These REITs should be able to deliver durable and growing dividends.
Companies with higher dividend yields tend to be riskier. They usually have some issues that have weighed on their valuations and are pushing up their dividend yields. Those problems can sometimes cause these companies to reduce or suspend their dividends.
However, their payouts become more durable as they work through their issues. That’s currently the case with W.P. Carey (WPC 0.59%) and EPR Properties (EPR 0.82%). The real estate investment trusts (REITs) have had to reduce their dividends in recent years due to some issues with certain property types they owned. They have addressed those problems, putting their big-time dividends on much more sustainable foundations. They’re now in a great position to produce durable and growing dividend income for the next decade or more.
Building back better
W.P. Carey had been an elite dividend stock until last year. It had increased its payment every single year for a quarter-century. However, headwinds facing the office sector since the pandemic weighed on that part of its portfolio. That led the REIT to make the strategic decision to exit the office sector. As a result, it reset its dividend level to reflect its lower earnings and a desire to have a more conservative dividend payout ratio. It reduced the rate from around 80% at the time to a target range of 70%-75%.
Even with that cut, the diversified REIT still offers a very high dividend yield of nearly 6%. That payout is much more sustainable because the company has a stronger portfolio and financial foundation. It’s using the proceeds from the sale of offices to invest in properties with better long-term fundamentals, like industrial real estate. It also used the sales to strengthen its financial foundation. Its leverage ratio is currently below its target range in the mid-to-high fives at 5.4.
W.P. Carey has already started building back its dividend, increasing it three times this year. It expects to continue growing its dividend in the future at around the same rate as it increases its adjusted funds from operations (FFO). Its FFO should rise as rents increase and it makes accretive acquisitions. With a much more sustainable portfolio and balance sheet, W.P. Carey is in an excellent position to deliver a stable and growing dividend in the coming decade.
Coming back stronger
EPR Properties has also faced pandemic-related headwinds in recent years. The REIT focuses on owning experiential real estate like movie theaters, eat-and-play venues, and other attractions. Many of its properties had to shut their doors during the pandemic, which affected its tenants’ ability to pay rent. That forced the REIT to suspend its dividend until things started returning to normal.
The company reinstituted a dividend in late 2021, resetting the payout at a lower rate than its pre-pandemic level. That allowed it to retain additional cash flow to enhance its financial flexibility. That came in handy last year, when one of its theater tenants went through the bankruptcy process.
EPR Properties has spent the past few years reducing its exposure to the theater industry. It has sold off some vacant properties and used its financial flexibility to diversify into other experiential property sectors. For example, it sold $56.5 million of properties this year, including four theater properties for $10.3 million in the second quarter at a $1.5 million gain. The REIT used that money and other funding sources to invest $132.7 million into new experiential property acquisitions and build-to-suit development and redevelopment projects through the first half of this year.
The improving health of EPR Properties’ portfolio has enabled the REIT to increase its dividend a few times over the past couple of years. It currently yields nearly 7%. With a stronger portfolio and solid financial foundation, the company should be able to continue expanding its portfolio and dividend in the coming years.
With their problems in the past, these dividends should be durable over the next decade
W.P. Carey and EPR Properties experienced some pandemic-related issues that ultimately forced them to reduce their dividends. However, they’ve addressed those problems and are building much more sustainable companies. They should now be able to continue paying and growing their high-yielding dividends over the next decade. That makes them both great income stocks to buy and hold for the very long term.
