VICI - 5 REIT Picks With Steady Dividends For Income Investors

2023-09-06 08:46:53 ET

Summary

• Investors and analysts are closely watching the upcoming U.S. Federal Reserve meeting for clues on monetary policy.
• Some experts predict the Fed will pause its inflation-busting policy, while others expect further rate hikes.
• REITs, such as Crown Castle and National Storage Affiliates Trust, offer potential opportunities for income investors in the high-interest rate environment.

Across the market, investors and analysts are keeping a close on what the U.S. Federal Reserve and Chair Jerome Powell will have to say in their upcoming meeting scheduled for later in September.

Some experts are hopeful that the central bank will pause its inflation-busting monetary policy in their next meeting, however, the sentiment is not widely shared across the market, with some predicting that the Fed will further increase its current range of 5.25% - 5.5%.

Near the end of August, Chair Jerome Powell reiterated that further interest rate hikes are still on the cards for the year, as they attempt to bring down stick inflation to their annual target range of 2%.

Yet, over the last 18 months of aggressive monetary tightening, inflation has been on a downward trend, coming down from a four-decade high of 9% measured in June 2022 to 3.2% in July 2023, a slight increase of 0.2% from 3% in June 2023.

While the Fed is committed to bringing inflation down further to its objective, some experts are perhaps less supportive of initiating further rate hikes this year, without pushing the economy over the edge.

Atlanta Federal Reserve Bank President Raphael Bostic told Reuters , “We should be cautious and patient and let the restrictive policy continue to influence the economy, lest we risk tightening too much and inflicting unnecessary economic pain.”

While Bostic said that he is still in support of holding rates where they are currently sitting, pausing any further action - for now at least - can be a less restrictive attempt for the U.S. economy.

Steady wins the race to recovery it may seem, however, with interest rates at their highest in more than two decades, investors are keeping their finger on the pulse as they begin to plan their next move and decide on where to park their cash as the economy begins to soften.

Picking high-dividend REITs

With interest rates nearing a new record peak, investors are strategically looking at how long-term performance will unfold over the coming months.

There are major questions over the near-term possibility of Real Estate Investment Trusts, seeing as consumers and companies are struggling to keep up with the pace of mortgage rates and rental increases on the back of sticky inflation.

While REIT performance has been on the decrease, earlier reports suggested that the Equity REIT Index has steadily outpaced the S&P 500 since the start of earnings seasons. Funds revived investor sentiment with higher-than-expected earnings, while 37 out of 88 equity funds that provided full-year Funds From Operations guidance, lifted their full-year earnings outlook.

While some investors may still be sitting with a sour taste in their mouths, given the current high-interest rate environment, and perhaps the resilience of equity funds, it could potentially be another promising quarter for REITs on the back of semi-bullish sentiment.

Crown Castle

Results for Crown Castle ( CCI ) Q2 2023 helped to lift investor sentiment somewhat, as the company was one of the few to announce an increase in their Funds From Operations (FFO) for the full year.

Following their Q2 2023 earnings , Crown Castle raised their FFO by 2% compared to the same period last year and measured a 4% increase in rental revenue income for the second quarter compared to Q2 2022.

Crown Castle is a provider of cell tower infrastructure, heavily relying on the advancements of 5G, edge computing, and CBRS, according to their website . For this year, the company is expected to see robust growth of its core business, estimating a 5% increase in tower organic growth, and the deployment of roughly 10,000 small cell nodes. They are expected to boast a 3% return in fiber solutions growth for the full year.

While the company did mention that carriers have reduced network spending throughout the year, resulting in lower tower activity, long-term lease agreements will help them remain on track for full-year growth, and expect to see little impact of reduced activity affecting their rental revenue.

CCI has been trending downward for much of the year, with performance down 34% from its earlier peak in the year. However, the cheaper prices have been a major upside for income investors, as CCI holds a 6.23% annual dividend yield, reporting Q2 dividend earnings of $1.57 per share. What could be a compelling case for CCI is that the company sees a 4.42% return on assets, with a 4.48% return on capital.

National Storage Affiliates Trust

Overall, National Storage Affiliates Trust ( NSA ) reported better than expected quarter-over-quarter performance, seeing an 8.22% increase in revenue, and a total net income increase of 17.61% for Q2 2023 .

Despite having to face challenging economic conditions, primarily led on by slower consumer spending and the overall higher interest rate environment, National Storage continued steady growth over the second quarter.

For the quarter, the company reported core FFO performance of $88.2 million or $0.68 per share. This was however a decrease of 4.2% per share compared to Q2 2022. During its earnings call, the company said slower growth was driven by same-store growth, net operating income (NOI), and the headwinds of higher interest rates.

While the market has experienced heated conditions, and not what investors were looking for much of the year, NSA performance has declined by 4.52% to date. However, during August, shares witnessed a slight improvement, climbing 0.84%. For the first six months of the year, diluted and adjusted earnings per share moved upward from $0.48 per share in the first six months of 2022 to $0.56 per share in 2023, representing a 16.7% change.

Given the softening economy, the company has continued to decrease expenses in-store and acquired two new properties during the second quarter. Currently, NSA has an annual dividend yield of 6.67% or a quarterly dividend yield of $0.56 per share. The company benefits from lower operational costs, steady demand, and existing short-term lease agreements.

Iron Mountain Incorporated

Next on our list is Iron Mountain Incorporated ( IRM ) a multinational corporation that provides a plethora of digital and data storage services across the world, and operates data recovery services in more than 58 countries globally.

Growing demand in cloud technology, data storage, and information technology against the backdrop of supercharged Artificial Intelligence ((AI)) has helped to play in favor of Iron Mountain, both in terms of financial and stock performance.

Quarter-over-quarter revenue climbed by 5.30% for Q2 2023 , with total revenues of $1.36 billion. For the same period, ending June 2023, the company announced that it reached net income of $1 million, and managed to achieve a new record quarterly revenue and adjusted EBITDA.

Additionally, FFO earnings per share were $0.94, a slight increase from $0.93 in Q2 2022. The increase was driven by overall improved adjusted EBITDA, and according to their earnings release, FFO per share was $1.91, compared to the $1.83 per share for the same quarter last year.

Based on current performance , IRM provides income investors with a steady dividend yield of 3.91%, and an annual dividend yield hovering around 4.09%. For the three months between June 2023 and September 2023, quarterly dividends are expected to increase from $0.61 per share to $0.65 per share, respectively.

Overall, the company has made steady adjustments to its balance sheet over the last couple of months, helping it regain its footing, but further giving investors and analysts a bullish sentiment in terms of the long-term outlook IRM holds.

Annaly Capital Management, Inc.

Annaly Capital ( NLY ) is considered to be one of the largest, and most influential real estate mortgage investment trusts, boasting more than $12 billion in permanent capital, and an increasingly diversified portfolio.

Their business strategy allows them to borrow cash through short-term purchase agreements, which then allows them to reinvest in asset-backed securities. This has been a major upside for the company, boasting a total portfolio of more than $78 billion, including $71.4 billion in a highly liquid agency portfolio according to its Q2 2023 earnings report .

Looking at quarterly financial performance, the company declared a stock dividend of $0.65 per share, with a GAAP leverage of 6.1x, an increase from 5.9x in the previous quarter. On an annualized return, the GAAP return on equity was 5.4%, with an average earnings available to distributed equity of 13.2%.

Given their strong financial position and forward-looking guidance, Annaly operates at a significant margin for income investors seeking out high dividend yield REITs that provide both short and long-term capital returns.

On the stock market, NLY has been somewhat all over the board with year-to-date prices tumbling 5.46%, however during the month of August, stronger guidance and financial performance helped NLY to trend north by 1.65%.

Overall, the company has a proactive portfolio that seeks to minimize risks and weather off any turbulence. Furthermore, their approach has allowed them to effortlessly navigate through difficult economic challenges, including the regional banking crisis, soaring interest rates, and the overall softening of the U.S. economy.

VICI Properties Inc.

Those who are familiar with the bankruptcy of Caesars Entertainment Corporation will know of the spin-off company VICI Properties ( VICI ) that was formed afterward.

Analysts have grown seemingly bullish over VICI, calling it an asset hiding in sight . However, decreased sentiment over consumers’ ability to spend and splurge on outings to casinos, hotels, resorts, and golf courses has seen stock prices sliding across the board.

Now, however, there could be long-term upside for VICI given its diverse portfolio, and strategic efforts to significantly decrease operational expenses across most of its properties during the last several months.

Overall, revenue for Q2 2023 was strong, rising 32.52%, while total net income made the biggest jump of more than 1,296%, booking in $690 million in the second quarterly revenue.

Despite the seemingly grim outlook on consumers’ ability to spend on experiences, stocks VICI are only down 2.87% year to date and have made some steady improvements over August.

Based on Q2 2023 earnings , shareholders received supercharged dividend performance. Attributed shareholder net income increased from $57.7 million Q2 2022 to $690.7 million Q2 2023. This further represented an increase in year-over-year per share improvement from $0.06 to $0.69 per share.

Finally, there has also been a steady increase in attributed FFO, rising 25.7% year-over-year to $540.5 million, and climbing 11.9% on a per-share basis to $0.54 per share.

These highlights indicate that while there has been some question over the near-term potential of VICI, it seems to pay off to invest in experiences.

Final thoughts

Tight monetary conditions in the Federal Reserve will continue throughout the last few months of the year, and even into next year. However, investors are advised to practice caution, although REIT options remain attractive in the high-interest rate environment, the softening economy could provide even more volatility.

While there may be some potential in REITs, seeking diversified alternatives could perhaps be the winning key for income investors who are playing a long-term strategy and ready to hold their stakes for the coming years.

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