The allure of real estate investing is that you can generate passive income. In theory, the only work an investor needs to do is take the rent checks out of the mailbox and then deposit them at the bank. However, most seasoned real estate investors will tell you that real estate investing is much more active than that since there are toilets to fix and tenants to keep after.
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REITs, on the other hand, provide an investor with truly passive income because the management teams of these entities take care of all the hard work. Meanwhile, all an investor needs to do is sit back and watch the dividends roll into their brokerage account each quarter. For investors who would rather go with the easier option, here are three top REITs that should provide a reliable stream of passive real estate income.
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A healthy income stream
Medical Properties Trust (NYSE: MPW), as the name suggests, owns healthcare facilities. However, the company has chosen to focus its investments on the physical real estate associated with hospitals as opposed to other medical propertiesbecause these buildings are the heartbeat of local healthcare. By acquiring the hospitals, Medical Properties provides healthcare systems with cash to reinvest in growing their system and improving patient care. Since inception, the company has invested more than $6 billion into a portfolio of around 250 facilities in the U.S. and Europe, which it leases to hospital operating companies under long-term leases.
Medical Properties Trust returns a generous portion of the cash flow it collects from these leases to investors via a quarterly dividend that recently yielded 7.35%. However, the company still maintains a conservative payout ratio of 75% to 80%, which for perspective is a more sustainable rate than leading healthcare-focused REIT Welltower, which sent back an average of 85% of its available cash flow to investors during the past two years. Moreover, Medical Properties Trust further solidifies its payout by maintaining a sector-leading leverage ratio of just 5.1 times net debt-to-EBITDA.
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As the only company focused on acquiring hospitals, Medical Properties Trust has a wide open market with minimal competition. Because of that, the company remains confident that it can continue buying between $500 million to $1 billion of hospital real estate each year without tarnishing its strong credit metrics. Further, this is needle-moving growth for investors because, for example, the company expects that 2017's deals should push cash flow per share up another about 7.5% this year at the midpoint. That positions the company to continue growing its payout at a healthy clip, likely keeping pace with the 14% increase the company has delivered since 2014.
An easy way to net a growing income stream
W.P. Carey (NYSE: WPC) takes a much more diversified approach to real estate investing. Overall, the company owns more than 900 properties primarily across the U.S. and Europe, which include industrial, office, retail, warehouse, self-storage, and other assets. That said, all these properties have one thing in common, they're net lease facilities, which means that tenants bear many of the responsibilities for expenses, enabling W.P. Carey to generate very steady cash flow. Meanwhile, those contracts, on average, extend for nearly a decade, which enhances the company's financial stability.
W.P. Carey also pays a pretty generous dividend, which recently yielded 6.35%. More importantly, that payout is on a very sustainable footing because of the consistency of the company's cash flow and its conservative payout ratio, which was just 76.7% last year. On top of that, W.P. Carey maintains a solid balance sheet, complete with an investment grade credit rating and sustainable leverage metrics, including 49.7% debt-to-assets and 5.8 times debt-to-EBITDA.
Investors can expect W.P. Carey to deliver modest dividend growth in future years because the company's focus isn't on getting bigger but getting better. Last year, for example, the company bought or built $544 million of properties, which it paid for by selling $636 million of lower-returning properties and recycling that capital into the new higher return assets. Meanwhile, the company currently has $60 million of development projects under way and the balance sheet strength to make deals when compelling opportunities arise. Because of that, W. P. Carey should have no problem continuing to steadily increase its dividend, which it has done for the past 18 years.
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Going global for growth
American Tower (NYSE: AMT) is one of the largest REITs in the world. However, it's quite different from most in the REIT space because the company doesn't own buildings. Instead, it owns a vast portfolio of communications towers, and it leases space on those towers to tenants such as mobile carriers under long-term contracts. Currently, the company operates about 40,000 towers in the U.S. along with another 107,000 towers internationally.
One of the other notable differences between American Tower and other REITs is that the company pays out a smaller portion of its cash flow in dividends each quarter. During the first quarter of 2017, for example, it generated $506 million in free cash flow but only paid out $264 million in dividends, which is a 52% payout ratio. That's one reason why the company's currently yield was lately just under 2%. However, by retaining nearly half of its cash flow, American Towers has additional capital to acquire more towers and grow at a fast clip. In fact, the company has grown its dividend at a 25% compound annual rate since 2012, including 22% over the past year.
Looking ahead, American Tower expects to continue growing at a healthy clip, with plans to boost the payout more than 20% this year. That's growth the company can easily attain because of its low payout rate and the fact it has several tower acquisitions already in the pipeline, which it can finance with excess cash and an excellent balance sheet. Meanwhile, with mobile data usage in the U.S. alone expected to grow at a 35% compound annual rate through 2021, it reinforces that need for more tower infrastructure, providing American Towers with a massive opportunity to build and buy additional towers as well as lease more space at existing locations. Because of this focus on growth over distributing income, investors in American Towers have the potential to earn a higher total return than they could make by investing in other REITs.
While these companies focus on different parts of the real estate market, the commonality is that each offers investors a stable current income stream backed by rock-solid financials. Because of that, investors don't have to worry about the sustainability of their dividend checks. Instead, they can sit back and relax while they collect a steadily growing stream of passive income.
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Matt DiLallo owns shares of American Tower, Medical Properties Trust, and W. P. Carey and has the following options: long January 2018 $80 calls on American Tower and short October 2017 $120 calls on American Tower. The Motley Fool owns shares of and recommends American Tower. The Motley Fool has the following options: short October 2017 $120 calls on American Tower and long January 2019 $80 calls on American Tower. The Motley Fool recommends Welltower. The Motley Fool has a disclosure policy.