Real estate investment trust (REIT) investors have taken it on the chin this year. Dozens of REITs have reduced or suspended their dividends, including some of the sector’s former stalwarts. Driving the dividend downdraft is the impact COVID-19 has had on rent collection around the industry.
More REIT dividends will likely fall victim to this year’s downturn, which is why investors need to be on their guard. Three REITs where the danger of a dividend cut seems to lurk these days are Getty Realty (NYSE: GTY), National Retail Properties (NYSE: NNN), and Global Medical REIT (NYSE: GMRE).
Running out of gas
Getty Realty currently yields more than 5.1%. On the one hand, that payout seems to be on a firm foundation since the retail REIT — which specializes in owning gas stations and convenience store properties — collected 97% of the rent it billed in April. That’s impressive considering how low collection rates were for other retail-focused REITs.
However, the company warned in its first-quarter earnings release that “the longer that COVID-19 shelter-in-place directives continue, the greater the possibility that there could be impacts to our 2020 financial performance.” That’s a concern given the recent spike in cases across many states, which could affect travel and, therefore, its tenants’ ability to continue paying rent.
Adding to the concerns is Getty’s financial profile. It has an elevated dividend payout ratio of more than 85% of its FFO and a credit rating right on the investment-grade border. Because of these factors, if market conditions deteriorate, Getty might need to reduce its dividend so that it doesn’t put any unnecessary pressure on its balance sheet.
Despite the streak, the dividend isn’t untouchable
National Retail Properties has an excellent dividend history. The retail REIT — which focuses on net-lease properties — has increased its payout for an impressive 30 straight years. Given that track record, it would be an attractive dividend stock, especially since it currently yields 6.2%.
However, there are some cracks in the foundation that could put the payout at risk. National Retail Properties’ tenants have struggled to pay rent this year due to COVID-19, with the REIT only collecting 52% of what it billed in April. That led CEO Jay Whitehurst to warn on the company’s first-quarter conference call that “our board will continue to review our dividend policy as we work through the current economic turmoil, and by no means is our dividend untouchable.” Thus, if its rent collection rate remains weak, the REIT might need to reduce its dividend.
Another potential COVID-19 casualty?
Healthcare REIT Global Medical REIT currently yields 7.3%. One reason the yield has risen to such heights is that the market has some concerns about its sustainability. Among the issues is that some of the REIT’s medical office tenants are struggling to pay rent because COVID-19 has impacted their ability to serve patients. That’s evident in the company’s rental collection rate, which declined from 97% in April to 87% in May. That has the market worried about the dividend’s sustainability since the REIT already pays out roughly 100% of its adjusted FFO.
In commenting on the dividend, CEO Jeff Busch stated on the first-quarter call that the company doesn’t “see any issues right now.” That’s because it has “a very good liquidity position,” which provides it some cushion. However, if its rental collection rate remains under pressure, this REIT’s dividend might fall victim to COVID-19.
These REIT dividends might be next in line for a reduction
This year has been a tough one for REIT investors because a growing list of them have slashed or suspended their payouts. It seems like more REIT dividends are falling victim to this year’s real estate downturn every day, suggesting more payouts are at risk. That danger appears to be lurking at Global Medical REIT, Getty Realty, and National Retail Properties, given some potentially worrisome trends in their collection rates or financials. Because of that, REIT investors should tread carefully around this trio until they see some improvement.