2023-08-29 08:05:00 ET
Summary
- Quite a few REITs have cut their dividend recently.
- But there are also REITs that continue to grow their dividends.
- I highlight 5 REITs that are likely to hike their dividend in the near term.
Recently, I highlighted 5 REITs that are likely to cut their dividend in the near term. These are:
- BrightSpire Capital ( BRSP )
- Blackstone Mortgage Trust ( BXMT )
- Global Net Lease ( GNL )
- Easterly Government Properties ( DEA )
- Sabra Health Care REIT ( SBRA )
This may have given you the impression that REITs are facing severe challenges and should be avoided, and in some specific cases, this is true.
But in most cases, REITs are actually doing just fine and continue to grow their dividend payments.
It is important to recognize here that the REIT market is vast and versatile with over 200 companies, and for every dividend cut, there are many dividend hikes as well.
Your job as an investor is to be selective and find those REITs that are likely to hike their dividend and aren't getting enough credit for it.
Today, there are many REITs that are heavily underappreciated in this regard and trade at historically low valuations, despite enjoying strong growth prospects.
Here are 5 of them:
STAG Industrial ( STAG )
You probably didn't expect that I would start this list with STAG Industrial. After all, STAG has a multi-year history of paying flat dividends (they have only announced tiny hikes to extend their dividend growth streaks).
But earlier this year, I got to meet the executives of the industrial REIT at a major conference in Miami. I talked with the company's CFO and even asked him directly about the dividend. There is a video about it that you can watch by clicking here.
In short, he explains that they kept a flat dividend in recent years because they were focused on deleveraging the balance sheet, lowering their payout ratio, and improving the quality of the balance sheet.
But this is now behind.
Their balance sheet is strong, their payout ratio is low, and their portfolio is now much more comparable to peers like Prologis ( PLD ):
Therefore, they now don't have a reason to not grow their dividend and so their capital allocation strategy is going to change. The CFO hinted strongly at a larger hike later this year. He explains that the dividend is likely to grow in line with their cash flow going forward and therefore, I think that a ~5% hike is likely.
Why does this matter?
Today, STAG is priced at a steep discount to its peer group and this is in large part because of the lack of dividend growth.
STAG Industrial | Peer Group | |
FFO Multiple | 16x | 24x |
As this changes and they hike their dividend, I think that it is likely that its valuation multiple will also expand. If it rises to 20x FFO, that would unlock another 25% upside from today's valuation. While you wait, you earn a 4% dividend yield.
Medical Properties Trust ( MPW )
In one of our recent articles , we explained that MPW is very likely to cut its dividend in the near term. The REIT has a bit too much debt, it is dealing with some troubled tenants, it needs to sell some assets, and it is overpaying relative to its current cash flow.
Well, it didn't take long and the dividend has now been cut by nearly 50%, leaving it with a low 60% payout ratio based on its AFFO.
I would not expect a dividend hike in the near term so it is perhaps a bit premature to add MPW to this list, but as they now reduce their leverage and resolve the situation with Prospect (one of their problem tenants), I think that the dividend will return to positive growth in late 2024 or 2025.
Note that Prospect will begin to pay 50% of its rent in September and return to 100% of payments in March 2024. This will increase their cash flow and lower their payout ratio even further.
Moreover, as I have previously explained , I think that it is likely that interest rates will return to lower levels in the near term and this should be particularly beneficial to MPW because it has more leverage than your usual REIT.
Therefore, if things go according to plan, I think that it is likely that MPW will return to dividend growth in the coming years.
Note that I have been wrong on MPW in the past and could be wrong again!
Brixmor Property Group ( BRX )
BRX has been one of our most successful investments over the past years. It is one of a few REITs that has resisted the recent market sell-off and kept rising in value even as the rest of the REIT sector ( VNQ ) went through a crash:
And its fundamentals remain solid.
The REIT owns defensive grocery-and-service-anchored strip centers and their rents are today deeply below market, allowing them to push for large rent hikes as leases gradually expire.
The balance sheet is also strong, the payout ratio is low at around 50%, and the REIT has a strong history of dividend growth.
We think that a ~5% hike is likely later this year, but despite this, we are not buying shares at this time because we think that there are even better options in the REIT market today.
Alexandria Real Estate Equities ( ARE )
Alexandria is a blue-chip REIT that invests in life science buildings.
This one is pretty simple as Alexandria has it all: a strong balance sheet, growing cash flow, a low payout ratio, and a history of hiking its dividend.
It has a fortress BBB+ rated balance sheet with low debt and long debt maturities.
Its rents are below market and set for rapid growth as its leases gradually expire. Companies like Moderna (MRNA) and Pfizer ( PFE ) require a lot of lab space and their needs have only grown in the post-pandemic world.
The company's payout ratio is today at a low 58% and it has guided to grow its cash flow by another 6% in 2023:
Therefore, I think that another ~5% dividend hike is likely, and priced at just 13x FFO, I think that the risk-to-reward of ARE has become very compelling. We estimate its fair value at closer to 18x FFO, resulting in 50% upside potential, and you earn a 4.3% dividend yield while you wait.
VICI Properties ( VICI )
VICI is another simple case.
The casino net lease REIT has guided to grow its FFO per share by about 10% in 2023.
It is growing so rapidly because it recently made some large casino investments that were highly accretive to per-share results.
And so I think that a dividend hike is very likely, given that the company has a low payout ratio, a strong balance sheet, steady growth prospects, and a clear history of dividend growth:
I expect a ~5% dividend hike in the near term, which combined with the dividend should get you to double-digit total returns.
I think that VICI is closer to its fair value than ARE and therefore, it doesn't have quite as much upside potential, but it is also a lot more predictable.
I think that its risk-to-reward remains compelling.
Bottom Line
Not all REITs are created equal.
We invest in just 1 REIT out of 10 on average and it is this selective approach that has allowed us to outperform over the long run.
For further details see:
5 REITs That Will Likely Hike Their Dividends