolio: huge dividends, every month, forever.
Disclosure: none