A real estate investment trust (REIT) is a company that owns, operates, or finances income-generating real estate. REITs allow investors to gain exposure to real estate without the burden of managing physical properties, and they are legally required to distribute at least 90% of their taxable income to shareholders in the form of dividends.
Some REITs, like EPR Properties (EPR 0.41%) and Reality Income (O -0.22%), even distribute dividends on a monthly basis, which can provide steady income for investors, particularly retirees. So, let's look at these two REITs and see whether they are worthy of your portfolio.
EPR Properties believes in the experience economy
If you frequent movie theaters, eat-and-play concepts like TopGolf, amusement parks, or ski hills, chances are you've visited a location owned by EPR Properties. The REIT owns 359 properties across 44 states and Canada, collecting rent from its experiential tenants. The company has paid a regular dividend since going public in 1997 and switched from a quarterly to a monthly payout in 2013.
Today, EPR Properties pays a monthly dividend of $0.275 per share, resulting in a hefty annual dividend yield of 6.9%. In addition to the monthly payout, the stock has had a nice run over the past year, with a 20% price appreciation. The stock is still down roughly 30% from pre-pandemic levels, as the company obviously suffered during the pandemic when people were unable to visit its properties, forcing it to modify its leases with its tenants unable to meet rent obligations.
The good news is that revenue and net income are on the rise again, with the company's trailing-12-month revenue of $662 million surpassing its 2019 revenue of $652 million. And while the company's trailing-12-month net income of $176 million hasn't quite reached its 2019 level of $202 million, it's quite an improvement from its 2020 net loss of $132 million.
Despite the challenging macro environment for EPR Properties, management expanded its portfolio from 280 properties in 2020 to 359 properties today. Management pulled this off while maintaining its net debt -- total debt minus cash and cash equivalents -- of roughly $2.7 billion and lowering its annual interest expense from $158 million in 2020 to $120 million over the 12 trailing months.
EPR Properties is heavily concentrated in movie theaters, with 39% of its portfolio dedicated to the industry. Even before the pandemic, the movie theater business was declining, selling 200 million fewer domestic tickets in 2019 compared to its highs in the early oughts. As a result, management has stated its intention to reduce its strategic focus on theater properties in favor of its other experiential property types.
Nonetheless, EPR Properties stock looks cheap on a valuation basis when you look at its forward price-to-earnings (P/E) ratio. The stock trades at a forward P/E ratio of 18.4, significantly below its five-year trailing median P/E ratio of 23.3.
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Realty Income calls itself "The Monthly Dividend Company"
Realty Income is a REIT that primarily invests in retail and commercial properties, with its three largest clients being Walgreens, 7-Eleven, and Dollar Tree. The stock has underperformed in the last five years, with a total return of only 20% compared to the S&P 500's 100%.
Despite the recent underperformance, the stock is incredibly friendly to dividend seekers. That's because Realty Income, which has dubbed itself "The Monthly Dividend Company," has paid a consecutive monthly dividend throughout its 54-year history and increased its dividend 123 times since going public in 1994. Today, the company pays a monthly dividend of $0.2565, resulting in an annual dividend yield of 5.2%.
Beyond its dividend, the company is on a spending spree to generate growth, investing approximately $9 billion in 2023, including $950 million in the Bellagio Las Vegas. Additionally, Realty Income recently entered into a merger agreement with Spirit Realty Capital, a REIT investing in single-tenant real estate assets, in an all-stock deal valued at $9.3 billion and expected to close sometime in 2024. The combined company will result in the fourth-largest REIT.
Given the recent investments, Realty Income's trailing-12-month revenue and net income of $3.9 billion and $881 million would represent record annual results for the company. However, the company's net debt has also skyrocketed. As of its most recently reported quarter, Realty Income's net debt stood at $20.3 billion, up 141% over the past three years.
And given the state of elevated interest rates, investors can expect higher interest expenses moving forward. Notably, Realty Income paid $660 million in interest expenses over the trailing 12 months, another record high.
O Total Interest Expense (TTM) data by YCharts
Nonetheless, there's still reason for optimism; at the end of the quarter, occupancy was 98.8%, just shy of the company's recent record of 99%. Looking ahead, the unprecedented growth provides an exciting opportunity for investors, but it will be crucial to keep an eye on how management handles its debt.
Are these two monthly dividend-paying stocks worth buying?
Investing in REIT stocks isn't for everyone, as dividends are prioritized over share price appreciation. Still, REITs provide exposure to real estate without the challenge of managing physical properties.
These two stocks provide steady and reliable payments, and despite each having exposure to movie theaters, the rest of their portfolios are relatively stable. So, if you're looking for monthly income, EPR Properties and Realty Income are quality investment options.
