2 REITs That Offer Higher But Riskier Yields

Core Viewpoint - The article discusses two REITs with attractive yields above 5%, but highlights their risk due to high payout ratios and the current economic environment with prolonged high interest rates [4][24]. Group 1: Investment Risks - REITs are considered riskier investments due to their requirement to pay out 90% of distributable earnings, with many having payout ratios in the 60% to 70% range deemed safer [5]. - A payout ratio above 80% is considered high risk, as it limits capital for reinvestment and leaves little margin for error during economic uncertainty [5]. - The article cites a recent example of TriplePoint Venture Growth cutting its dividend by 25% due to a high payout ratio and tight dividend coverage [5]. Group 2: REIT 1 - Easterly Government Properties (DEA) - DEA has a forward yield of 7.9% and a cash available for distribution (CAD) payout ratio above 100%, indicating potential risk for dividend sustainability [7][8]. - The REIT's revenue grew from $72.8 million in Q1 to $76.22 million in Q2, a year-over-year increase of 6.8% [7]. - DEA's net debt to EBITDA ratio was 7.1x in Q2'23, significantly higher than its peer Cousins Properties at 5.12x [8]. Group 3: REIT 2 - Gaming And Leisure Properties (GLPI) - GLPI has a forward yield above 6% and an AFFO payout ratio of 80.5%, which is higher than peer VICI Properties at 74% [9][24]. - The REIT's revenue increased to $380.6 million in Q2, reflecting a 6.7% year-over-year growth [9]. - GLPI's net debt to EBITDA ratio improved from 6.3x to 4.5x, indicating a stronger balance sheet compared to DEA [23]. Group 4: Future Outlook - Both REITs are expected to benefit from a potential decline in interest rates, which could enhance their investment activity and dividend safety [24]. - The article emphasizes the importance of balance sheets in assessing the ability to cover dividends, especially in light of upcoming debt maturities [24].