SRC - Like Passive Income? Buy Spirit Realty Capital's 6.6% Yield

Summary

• Spirit Realty Capital, Inc. is growing its adjusted funds from operations fast.
• Spirit Realty Capital’s portfolio exhibits robust key metrics.
• The trust’s stock has a compelling valuation based on FFO.

Spirit Realty Capital, Inc. ( SRC ) is a well-managed commercial real estate investment trust ("REIT") with a strong annualized base rent growth forecast for 2023.

The trust benefits from commercial real estate recovery following the pandemic and has strong portfolio metrics that support its dividend to shareholders.

Furthermore, Spirit Realty Capital provides inflation protection to passive income investors because most of its contracts include rent escalation triggers.

The stock of Spirit Realty Capital also provides passive income investors with a 6.6% dividend that is covered by funds from operations and has the potential to grow over time.

Spirit Realty Capital’s Asset Composition

Spirit Realty Capital's real estate portfolio is primarily comprised of retail and industrial properties, but the trust is also investing in office space.

Retail real estate generates $465.6 million (70.4%) of the trust's total annual rental income and is thus Spirit Realty Capital's most important income source. Spirit Realty Capital earned $137.0 million in rental income from industrial real estate (20.7%), while office and other real estate earned $58.4 million (8.9%).

As of September 30, 2022, Spirit Realty Capital's real estate portfolio was 99.8% occupied, and the trust has consistently maintained high occupancy over time, even during the Covid-19 pandemic. A high occupancy rate is required for strong portfolio performance, asset utilization, and growth in funds from operations.

Inflation Protection

The majority (91%) of Spirit Realty Capital's rental contracts include either fixed or variable rental rate increases. The majority of leases (77%) automatically trigger annual fixed rental increases, while approximately 14% are triggered by increases in the underlying consumer price index.

Because of these automatic rent increases, Spirit Realty Capital is poised to grow its rental income and funds from operations organically in the future, even if the trust decides not to make any acquisitions.

Dividend Pay-Out Ratio

In 3Q-22 , Spirit Realty Capital earned $0.90 per share in adjusted funds from operations, implying a dividend pay-out ratio of 74%. The trust earned $2.68 per share in adjusted funds from operations and paid $1.94 per share in dividends from January to September, for a pay-out ratio of 72%.

The dividend has been adequately covered by AFFO (adjusted funds from operations), and given the strength of key portfolio metrics such as occupancy/FFO forecast, the dividend is likely to rise further.

Spirit Realty Capital Raised Its FFO Guidance

The commercial trust reduced its adjusted FFO forecast in the fourth quarter and is now guiding for $3.55 to $3.57 per share in adjusted funds for operations in 2022, representing a mid-point YoY growth rate of 9.5%. The trust benefits from a significant recovery in the commercial real estate market following Covid-19.

Spirit Realty Capital's stock is valued at 11.4x FFO based on the trust's funds from operations guidance for 2022.

Another commercial trust that competes in the same retail space as Spirit Realty Capital is Kimco Realty Corporation ( KIM ) , which trades at an FFO multiple of 13.6x, and then there is Realty Income Corporation ( O ) at a funds from operations multiple of 16.4x.

Why Spirit Realty Capital Could See A Lower Valuation

Spirit Realty Capital is a commercially focused real estate investment trust whose performance is determined by the state of the real estate market as a whole.

A downturn in the commercial real estate market is likely to have an impact on the trust's funds from operations potential and dividend growth prospects.

Having said that, Spirit Realty Capital's consistent high occupancy suggests that the trust's downside is likely to be rather limited.

A slowing of AFFO growth may not jeopardize the dividend, but it may be viewed as a headwind for the trust's valuation.

My Conclusion

Spirit Realty Capital is a well-managed real estate investment trust with strong rental and funds from operations growth potential.

The portfolio has very high occupancy, and the trust proved its worth during the last recession by defending occupancy rates in excess of 99%. The trust's low pay-out ratio in the low 70% range translates into a secure dividend, and the trust can easily raise its dividend.

Spirit Realty Capital currently provides passive income investors with a 6.6% dividend yield and opportunities for funds from operations growth if the commercial real estate market remains strong in 2023.

The FFO multiple is very reasonable, and Spirit Realty Capital, Inc. stock is likely to continue to pay out dividends to passive income investors in the future.

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