2023-06-05 12:35:15 ET
Summary
- Spirit Realty Capital, Inc. has a well-diversified tenant portfolio with a healthy balance sheet.
- Attractive dividend yield of 6.84% which is well-covered; potential for increases.
- Spirit Realty Capital, Inc. reported strong Q1 2023 earnings; guidance for FY 2023 raised.
Introduction
Regular readers of my articles will note that I am a strong proponent of dividend stocks. Similar to many others on this site, I desire to grow my dividend portfolio, and for me this means investing in real estate investment trusts, or REITs. I have written about several other REITs in the past but never ventured into the domain of retail REITs. However, Spirit Realty Capital, Inc. ( SRC ) is a company which I have been following closely for a while now. With the release of its Q1 2023 results last month, I thought it would be a good time to analyze the stock to determine if I should initiate a position in the company.
Business Model
Spirit Realty Capital is a internally-managed triple net-lease REIT with a focus on acquiring single-tenant, operationally essential real estate assets across various industries. The term "triple net-lease" is important, as it means the tenants assume responsibility for all property-related expenses, including real estate taxes, building insurance and maintenance, in addition to rent and utilities. The company has a diverse tenant base comprising of 347 tenants. Of these, over 90% of its tenants generate revenues exceeding $100 million, with an impressive 66% boasting revenues surpassing $1 billion, which provides a sense of security. Additionally, the top 5 tenants contribute just 13.3% of the company's Annualized Base Rent ("ABR"), ensuring its income stream is not reliant on a single tenant. In recent years, the company has gravitated towards the industrial sector, which now contributes close to a quarter of its ABR.
The company maintains consistently high occupancy rates, with an occupancy level of 99.8% as at 31 March 2023. Unsurprisingly, its lowest occupancy rates came in Q2 2020, during the midst of the pandemic. However, this "lowest" occupancy rate was 99.2%, which is testament to the company's ability to identify quality tenants. The company has also locked in these tenants for the long-term, with a weighted average lease term ("WALT") of 10.4 years ensuring a stable income stream.
SRC Q1 2023 Investor Presentation
Additionally, the geographical diversification of the company's portfolio provides an additional layer of stability, thereby ensuring resilience across different markets.
SRC Q1 2023 Investor Presentation
Q1 2023 Earnings & FY 2023 Outlook
The company released its earnings for Q1 2023 last month . The company reported revenue of $188 million for Q1 2023, a 11.8% increase compared to the $168 million reported in Q1 2022. Significantly, the company reported zero lost rent during the quarter as well. Net income for the quarter came in at $0.66/share, a substantial 57% growth compared to the $0.42/share in the same period last year. Its adjusted funds from operations ("AFFO"), a key measure when determining a REITs ability to pay dividends, was $0.89/share. This was a slight increase of $0.01/share year-on-year. During the quarter, the company acquired 7 properties with a WALT of 19.1 years, strengthening the stability of its portfolio. These properties were acquired for $239 million at a capitalization rate of 7.91%. The company also generated $108 million through the disposal of 35 properties with a capitalization rate of 6.13%, and further reduced its exposure to the movie theater business by disposing of 4 movie theaters for $44 million.
In terms of outlook for the year, the company raised its guidance slightly, projecting an AFFO of between $3.54/share and $3.60/share, an increase of $0.01/share on both ends. To provide some perspective, the company's FY 2022 AFFO came in at $3.56/share, which substantially exceeded the midpoint of its initial guidance by $0.14/share (the initial guidance was a range of $3.32/share to $3.52/share). The company also raised its disposition guidance to between $325 million and $375 million, up from $225 million to $275 million as it seeks to dispose of properties with a lower capitalization rate.
Balance Sheet
Spirit Realty Capital maintains a strong liquidity position , with approximately $1.6 billion in available funds at the end of Q1 2023. This provides the company with the financial flexibility to pursue growth opportunities and meet its debt obligations. Although the company has a total debt of around $3.6 billion, there is no debt maturing in either this year or the next. The earliest debt repayment is scheduled for 2025, for an amount of only $300 million. Additionally, 97% of the company's debt is fixed debt, ensuring a predictability in its debt repayments. Overall, the company has a healthy liquidity position with a predictable debt schedule which contributes to its financial stability.
SRC Q1 2023 Investor Presentation
Dividend
The company paid out a dividend of $0.663/share for Q1 2023, marking the third consecutive quarter it has paid out this dividend. Annualized, this comes to a dividend of $2.652/share. Assuming a share price of $38.77, this gives a forward dividend yield of approximately 6.84%. Even with a conservative estimate of the AFFO coming in at the lower end of guidance at $3.54/share, the company's dividend payout ratio is relatively low at approximately 75%. This indicates the dividend is well covered, and also suggests the potential for future dividend increases.
Separately, the company has also maintained its dividend for the second quarter, with a dividend of $0.663/share to be paid out in July 2023 .
Share Price and Valuation
In terms of valuation, the company has a fairly reasonable forward price-to-adjusted funds from operations (P/AFFO) ratio of 10.89. This compares favorably compared to some of its peers like Realty Income Corporation ( O ) and W. P. Carey Inc. ( WPC ), which have a forward P/AFFO ratio of 14.88 and 12.95, respectively. For what it's worth, the company is still trading below its pre-pandemic levels of $54, implying a close to 40% upside if it ever reaches back to those levels. Nevertheless, the company is certainly trading at a more attractive valuation than its peers at the moment.
Additionally, the company's current share price is close to its lowest for the year, and is down 13% from its highs in February. With no material change in the company's fundamentals, this means the share price is more attractively valued now compared to the rest of the year.
Risks
As with any investment, there are bound to be risks. Perhaps the most obvious risk would come from the tenants, whereby they might fail to pay their rent. Thus, the quality of the tenants is paramount. In this regard, the company has done very well. Firstly, it has a very broad range of tenants, spanning across different sectors. This helps reduce the impact of a failure in one particular tenant or industry. Additionally, as mentioned above, the bulk of its tenants (90%) generate over $100 million in revenues, with 66% generating over $1 billion. Having tenants with a large revenue base helps to further reduce the chances of a failure in its tenants.
Another potential risk comes in the form of interest rates. In the current rising interest rate environment, the cost of borrowing will increase as well. Thankfully, the company is protected against this, with 97% of its debt being fixed. This ensures predictability of the company's debt payments and ensures the company has sufficient runway to allocate its capital accordingly.
Conclusion
Spirit Realty Capital, Inc. has built up an impressive portfolio, with high quality tenants and a well-diversified mix. The company maintains a healthy balance sheet, which provides for additional opportunities for strategic investments. At its current valuation compared to its peers and dividend yield, I view Spirit Realty Capital, Inc. as a buy.
For further details see:
Spirit Realty Capital: Healthy Balance Sheet, Well-Covered Dividend