Earn A 10% Dividend Yield from These REITs

Most Real Estate Investment Trusts, or REITs, like Realty Income (O), VICI Properties (VICI), W.P Carey (WPC), Prologis (PLD), and others pay a 3-5% dividend yield. But there are some exceptions that yield a lot more. EPR Properties (EPR) and Global Medical REIT (GMRE) will earn almost a 10% dividend yield. They are ideal for a dividend portfolio that seeks high passive income and dividend growth. These are among the best REITs to buy in 2023. You can access my entire REIT Portfolio by taking a 2-week free trial to my REIT newsletter, High Yield Landlord: https://seekingalpha.com/checkout?service_id=mp_1268

EPR is a triple net lease REIT that specializes in experiential properties such as movie theaters, water parks, and golf complexes. In 2022, it hiked its dividend by 10%, but its share price dropped and as a result, it now offers a 9% dividend yield.

The market fears EPR because of two key misunderstandings:
Firstly, it thinks that it will suffer in a recession because its properties rely on discretionary spending, but this doesn't really make sense since EPR is the landlord, not the operator. EPR earns steady rental income from leases that have 14-year terms left on average and its rents are hiked each year by 1.5-2% on average, whether we go into a recession or not. The recent coverage ratio is around 2x, so most of its tenants would have no problems paying their rent even if their profitability suffered for a year or two.

Secondly, the market also fears that movie theaters are going to die and that its tenants AMC (AMC) and Cinemark (CNK) will default on their leases. I agree that many theaters will close in the coming years. But where I disagree is that I think that this will actually benefit EPR's theaters. I think that it is a case of the weak getting weaker and the strong getting stronger. The lower quality theaters will close down, but this will consolidate traffic towards the higher quality theaters such as those of EPR. Good theaters are not going anywhere because they remain the best option for studios to monetize new blockbusters. The new Avatar movie is already one of the highest-grossing movies of all time and so clearly, people still enjoy going to movie theaters. Today, EPR's theaters are already profitable at the property level with 1.3x rent coverage even as we still emerge from the pandemic. Now, the movie slate is improving and so I would expect the rent coverage to only improve further in 2023.

You should discount EPR for the exposure to movie theaters, but not by so much. The theaters only represent around 1/4 of its portfolio as measured by NAV, and the remaining 3/4 is doing very well. Yet, EPR is priced today at just 8x, which is a nearly two times lower multiple than that of other net lease REITs: Realty Income (O), National Retail Properties (NNN), and VICI Properties (VICI). We think that as the health of its tenants continues to improve, EPR will eventually reprice at closer to a 6% dividend yield, unlocking up to 50% upside to shareholders.

GMRE is a REIT that specializes in medical office buildings. It hiked its dividend by a small 2% in 2022 but its share price got cut in half. As a result, it is now priced at a 9.4% dividend yield, which is historically high for the company.

We think that the company is undervalued because it dropped in solidarity with senior housing and skilled nursing REITs like CareTrust REIT (CTRE), National Health Investors (NHI), Omega Healthcare (OHI), and Welltower (WELL) and hospital REIT Medical Properties Trust (MPW). Those sectors suffered a lot from the pandemic and the recent surge in inflation. Many senior housing and skilled nursing operators are today still struggling to stay alive and rent coverage ratios are low at 1-1.5x.

But the market appears to ignore or at least underappreciate that medical office buildings are a lot safer, despite also being healthcare properties. They enjoy rent coverage of nearly 5x on average and so the risk of a lease default is a lot smaller. GMRE also sold off so heavily because it is a smaller REIT with a bit more leverage than most. Its interest expense will rise in 2023, which will slow down its growth prospects, but this is not the end of the world.

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Image sources: NAREIT, YCHARTS, EPRA, O, Canva

Important Disclaimer: Leonberg Capital holds positions in O, WPC and VICI. This video is impersonal and does not provide individualized advice or recommendations for any specific person. This YouTube channel is managed by Leonberg Research OÜ, a subsidiary of Leonberg Capital OÜ.

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