Income investors dream of buying stocks whose companies have solid business models and fundamentals, but because of temporary market conditions, the shares have ultra-high yields.
When markets sell off as a whole those dreams may come true, but other times dreams turn into nightmares if poor earnings cause dividends to be cut and share prices to tumble even further.
Take a look at three real estate investment trusts (REITs) with massive dividend yields and decipher whether they are likely to reward investors looking for ongoing high income or simply become future yield traps:
MFA Financial Inc. MFA is a New York-based mortgage REIT (mREIT) that invests in residential mortgage assets, including government-supported mortgage-backed securities (MBSes), agency MBS and other types of loans.
2022 has been a terrible year for mREITs in general, and MFA Financial is no exception, having lost 32% of its value year-to-date. But it has gained back 15.25% off its lows over the past month to its most recent closing price of $11.11.
Third-quarter revenue of $52.29 million declined from $61.82 million in the third quarter of 2021. Earnings per share (EPS) was a loss of $0.62, far below the $0.68 per share profit of the third quarter in 2021.
The annual dividend of $1.76 is no longer covered by $1.66 EPS, so the massive 15.8% yield could potentially see a cut. In fact, MFA Financial severely cut its quarterly dividend in 2020, from $0.80 to $0.20, so it may not hesitate to do it again.
Even a reduction of the dividend to $1.11 per share would still yield 10% and bring the payout ratio to a much healthier 66%. Therefore, investors should be wary of this massive dividend yield.
Necessity Retail REIT Inc. Class A RTL is a New York-based retail REIT that owns, leases and operates over 1,050 single-tenant and open-air grocery centers with 29 million rentable square feet, mostly in the Southeast U.S. Its tenants include Best Buy Co. Inc., Bank of America Corp., The Home Depot Inc., BJ’s Wholesale Club Holdings Inc., Chevron Corp. and other well-known names.
Third-quarter revenue grew 26% and net operating income (NOI) rose 12.3% from the third quarter of 2021. But funds from operations (FFO) of $0.22 per share was a decrease of 12% from $0.25 in the third quarter of 2021. The executed occupancy and leasing pipeline at open-air shopping centers increased from 89.4% a year ago to 92.8% in the third quarter of 2022.
Necessity Retail REIT pays an annual dividend of $0.85 that currently yields 12.8%. The forward annual FFO is $0.96, so the FFO/dividend ratio is high at 88%. Between the lackluster FFO and the debt-to-equity ratio of 169.92, the ability of Necessity Retail REIT to maintain its high-yielding dividend is still possible, but investor caution is urged.
Global Net Lease Inc. GNL is a New York-based diversified international commercial property REIT with 311 properties across 11 countries. Its 140 tenants are spread across 50 different industries. Global Net Lease’s current occupancy rate is a robust 98.6%, and its average lease term is 8.1 years.
After disappointing Wall Street with FFO of $0.43 per share and $95 million in revenue in Q2 2022, Global Net Lease also produced mixed results in its third quarter. Core FFO of $0.47 was up 9%, but $92.6 million in revenue was down 3% from the third quarter of 2021.
Global Net Lease’s share price double-bottomed in mid-October and has risen 36% since, making it one of the best-performing REITs over the past six weeks. With a recent closing price near $13.35 and an annual dividend of $1.60, the stock sports a lofty current dividend yield of just below 12%. Its forward annual FFO of $1.76 per share covers but leaves little room for any increase in dividend payments, especially with a total debt-to-equity level of 1.6.
Nevertheless, Global Net Lease’s diversification reduces its recession risk, and its high leasing rate bodes well for its future. Another increase or two in FFO would help Global Net Lease maintain or even raise its massive dividend yield and possibly even see some price appreciation as well.
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