OUT - I Am Buying These 8% Yielding REITs

2023-07-13 08:05:00 ET

Summary

• REITs now offer high dividend yields.
• Some yield as much as 8% per year.
• I highlight two of my favorite high-yielding REITs.

Real estate investment trust ("REIT") dividend yields have expanded significantly over the past 18 months.

This is because REIT share prices have collapsed even as most of them kept hiking their dividends:

As a result, quite a few REITs are today offering a sustainable 8% dividend yield, which not long ago was a rarity.

At High Yield Landlord, we love to target such high-yielding investment opportunities because they allow us to earn attractive returns, independent of what the market ends up doing.

We can't predict what the market will do over the short run, but we know that if we can get an 8% dividend yield, that's cold hard cash hitting our account, and we then don't need much growth to reach double-digit total returns.

Example: 8% Dividend Yield + 3% FFO per share Growth = 11% Annual Total Return.

Moreover, often (but not always!) the high-yielding REITs are also undervalued and offer additional upside potential in a future recovery. As an example, if a REIT is now priced at an 8% yield, but it has historically been priced at a 5% yield during most times, it would imply that it has 60% upside potential as it eventually returns to its historic valuation. We of course can't predict when this recovery will occur, but assuming that it takes 3 years, your expected return then gets a lot more compelling:

Example: 8% Dividend Yield + 3% FFO per share Growth + 20% Repricing Upside = 31% Annual Total Return

That's the ideal investment opportunity for us at High Yield Landlord. In what follows, we highlight two such 8% yielding undervalued REITs that we are buying:

Global Medical REIT Inc. ( GMRE )

GMRE is my favorite 8%+ yielding opportunity right now.

This is a medical office REIT that has a unique strategy of focusing on secondary markets which are mostly overlooked by other investors.

This gives it two advantages:

1. It is able to buy properties at higher cap rates and with better lease terms.
2. These markets are potentially less affected by new supply, which is primarily hitting primary markets.

Historically, it has led to significant market outperformance, as the REIT was able to earn market-beating returns:

But recently, its share price has crashed, and as a result, the company is now priced at a historically high dividend yield of 8%.

Why is that?

I think that there are 2 main reasons, both of which are at least partly unjustified:

1. The first one is its balance sheet . The REIT has a bit more leverage than average and it is causing the market to worry. Admittedly, this will be a headwind in the coming years and it will slow down the company's growth as interest expense rises, but it is not the end of the world. Its debt remains manageable with a 50% LTV, its rents are rising, and the company is selling some assets to pay off debt.
2. Secondly, the market appears to be concerned about the state of the healthcare market. Labor cost surged over the past few years and it is causing many healthcare property operators to struggle. Medical Properties Trust ( MPW ) and Omega Healthcare ( OHI ) have both reported that they have had some difficulties collecting rent from certain tenants. But what the market appears to have overlooked or at least underappreciated is that medical office buildings are far safer investments than skilled nursing facilities or hospitals. Their rent coverage ratios are a lot higher at around 5x for medical office buildings versus just 1.1-1.5 for skilled nursing facilities. Therefore, the risk of lease delinquencies is far lower in the case of GMRE, which is doing just fine for the most part.

I think that as GMRE deleverages its balance sheet a bit and then returns to growth, the market will reprice it at a higher valuation and lower yield. Given that it trades today at just 9x funds from operations ("FFO") and offers a 9% dividend yield, the upside could be up to 50% as they reprice at a 6% dividend yield, and the nice thing here is that you don't need much growth to achieve very attractive total returns from the dividend alone.

I recently got to meet the management at the NAREIT REIT Week Conference and they seemed very confident in their ability to maintain the dividend and return to growth in the coming years.

This is why we have built GMRE into one of our largest holdings at High Yield Landlord.

OUTFRONT Media Inc. ( OUT )

Then the second REIT that I want to discuss is OUT, which is one of the biggest owners of billboards in the U.S.

I am less bullish on this REIT, and so this explains why it is a much smaller position for us.

But I like it primarily because its valuation has crashed due to what I believe to be temporary factors and it now trades at a historically low valuation and high dividend yield of nearly 8%:

Billboards are cyclical investments because companies tend to cut down their advertising spend during recessions. The market fears that we are approaching one and this is why OUT's share price has crashed.

It will likely result in lower cash flow in the near term and the dividend could be at risk of a cut.

But if you can look beyond the next year or two, I think that this is a great buying opportunity because the company is now heavily discounted and the long-term growth prospects remain compelling.

The company is in the process of converting many of its assets into digital billboards, which can earn far greater cash flow by displaying many ads simultaneously. As an example, a digital billboard may advertise a Ford ( F ) pickup truck for 30 seconds and then switch to an ad for McDonald's ( MCD ) latest burger. Moreover, it also allows companies to target people at specific times with their ads. As an example, beer seller Anheuser-Busch InBev SA/NV ( BUD ) may put ads at 6 pm when people are commuting back home from work.

The market appears to have forgotten about this long-term thesis and now only seems to worry about the potential recession, but this will change again as we get to the other side of the cycle.

In the meantime, you get to earn a high yield, which I think is sustainable for now, and even if it was temporarily cut, that wouldn't be the end of the world. Its cash flow will bounce back, as it always does, because they control great assets that enjoy attractive long-term growth prospects.

I expect 50% upside as the market narrative changes and we earn a near 8% yield while we wait.

Bottom Line

The ideal investment for us has three things:

1. High dividend yield
2. Long-term growth prospects
3. Upside potential from repricing.

We are always looking for the REITs that offer the best combination of these three factors because this has historically been a winning strategy for us.

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