Need even higher dividend yields in 2025? Consider real estate investment trusts (REITs). REITs are literally required to be dividend paying machines. By law, it’s the income that counts.
Some REITs have yields of 10% or more. What a dividend! We will discuss seven of them and their outlook for 2025 later.
Nowadays, you can’t blindly pick older REITs. The real estate sector, which uses the Real Estate Select Sector SPDR (XLRE) as its proxy, currently pays only 3%.
However, the average yield for this REIT 7 pack is 12.4%. This is four times what the industry is paying.
With this level of income, it’s easy to retire on dividends alone. But not all is well for REITs heading into 2025.
The Fed gave the real estate sector a boost by cutting its benchmark interest rate three times in 2024. In fact, equity REITs are already taking full advantage of improved cost of equity capital by issuing new shares to raise capital.
But the Fed is also ramping up expectations for further rate cuts, with an official “dot plot” showing the central bank expects to cut its benchmark rate by just 0.5 percentage points in 2025. . Point of interest rate cut.
Let’s take a look at a group of REITs with yields between 10.4% and 15.3%, with a special focus on business and financial quality.
This REIT mini-portfolio yields 12.4%
Community Healthcare Trust (CHCT, yielding 10.4%) is a highly diversified owner of healthcare real estate. Spanning 35 states, we boast approximately 200 properties, including medical office buildings, urgent care centers, surgery centers, dialysis clinics, and many other types, that are leased to 315 tenants.
And it’s the owner of one of the most interesting charts I’ve ever seen.
CHCT takes a page out of the real estate income (O) strategy and has delivered quarterly dividend increases for years. In fact, Community Healthcare has consistently grown its dividend for ~37 quarters. However, this increase has been conservative and planned, with CHCT gaining only 0.25 cents per quarter for most of its streak.
However, the company’s funds under management (FFO, an important return indicator for REITs) are below 2020 levels. Much of the negative stock price is due to CHCT bouncing around from one tenant to another. One of the tenants, GenesisCare, declared bankruptcy in 2023, resulting in a variety of outcomes, including some leases being taken over and assigned while others remained with the operating GenesisCare entity. . While this issue was resolved, another important tenant began paying late or partial rent, and CHCT set up a consulting team to resolve this issue.
However, the stock price has stabilized recently. However, the Fed’s recent rate cuts should improve the company’s cost of capital, and most earnings models point to the company recovering after a difficult 2024, but I’ll be watching. CHCT is unlikely to struggle with dividend coverage (based on non-GAAP “funds available for distribution”), but that coverage could be strengthened, at least in the short term.
Global Medical REIT (GMRE, yielding 10.8%) is another double-digit yielding stock in the healthcare real estate space. GMRE currently owns 187 off-campus clinics and post-acute inpatient medical facilities, leases to 275 tenants, and has an occupancy rate of just over 96%.
In early 2024, I wrote that GMRE would likely bottom in late 2022 after one of its tenants, Pipeline Health System, filed for Chapter 11 bankruptcy. said. In any case, the stock price has been on a roller coaster all the way, going through many peaks and troughs and still losing about a quarter of its value over the past three years. ” GMRE had to deal with another bankruptcy, Steward Health Care, and has since suffered another 10% loss.
There are reasons to be optimistic. GMRE was able to enter into a 15-year triple net lease for a large property in Beaumont, Texas, previously leased to Steward Health. The company also went on the offensive throughout 2024, including closing on a portfolio of 15 properties for $80.3 million, and recently announced the acquisition of five properties for $69.6 million that will be completed in 2025.
Dividends still require attention. The Global Medical REIT is on pace to pay 21 cents per share and 90 cents per share in adjusted funds from operations (AFFO). That’s a 93% payout ratio, which is pretty tough unless GMRE starts growing again.
Innovative Industrial Properties (IIPR, yielding 10.8%) is not your typical real estate investment trust. We do not handle residential buildings, office buildings, warehouses, etc. We deal with weeds.
Innovative Industrial Properties provides capital to the regulated cannabis industry through a sale-leaseback program. IIPR purchases stand-alone industrial and retail properties (primarily marijuana cultivation facilities) and immediately leases them out, providing cannabis operators with a much-needed influx of cash that they can use to expand their operations. The company currently owns 108 properties representing nearly 9 million square feet in 19 states and leases them to 30 tenants.
IIPR was once a growth darling of the REIT industry, delivering nearly 900% total return from 2018 to its peak in 2021 before cratering, and has since lost 70% of its value. That includes a similarly hot and cold year in 2024, when stocks rose as much as 40% before falling 20% year-to-date.
IIPR’s stock price has fallen rapidly due to two events, one of which is far more concerning than the other.
Shares fell in November after the company missed out on revenue and normalized its funds from operations (FFO). The double-digit drop was even large enough to drive out class-action litigation firms. (Unsurprisingly, the stock fell a little further in the days after Florida’s recreational marijuana amendment failed.) Just days ago, Innovative Industrial Properties sold 11 properties and 17% of IIP. The representative tenant, Pharmacan, was unable to meet its rental obligations on 6 of the 11 properties due to cross-defaults, resulting in gross rental income for the first nine months of 2024. This provision meant that PharmaCann effectively defaulted on all lease agreements.
Meanwhile, IIPR currently trades at less than 8x annualized FFO (based on the first nine months of 2024). On the one hand, this gut shot is emblematic of a marijuana industry that seemingly refuses to make money, even as the actual marijuana trade has exploded.
Let’s stop and clear the smoke.
Brandywine Realty Trust (BDN, yielding 11.1%) was once an office-focused REIT, but has since become a hybrid with a mix of real estate properties, primarily focused on the Philadelphia metropolitan area and Austin, Texas. Diversified into REITs. For example, the current pipeline’s expected net operating income is 42% office, 32% life sciences, and 26% residential.
Following 2023, when Brandywine cut its dividend by 21%, the REIT has consistently outperformed 2024 without incident. While we are facing some issues in Austin, our portfolio in Philadelphia is strong. Its two most exciting projects are Schuylkill Yards in Philadelphia and Uptown ATX in Austin, which have the potential to drive long-term FFO growth. It’s also trading at a modest 6x next year’s FFO estimates. Dividend coverage has improved, but that’s not too surprising considering the recent dividend cuts.
Global Net Lease (GNL, 15.3% yield) is a commercial REIT operator that owns 1,223 properties in 11 countries and leases them to 723 tenants in 89 industries. The U.S. accounts for about 80% of its fixed rents, but it also has locations in Canada and Western European countries such as the United Kingdom, the Netherlands and Germany.
It’s also one of the stock REITs with an impressive yield of over 15%, despite management’s seemingly best efforts to keep the dividend low. GNL has cut its dividend by almost half since 2020 with three cuts, including a 22% cut in 2024.
Global Net Lease is currently selling properties here and there to reduce its leverage. Almost $1 billion is expected to be sold in 2024, and Wall Street expects an additional $500 million to $600 million in 2025. EBITDA is 8.4x at the beginning of 2024, but is expected to increase to 7.8-7.4x by the end of the year.
It’s a much healthier position, but it’s hard to ignore the dividend track record. GNL’s sensitivity to interest rates could also be an issue if the Fed enters a state of emergency in 2025.
While double-digit yields are relatively rare among equity REITs, they are common among mortgage REITs (mREITs). Mortgage REITs (mREITs) typically do not own physical real estate and instead invest in “paper” real estate.
For example, New York Mortgage Trust (NYMT, yielding 13.7%) sells a variety of residential mortgage loans, agency mortgage-backed securities (RMBS), non-agency RMBS, structured multifamily investments, and residential mortgage-backed securities (RMBS). Invests in loans and other securitized products. more.
30-year mortgage rates were less than 3% in mid-2021, but have now skyrocketed to the high 6% range. This hit mREIT housing securities hard. Similarly, NYMT stock and dividends were both split in half, the latter driven by two production cuts announced in 2023.
The company has almost completely dismantled its multifamily joint ventures that weighed on its book value, and its stock trades at just 54% of its adjusted book value. However, the company’s unamortized earnings (a non-GAAP financial measure used by NYMT) has not covered the dividend for at least three years. Management seems unconcerned and says they expect earnings to approach dividends over time, but I’d be cautious.
Dynex Capital (DX, yielding 14.4%) is almost entirely invested in government agency bonds. The longest-running mREIT on the market is a specialist in agency MBS, with residential agency MBS accounting for a whopping 97% of its portfolio and commercial agency MBS accounting for another 2% or so. Non-governmental CMBS account for the remainder.
Agency MBS are considered “safer” than non-agency MBS, but they also generally have lower fees. As a result, agency MBS-focused REITs will leverage more leverage to maximize performance and returns. Dynex’s leverage decreased to 7.6x in the most recent quarter, but it’s still a very solid multiple.
I said in the summer of 2024, “If the yield curve steepens (the gap between short-term and long-term interest rates widens), Dynex stands to benefit.” The yield curve was mandated.
That’s an encouraging step in the right direction. The story surrounding Dynex’s dividend has largely been a story of collapse. DX paid 87 cents per share (adjusted for reverse splits) in 2012, but a series of dividend cuts brought that down to just 13 cents before the most recent increase.
Brett Owens is Chief Investment Strategist at Contrarian Outlook. For more great income ideas, get your free copy of our latest special report, “Early Retirement Portfolios: Huge Monthly Dividends, Forever.”
Disclosure: None