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Motley Fool Issues Rare “All In” Buy Alert
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Real estate investment trusts (REITs) have taken quite the beating over the last year. General market volatility coupled with a growing concern over interest rate hikes and future real estate market movements has pushed a number of REITs down notably.
Beaten-down stocks may not look like an appealing buy at first glance, but this is actually an ideal buying opportunity. Federal Realty Investment Trust (FRT 0.00%), Medical Properties Trust (MPW 0.96%), and EPR Properties (EPR -2.25%) are three stocks down 20% or more since the start of the pandemic. 
EPR data by YCharts
An investment today, while their prices are beaten-down, could pay off big in the long run. Here’s a closer look at each company and why they are good buys right now.
Federal Realty Investment Trust is one of the most reliable dividend-paying REITs in the industry. Having raised its dividend consistently for the last 55 years, the stock is a Dividend King. Share prices for Federal Realty Investment Trust fell hard at the start of the pandemic, having yet to recover. Now growing concern over a recession’s impact on retail spending has pushed shares back down.
Investor hesitation is fair, given Federal Realty Investment Trust owns and leases 104 retail and mixed-use outdoor shopping centers — it’s directly impacted by spending in the retail industry. But I don’t see a huge cause for concern. The company has an outstanding track record, having lived through several recessions before, and its current performance is promising.
The REIT’s latest earnings for Q2 2022 reported record funds from operations (FFO) while net operating income rose by nearly 32% since last year. It signed 132 new leases, making 94.1% of its properties leased with 92% of its portfolio currently occupied. Its strong performance prompted the company to raise its guidance for the full year and increase its dividend. Today its dividend yield sits at just under 4%.
Having interest or ownership in 447 properties in 10 countries, Medical Properties Trust is the largest owner of private hospitals in the world. Unlike its fellow beaten-down peers, Medical Properties Trust isn’t languishing from the initial pains of the pandemic. In fact, its stock nearly recovered completely in early 2022. Rather, the stock is getting battered over a new cause for concern — rising interest rates impacting its cost of borrowing.
The REIT has achieved impressive growth over the last several years and has grown its assets by 122% since 2018. But now investors are worrying that higher capital costs could impact its ability to maintain this same growth momentum. However, I don’t think there’s anything to fear.
For the six months ended June 30, 2022, its FFO grew close to 6% while net income was up 18%. It has $257 million in cash and cash equivalents and no debt maturities until 2023. Its debt-to-EBITDA is at 6.3 times, which is slightly elevated but still manageable. Thanks to its contractual rental increases when inflation reaches high levels, in 2023 it expects an extra $53 million or a 4.4% increase. Plus, income investors will love that its dividend yield is nearing 7% today.
EPR Properties is a net lease REIT that specializes in owning and leasing experience-based properties. With its portfolio of 358 different properties including movie theaters, eat and play restaurants, hotels and ski resorts, gyms, and education centers, the stock understandably was extremely hard hit during the pandemic. Falling 71% in the initial March 2020 crash, EPR Properties has yet to recover and is now sitting around 32% below pre-pandemic levels.
Its beaten-up stock price, however, doesn’t reflect its recent performance. Pent-up demand for experiential activities has exploded over the last year as pandemic restrictions have eased. Places like theme parks, movie theaters, concert venues, and gaming centers are seeing a resurgence in consumer spending as people choose experiences over things.
For the six months ended July 30, 2022, the REIT’s adjusted funds from operations, an important metric for REIT profitability, has grown 94% compared to the previous year. The company is in a strong financial position, having $168 million of cash on hand, a low debt-to-EBITDA of 5.1 times, and no debt maturities until 2024, meaning it has more than enough money to help it float if things get worse.
It is worth noting that while its latest earnings are showing promising signs of recovery, it’s not totally out of the clear just yet. Cinemark, one of EPR Properties’ largest tenants and accounts for roughly 6.5% of total revenues, recently hired bankruptcy attorneys. This suggests that it is likely going to file for chapter 11 bankruptcy. While this would certainly hurt EPR Properties temporarily, EPR looks like it is in a strong financial position to absorb a hit like this.
Its super-high dividend yield of 6.5% already makes it alluring, but income investors will also enjoy knowing that EPR Properties is one of the few monthly dividend-paying REITs. Plus, its payout ratio is well within the healthy range at 67%, so dividend cuts aren’t a cause for concern in the near future, even with looming tenant challenges.
Liz Brumer-Smith has no position in any of the stocks mentioned. The Motley Fool recommends EPR Properties. The Motley Fool has a disclosure policy.
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