2023-10-06 18:26:33 ET
Summary
- The REIT market is crashing, creating a unique opportunity for dividend investors to find bargains.
- Realty Income, W. P. Carey, and Medical Property Trust are three REITs with highly attractive valuations, yields, and compelling return potential.
- Realty Income offers high-quality dividends, strong portfolio performance and a safe dividend.
- W. P. Carey and Medical Properties are in turnaround situations, trade at truly depressed valuations and have company-specific catalysts.
The REIT market is crashing, creating unique opportunities for investors. While I am not a typical REIT investor, I believe the sell-off in the sector has created a number of bargains in both lower-risk and higher-risk REITs. In this article, I am going to discuss three REITs that could be interesting for dividend investors in terms of recovery potential and yields. I have been buying all three of the discussed REITs on Friday, Monday, and Tuesday.
Considering that the market has recently pushed valuations of major REITs to 1-year lows and a number of them are now deeply oversold, too, I believe the risk profile is highly attractive for investors!
The REIT crash generates unique opportunities to be greedy
The REIT sector in general has sold off in the last couple of days, leading to unique bargains that dividend investors can load up on. I believe the following three REITs offer very attractive return potential over a 12-month period while two REITs have very specific catalysts as well.
Realty Income
Realty Income ( O ) is the gold standard in the REIT industry as the company has consistently grown its earnings over a long time, largely through acquisitions. The net-lease REIT has a strong focus on retail properties (see industry breakdown below), and it has recently taken steps to create new revenue streams in the gaming industry.
Realty Income's Bellagio deal is set to diversify the REIT's income streams and includes a top asset (with its accompanying 30-year lease) on the Las Vegas strip. The Bellagio deal was the reason why I bought Realty Income for the first time ever in September: The Market Is Wrong, I Am Buying This 5.6% Yield Hand Over Fist . You can now buy the REIT 11% cheaper than I did last month, thanks to the REIT meltdown.
While the deal is good for Realty Income from a diversification and income perspective, Realty Income offers much more than that:
- A 99% portfolio occupancy rate.
- A 76% payout ratio (based off of normalized FFO).
- 5%+ long-term annual AFFO growth.
- A super low valuation of 11.9X NFFO.
Additionally, Realty Income, in the long term, never disappointed in terms of dividend growth, and investors that dripped their dividends, especially during times of depressed valuations, generated solid growth over time.
Realty Income's current yield is the highest since the beginning of the COVID pandemic in 2020…
Weaknesses: Realty Income depends on acquisitions to drive growth and real estate is currently less attractive as an asset class due to high interest rates.
Potential catalyst: High-quality dividends and exemplary portfolio performance should attract dividend investors back into the stock in due time.
W. P. Carey
The second REIT I added on Friday was W. P. Carey ( WPC ) which is currently going through a portfolio optimization process that could last a couple of quarters. The REIT just recently announced that it was spinning off the majority of its office real estate portfolio and selling other non-core office properties in separate transactions.
W. P. Carey's shares have been brutalized this year, losing one-third of their value and just made new 1-year lows. As the REIT optimizes its portfolio footprint and sells/spins off its office properties, there is a strong argument to be made for the possibility of a strong valuation recovery.
W. P. Carey has worked on its portfolio restructuring for a while and is set to reduced its office exposure to 0%. The REIT could further replace office properties with properties in other categories (such as industrial or retail).
Based off of historical yields, WPC is trading at the highest dividend yield in years as well…
Among the things that I believe stand out for dividend investors are:
- Offices accounted for only 16% of total real estate assets
- W. P. Carey is expected to receive $800M in proceeds from its office divestments, proceeds that can be reinvested in rent-producing properties in other categories
- Portfolio repositioning and asset sale completion could lead to revaluation gains in the longer term
- W. P. Carey's shares dropped to a new 1-year low on Monday (and shares are deeply oversold based on RSI, RSI value: 15.92)
- The REIT expects $5.18 to $5.26 per share company AFFO in FY 2023, implying a highly competitive valuation (10.0X P/AFFO ratio).
Weaknesses: Real estate is suffering from high interest rates, acquisition are therefore less attractive unless done at high cap rates, portfolio optimization may take time
Potential catalyst: Office spin-off/asset sales, recycling of divestment proceeds into other real estate assets
Medical Properties Trust
I added another 2,222 shares of Medical Properties Trust ( MPW ) on Tuesday and another 1,278 shares on Thursday. Just recently, shares of MPW hit a depressing 1-year low at $4.97.
Medical Properties also experienced, just like W. P. Carey, a significant valuation drawdown in 2023: it lost more than half of its value, largely because the REIT ran into tenant problems and because it owns a ton of variable debt which has started to weigh on investor sentiment.
Medical Properties owns hospital assets in the U.S. and Europe, mainly, and recently cut its dividend by 48% in order to account for lower income produced from its hospital assets. Since my initial position in August, I have tripled my position in MPW and look to add more if shares continue to slide: Strong Buy After The Dividend Cut . Shares have declined 27% since I started investing in MPW, so you can buy the REIT at a much lower valuation than I did.
What has produced considerable negative sentiment overhang lately is that the company carries too much debt on its balance sheet which may force further asset sales. The REIT has sold hospitals in Australia and is actively looking for ways to repay its $10.2B of debt.
Source: Medical Property Trust
I believe the REIT will ultimately be successful in reducing its leverage and repaying a good chunk of its debt. Medical Properties owns a large number of hospitals (444 at last count) that generate income and have value for the REIT as well as investors.
Why MPW is an attractive recovery investment:
- MPW achieved $0.85 per share in normalized FFO in H1'23 which calculates to $1.70 per share annualized
- This results in a normalized FFO multiplier factor of 3.0X, a silly valuation considering that the trust achieves positive FFO and most real estate assets/leases are performing well
- Post-dividend cut, the dividend payout ratio (based off of NFFO) is just 35%… resulting in a highly sustainable dividend
- Extremely negative investor sentiment following the dividend cut, RSI shows MPW is oversold (RSI value: 25.06)
- MPW provides dividend investors with an 11.8% yield
Weaknesses: Investors have no assurance that asset sales and debt restructuring will be successful, more asset sales may follow reducing run-rate FFO
Potential catalyst: Resolution to tenant problems, additional asset divestitures, restructuring and deleveraging balance sheet after dividend cut
Risks with REITs
The current REIT meltdown may go on for a while which may result in even more attractive valuations. However, although some riskier REIT choices are included here, I don't believe dividend investors are at risk of catching falling knives. Especially with MPW, I believe investors can take advantage of a very attractive valuation and overly bearish investor sentiment. Company-specific risks include setbacks with offices spin-off/sales (in the case of WPC) and leverage/refinancing issues (in the case of MPW).
Final thoughts
The REIT meltdown is a huge and unique opportunity for investors in general to get greedy. The REIT sector offers tremendous bargains right now. I aggressively bought the three REITs that I covered here, and they range in riskiness from low (Realty Income) to medium (W. P. Carey) to high (Medical Properties Trust).
The last two REITs could be considered recovery plays, in my opinion, because W. P. Carey is currently optimizing its real estate footprint and removing from its balance sheet higher risk office assets. Medical Properties has recovery potential as the REIT's tenant and debt situation gets resolved. In all three cases, but especially in the last one ((MPW)), the valuations are extremely attractive right now and yields are at multi-year highs. Time to accumulate aggressively!
For further details see:
Buy The REIT Crash: 3 Contrarian REITs To Buy With Yields Up To 12%