Income investors looking for high-yield stocks with safe dividends should take a closer look at real estate investment trusts.
The appeal of REITs is that they provide investors with the opportunity to profit from real estate, without the need to own property.
REITs are required to distribute the vast majority of their taxable income to shareholders, in exchange for a favorable tax status. As a result, investors can find high dividend yields to be very common among REITs.
Of course, investors need to make sure the underlying dividend is safe, particularly in an environment of higher interest rates and possible recession.
The three REITs, below, have safe dividends, even in a recession, along with their high yields.
A Healthy 7% Yield
National Health Investors (NHI) is a REIT focused on healthcare facilities. Some of the healthcare facilities NHI invests in are independent living facilities, senior-living campuses, and medical office buildings.
NHI specializes in sale-leaseback, joint-venture, mortgage, and mezzanine financing. On June 30, NHI had investments in 97 senior housing properties, 65 skilled nursing facilities, and one hospital across 31 states. During 2022, rental income was $218 million and made up 78% of income.
On August 8, National Health Investors reported second-quarter 2023 results. Normalized funds from operations (FFO) per diluted common share for the quarter was $1.06, a 16.5% decrease from $1.27 in the prior year quarter. During the quarter, National Health sold six properties for net proceeds of roughly $39.1 million. NHI provided normalized FFO per share guidance and now expects $4.31 to $4.35.
Future growth is likely due to the aging U.S. population, and growing demand for healthcare. Increased investment activity through financing or purchasing more healthcare real estate, as well as improved collections, and improved occupancies should see NHI continue to grow.
We are forecasting 4.0% average annual AFFO growth over the intermediate term. The trust will pursue acquisitions and diversify opportunistically, with the main focus on triple-net senior housing and skilled nursing.
Target leverage is set at 4x-5x Net Debt to Adjusted Annualized EBITDA, and the trust targets a 60/40 equity/debt funding mix. At the end of Q2 2023, NHI's leverage ratio was 4.6X, within target range. The payout ratio appears to be stable at about 80%, indicating a secure payout level.
NHI stock yields 7%.
Unlock Income Potential
Public Storage (PSA) owns an interest in about 2,400 properties that lease storage space, typically on a month-to-month basis, making it the largest such entity in the United States. The trust produces about $4 billion in annual revenue.
In the 2023 second quarter, FFO per share of $4.28 compared favorably to $3.99 per share in the prior year and topped estimates by $0.08. Revenue grew 8.7% to $1.12 million, which was in line with what analysts had anticipated. For the quarter, same-store operating income improved 6.2% due to a 6.3% increase in same-store revenues. Same-store square foot occupancy of 93.7% declined 200 basis points from the prior year, but improved 50 basis points on a sequential basis.
For the period, the trust acquired 11 self-storage facilities with 0.9 million net rentable square feet for $144 million. Subsequent to the end of the quarter, Public Storage acquired or was under contract to acquire 11 additional self-storage facilities with 0.8 million net rentable square feet for $118.2 million. The trust provided update guidance for the year, with management now expecting FFO in a range of $16.40 to $16.80 for 2023.
Public Storage has a strong history of growth. It has doubled its revenue over the past decade. Public Storage has important scale advantages over its competitors, such as overcrowding in the building of storage space.
Acquisitions are also a driver of growth. On July 24 Public Storage announced that it had agreed to acquire Simply Self Storage from Blackstone Real Estate Income Trust (BREIT) for $2.2 billion. We expect 4% annual FFO-per-share growth for the foreseeable future, as FFO is starting from a high base.
Public Storage enjoys an industry-leading A-rated balance sheet and a healthy dividend payout ratio.
The shares currently yield 4.4%.
An 'Essential' REIT Holding
Essential Properties Realty Trust (EPRT) acquires, owns, and manages single-tenant properties that are leased on a long-term basis to middle-market companies who operate service-oriented or experience-based businesses. Such businesses include restaurants, car washes, automotive services, medical services, convenience stores, entertainment, health & fitness, and early childhood education.
The trust owns or has an interest in 1,742 properties spanning 17.2 million square footage. There are 360 diverse tenants across 16 industries in 48 states.
In the 2023 second quarter, funds from operations increased by 5% year over year to $0.43 per share. Adjusted FFO rose by 8% to $0.41 per share. At the end of the quarter, the weighted average occupancy stood at 99.9%. The properties are under a weighted average lease term of 14.0 years with a weighted average rent coverage ratio of 4.1x. Leadership's upgraded its 2023 guidance and calls for adjusted FFO to be between $1.62 to $1.65 for the full year.
We estimate the trust can grow AFFO per share by roughly 6% annualized going forward. It can achieve growth through further sale-leaseback transactions with middle-market companies. So far, 88% of sale-leasebacks are internally originated, and the trust has on average over the last two years invested roughly $240 million per quarter into growing the business. The trust has nearly $634 million in available liquidity as of June 30th, 2023.
A competitive advantage of EPRT is their focus on leasing to service-oriented businesses, and in doing so, they have tenants that are well-positioned to withstand competition from e-commerce business. The dividend payout ratio is just under 70% for this year, which indicates a secure dividend.
EPRT stock yields 4.7%.
