EQIX - World Beaters: 10 Double-Digit Dividend Growth REITs

2023-12-26 07:30:00 ET

Summary

• Dividend growth rate is an underrated aspect of dividend investing.
• Companies that start with lower yields but grow the dividend rapidly end up paying higher yields over time and outperforming on share price. In other words, they beat the world.
• Who are they? This article lists the top 10 dividend-growth REITs, with safe yields of 2.00% or better. The results are sometimes surprising.
• I then take a quick peek at the FFO growth, balance sheet, and valuation for each company listed.

One of the smartest ways to invest in dividend stocks is to shoot for dividend growth. The dividend growth rate is one of the more underrated aspects of dividend investing. Here are two reasons why.

Pay Yourself a Raise

There are companies that pay plump yields but don't grow the dividend much over time. There are others that start with lower, less attractive-looking yields, but grow the dividend rapidly over time.

In the first year of holding security, the Yield you sign up for is usually the Yield you actually experience. However, after year one, the picture starts to change significantly. The result is that a few years out, a company that had a relatively unattractive yield at purchase (YAP) but grows the dividend rapidly, ends up paying you a much better yield than actually experienced (YAE, also known as yield on cost, or YoC).

Here is a simple example. Suppose you have a choice between a company that yields 3.0% with 10% annual dividend growth, versus one that yields 5.0% with no dividend growth. Here is what develops over the first 7 years.

By year 14, the dividend grower that paid 40% less on YAP is now paying you double the higher YAPping company.

Thus, if you are a patient buy-and-hold investor with a long time horizon, companies that grow their dividend faster end up paying you a lot more cash!

Beat the World

But there is another good reason for investing in Dividend Growers. Their total returns over time strongly outpace the average REIT.

Total return = Gain + Yield.

Over the past 60 years or so, the average annual total return on REIT investment is roughly 12%. In round terms, Yield for the average REIT typically comes in at about 4%. Thus, Gain on the average REIT comes in at about 8% or about double the Yield.

Do you want to maximize Yield, or Gain? If you can identify the strong Gainers, you can realize total returns much greater over time than the mid-single-digits your Yield will pay you. In other words, you can beat the world.

Here is an example. The market cap-weighted Vanguard Real Estate Index Fund ETF Shares ( VNQ ) generated a total return of 98.97% over the past 10 years. However, the Vanguard Dividend Appreciation Index Fund ETF Shares ( VIG ), which chooses stocks with rapid dividend growth, generated almost double that return (180.2%).

Why? Because the dividend growers of the VIG strongly outpaced the VNQ in share price Gain, starting in year 5, resulting in 129.5% gains over 10 years, as opposed to the 33.4% gain for the VNQ.

In other words, fast-growing dividends predict the companies that will Gain most handsomely in share price.

There is a fairly simple explanation for this phenomenon. Dividends come from AFFO. Companies that keep raising their dividends are companies that keep growing their AFFO.

Which REITs do best at providing safe, fast-growing dividends?

The List

Here is a list of REITs growing dividends by double-digits over the past 5 years, with Dividend Safety ratings of B- or better from Seeking Alpha Quant ratings, while currently yielding at least 2.00%. The column marked " 2023 Div ." shows the most recent dividend payment, while the column marked " 2018 Div. " shows the dividend payment exactly 5 years previous to that.

(Note: Ordinarily, I would use 3-year dividend growth, so as not to over-reward companies for distant past dividend hikes. However, the COVID sell-off happened in 2020. Therefore, using 3-year dividend growth rates would unduly reward companies that cut their dividend in 2020, since their comparables would be so much easier.)

Sources: Seeking Alpha Premium, Charles Schwab, and algebra

There is usually an inverse relationship between YAP and Gain. That is, the lower the YAP, the greater the share price Gain, and vice-versa. Otherwise, REIT investing would be easy. We would just choose the companies with the highest YAP and we would all get rich without effort.

Therefore, it is well worth noting that IIPR and HST are both paying above-average YAP (current REIT average is approximately 3.68%) while growing dividends at double-digit rates. If you consider those companies worth investing in, you get the rare combination of high Yield and likely Gain outperformance at the same time.

The remainder of this article takes a quick peek at growth, balance sheet, dividend, and valuation metrics for each of the companies on this list.

InvenTrust Properties ( IVT ) is a grocery-anchored, necessity-based open-air shopping center REIT focused on key Sunbelt growth markets. IVT is a small-cap, at $1.74 billion.

Here are the company's 3-year growth figures for FFO.

Source: Seeking Alpha Premium, Hoya Capital Income Builder, Charles Schwab, and author calculations

* Consensus estimate

Like most REITs, InvenTrust took a gut punch during the pandemic but has fully recovered on FFO per share.

The company's debt ratio is ordinary at 34%, but Debt/EBITDA is strong at 5.1. Shares are selling for 16.4x FFO '23, but a discount of only (-1.1)% to estimated NAV.

Innovative Industrial Properties ( IIPR ) buys cannabis growth facilities and leases them back to the seller on a triple-net basis.

Source: Seeking Alpha Premium, Hoya Capital Income Builder, and author calculations

I began covering IIPR for Seeking Alpha in 2021 . IIPR is in a class by itself for FFO growth rate. Its 4-year FFO per share CAGR of 30.1% is truly astonishing, and that growth continued roaring, right through the pandemic.

IIPR's debt ratio is a microscopic 10%, and its Debt/EBITDA is extraordinary at 0.8. Shares are selling for 12.2x FFO, and a healthy (-22.5)% discount to estimated NAV.

American Homes 4 Rent ( AMH ) is the second-largest single-family rental REIT and the leader in build-to-rent housing.

Source: Seeking Alpha Premium, Hoya Capital Income Builder, and author calculations

AMH continued growing right through the pandemic too, posting a FROG-like 10.1% 4-year CAGR, with especially strong years in 2021 and 2022.

AMH's debt ratio is just 28%, and its Debt/EBITDA is strong at 5.4. Shares are selling for 22.0x FFO, and a healthy (-14.6)% discount to estimated NAV.

Rexford Industrial Realty ( REXR ) is the dominant player in supply chain facilities in the highly lucrative Southern California market.

Source: Seeking Alpha Premium, Hoya Capital Income Builder, and author calculations

Rexford is a growth powerhouse that kept chugging right through the pandemic, posting superb FROG-like CAGRs in both FFO and FFO per share.

REXR's debt ratio is excellent at 15%, and its Debt/EBITDA is steely at 4.5. Shares are selling for 25.8x FFO, (much lower than usual for this company) and a decent (-10.8)% discount to estimated NAV.

Invitation Homes ( INVH ) is the largest single-family rental REIT in the country, with a $21 billion market cap.

Source: Seeking Alpha Premium, Hoya Capital Income Builder, and author calculations

INVH kept growing right through the pandemic, posting double-digit CAGR in FFO and a very strong 8.9% CAGR in FFO per share.

INVH's debt ratio is a solid 30%, and its Debt/EBITDA is good at 5.8. Shares are selling for a slightly elevated 19.4x FFO and a solid (-20.4)% discount to estimated NAV.

Equinix ( EQIX ) is an international data center behemoth, with a market cap of $75 billion.

Source: Seeking Alpha Premium, Hoya Capital Income Builder, and author calculations

With barely a hiccup during the pandemic, EQIX has posted truly remarkable growth, especially for a company of its size.

EQIX's debt ratio is a slender 22%, and its Debt/EBITDA is very good at 4.4. Shares are selling for 25.6x FFO, but a frothy 9.5% premium to estimated NAV.

Prologis ( PLD ) has the largest portfolio of logistics real estate in the world, with 695 properties in more than 15 countries, and a market cap of $122 billion.

Source: Seeking Alpha Premium, Hoya Capital Income Builder, Charles Schwab, and author calculations

Despite its hefty size, PLD has grown at a skin-splitting super-FROG rate of 27% for FFO and 14.1% for FFO per share over the past 4 years.

PLD's debt ratio is a slender 18%, and its Debt/EBITDA is very good at 4.9. Shares are selling for 23.6x FFO, but a frothy 10.3% premium to estimated NAV.

The world's largest Hotel REIT, with a market cap of $13.6 billion, Host Hotels & Resorts ( HST ) owns 77 luxury and upscale properties, totaling 42,000 rooms, in 20 U.S. markets.

Source: Seeking Alpha Premium, Hoya Capital Income Builder, Charles Schwab, and author calculations

HST took a pandemic gut punch in 2020 but has recovered to better than 2019 FFO levels. HST's debt ratio is a normal 30%, and its Debt/EBITDA is sensational at 2.6. Shares are selling for 10.3x FFO, and a decent (-10.1)% discount to estimated NAV.

Contrary to its name, EastGroup Properties ( EGP ) is headquartered in Jackson, Mississippi, and focuses on location-sensitive customers in supply-constrained Sunbelt markets, owning and operating an industrial portfolio totaling about 59 million square feet.

Source: Seeking Alpha Premium, Hoya Capital Income Builder, and author calculations

EastGroup's FFO has been hopping along at a FROG-like double-digit rate, without even a slight slowdown during the pandemic.

EGP's debt ratio is a slender 22%, and its Debt/EBITDA is very strong at 4.4. Shares are selling for 23.8x FFO, and a frothy 8.0% premium to estimated NAV.

Park Hotels & Resorts ( PK ) is a Hilton spin-off, in operation since 2017, owning approximately 50 hotels (about 30,000 rooms), nearly all of which are operated by Hilton worldwide.

Source: Seeking Alpha Premium, Hoya Capital Income Builder, and author calculations

PK's revenues took a tremendous beating in the pandemic, and FFO per share has not quite recovered yet. Although 2022 was a great year, per share growth was flat in 2023.

PK's balance sheet picture is not pretty, however. The company's debt ratio is an obese 74%, and its Debt/EBITDA is weak at 8.9. Shares are selling for just 8.4x FFO and a sturdy (-19.7)% discount to estimated NAV.

Investor's bottom line

Not every company on this list is a Buy. However, I hope this will save you some time and trouble by presenting a robust short list of candidates for your consideration.

Dividend growth investing is not for everyone. It takes time to pay off, and it takes discipline to hold in the face of the inevitable cyclical downturns. However, if your investing horizon is at least 7 years, investing for dividend growth is a pathway to beat the world, by outperforming in both Yield and Gain. And the longer you keep it up, and the more skillful you are at identifying the divvy growers, the wider the margin of victory.

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