2023-09-22 08:00:00 ET
Summary
- REITs are still paying out dividends, with many even raising their dividends in recent months.
- Dividend growth is a sign of confidence in a REIT's future and stability.
- Three REITs worth considering are Sun Communities, American Tower, and Essential Properties Realty Trust.
On September 18, I published “ Make American REITs Great Again .”
There, I wrote in favor of buying up real estate investment trusts, or REITs.
Now.
While they’re this out of favor.
My regular readers know I love a good bargain – with the word “good” being every bit as key as “bargain.” I’m not looking for any old stock selling on the cheap.
I want good-to-great combinations of quality and value. In which case, the fields are ripe for picking these days.
I made my multi-pronged case for why that is in the MARGA article. And since it’s so recent, I won’t review everything here. In fact, I only mention it for one main point I made in REIT’s defense.
“So why in the world do I still think REITs are worth it?” I asked. “I’m sure a number of you already know the answer, or at least part of it: dividends. The REIT sector is still paying out dividends just like always.”
Moreover:
Many are even still raising their dividends just like always.
Take the recent S&P Global report about "8 U.S. REITs" that just announced "dividend hikes in August." The list consists of:
Sunstone Hotel ( SHO ) – UP 40%
Terreno Realty ( TRNO ) – up 12.5%
Iron Mountain ( IRM ) – UP 5.1%
Simon Property Group ( SPG ) – up 2.7%
EastGroup Properties ( EGP ) – up 1.6%
Gaming and Leisure Properties ( GLPI ) – up 1.4%
Spirit Realty Capital ( SRC ) – up 1%
Federal Realty Investment Trust ( FRT ) – up 0.9%.”
That’s a pretty decent list for a single month, don’t you think?
A Few Points of Dividend Clarification
One thing I didn’t mention in the “MARGA” article was the full title of that S&P Global piece. Published on September 12, it read “8 U.S. REITs, 1 Canadian REIT Announce Dividend Hikes in August.”
In which case, there’s something to be said about looking into global REITs too.
(Incidentally, Canada features far less than the U.S., so a single REIT raising its dividend in a single month shouldn’t be discounted.)
I wanted to clarify that in fairness to that ninth dividend-raising company.
With that said, I’m not actually recommending anything above the border today.
And even for the eight, I did say there that
“I’m not necessarily recommending any of them at the moment.”
I’ll admit that might not have been the most considerate statement. You read my articles exactly to see such stocks and what I think of them, after all.
I truly didn’t mean to tease. Those details were meant to make my case that REITs were worthwhile – a case I needed to spend more time and effort on considering how down the market is on them right now.
Again, though, I can recognize the side effects, so consider this my follow-up article.
Before I go any further though, a quick moment of clarification:
“There are multiple factors to consider, not just the dividends they pay out. For instance, who’s managing them… are their businesses well-placed in this post-Covid economy…
“And what are they priced at compared to where they should be trading?”
I had to add that disclaimer in to be on the safe side. Then again, I always look for those details. They’re fundamentals that should never be overlooked.
A rising dividend might be less of a fundamental, I’ll admit. However, it’s still pretty darn important in the REIT world.
REITs Don’t Raise Their Dividends Unless They Really Mean It
I’ve written plenty of other “The Safest Dividend Is the One That’s Just Been Raised” articles over the years. It’s a concept new readers need to know about and my loyal followers shouldn’t forget.
Why? Well, as I wrote back in April (my last posting on the topic ):
“I have one last chapter to go before finishing my new book, REITs for Dummies. I began writing the book in January, and I can’t believe that I’m just about done with it.
“As I explain in the book, one of the most important attributes for REITs has to do with dividends, which is the law that requires REITs to pay out at least 90% of their taxable income (in dividends) and are exempt from paying corporate taxes…”
(Author’s Note: REITs for Dummies is now finished and preparing to be published next month. I already have my advanced copy!)
I added how “dividend growth drives shareholder value,” which is pretty obvious. But it’s also a sign of confidence about a REIT’s future.
Because these corporate landlords have to pay out so much of their income, they only have so much to use elsewhere. They still need money to pay managers and employees, maintain their operations, and hopefully save for a rainy day.
That’s to say nothing of pursuing growth opportunities – without borrowing excessively. So a REIT that raises its dividend is saying it has enough to do all that and then some.
It’s a sign of stability. Of intelligently placed priorities. And of the kind of company I can get behind.
I can’t cover all the REITs that recently raised their dividends, but here are three I think you should know more about.
Sun Communities, Inc. ( SUI )
Sun Communities is a real estate investment trust (“REIT”) that was founded in 1975 and went public in 1993. They invest in manufactured housing (“MH”) and recreational vehicle (“RV”) communities as well as marina properties in the United States, the United Kingdom, and Canada.
SUI develops, owns, and leases parcels of land (“sites”) with utility access where MH or RVs can be placed. Their marinas contain wet slip and dry storage spaces which are leased to members and offers services such as routine maintenance, fuel sales, and vessel winterization.
SUI has 299 MH communities in North America that contain approximately 100,000 sites and 55 holiday parks in the United Kingdom which contain roughly 18,000 MH sites.
SUI also owns or has an ownership interest in 182 RV communities that contain 59,000 sites and 135 Marinas that contain around 48,000 wet slips and dry storage spaces.
As of their latest update, 50% of their rental revenue comes from their MH sites, 30% comes from their RV sites, and 20% of their rental revenue comes from their marinas.
Sun Communities has an investment-grade balance sheet with a BBB credit rating from S&P and a Baa3 from Moody’s.
They have solid debt metrics including a net debt to EBITDA of 6.2x, a long-term debt to capital ratio of 50.21%, and an EBITDA to interest expense ratio of 4.17x.
SUI’s debt is 82% fixed rate with a weighted average interest rate of 4.0% and a weighted average maturity of 7.1 years, and 77% of their properties and 71% of their net operating income (“NOI”) is unencumbered.
Sun Communities has a great track record of delivering growth in their adjusted funds from operations (“AFFO”). Over the last decade, SUI has only had 1 year when they did not have positive AFFO growth (2013), and it has delivered an 8.20% average AFFO growth over the last 10 years.
Over the last 3 years, they have an average AFFO growth rate of 13.21% and over the last 5 years their AFFO growth rate has been 11.34%. Analysts do not expect AFFO growth in 2023, but project AFFO growth of 9% in 2024 and 8% in 2025.
SUI has increased their dividend 7 times and maintained it 3 times in the last 10 years. Since 2013, they have never cut their dividend and even raised it by 5.33% in 2020 during the pandemic.
What’s more impressive is that they have improved their dividend payout ratio significantly over the past 10 years. In 2013, they paid a dividend of $2.52 per share with an AFFO payout ratio of 89.05%, compared with 2022 when they paid a dividend of $3.52 per share with an AFFO payout ratio of just 55.00%.
Since 2013, Sun Communities has had a blended average AFFO growth rate of 7.60% and an average dividend growth rate of 3.43%. The stock pays a 3.00% dividend yield that is secure and trades at a P/AFFO of 19.40x, which is a sizable discount to their 10-year average AFFO multiple of 24.12x.
We rate Sun Communities a Buy.
American Tower Corporation (AMT)
American Tower is a REIT that specializes in cell towers and other multitenant communications assets which are leased to radio and television broadcast companies as well as leading wireless service providers.
AMT has around 43,000 towers located in the United States and Canada and roughly 181,000 cell towers located internationally. Additionally, they own or have an ownership interest in approximately 1,700 distributed antenna systems and 28 data centers.
In total, AMT’s global portfolio consists of approximately 226,000 communication sites located in 25 countries and across 6 continents.
In addition to the revenue AMT receives through their lease agreements, they also generate ancillary revenue through services they provide such as tower site and rooftop management, structural analysis, zoning and permitting, and construction management services.
Due to the nature of their real estate, AMT has high tenant concentration and received roughly 42% of its Q2 U.S. property revenue from its three largest tenants: T-Mobile (16%), AT&T (14%), and Verizon (12%).
Additionally, AMT receives 30% of its property revenue from international tenants and 8% of their revenue from their data centers.
AMT is investment-grade and has a BBB- credit rating from S&P Global. Year-to-date they have improved several debt metrics including their net leverage, which slightly decreased from 5.4x in December to 5.3x as of the end of the second quarter.
AMT’s percentage of fixed rate debt improved from 77.5% to 85.4%, their liquidity increased by approximately $1.0 billion, and the weighted average remaining term on their debt improved from 5.6 years to 6.1 years.
AMT has some of the highest growth rates in the REIT sector, with a 10-year average AFFO growth rate of 12.77%, a 5-year average AFFO growth rate of 7.75%, and a 3-year average AFFO growth rate of 7.30%.
Since 2013 AMT has only had 1 year in which it did not grow AFFO (2019), and in that year AFFO per share only fell by 1%. Analysts expect a slight decline in AFFO per share in 2023, but then project 8% AFFO growth in both 2024 and 2025.
While AMT’s AFFO growth rate is impressive, their dividend growth rate is even more outstanding with a 10-year average dividend growth rate of 20.70%. a 5-year average dividend growth rate of 17.51%, and a 3-year average dividend growth rate of 15.78%.
Since 2013 AMT has increased its dividend each year with annual dividend growth ranging from approximately 20% to almost 30% between 2013 and 2020 and hikes over 10% each year within this timeframe.
AMT has been steadily raising its dividend by double digits while maintaining a very conservative AFFO payout ratio. While the AFFO payout ratio has increased from 32.07% in 2013 to 60.04% as of the end of 2022, they still have one of the most conservative AFFO payout ratios in the industry.
As a point of reference, Alexandria’s ( ARE ) 2022 year-end AFFO payout ratio was 72.17%, Realty Income’s ( O ) AFFO payout ratio was 75.69%, and Prologis’ ( PLD ) AFFO payout ratio was reported at 68.27% at the end of 2022.
So, while AMT’s AFFO payout ratio has essentially doubled over the past 10 years, it is still at a very conservative level and easily covers the dividend.
AMT’s stock has fallen almost 30% over the past year, presenting an opportunity to buy a great company at a discounted price.
Currently the stock pays a 3.43% dividend yield that is very secure and trades at a P/AFFO of 18.42x, which is a significant discount to their 10-year average AFFO multiple of 23.19x.
We rate American Tower a Strong Buy.
Essential Properties Realty Trust, Inc. (EPRT)
Essential Properties Realty Trust is a net-lease REIT that went public in June 2018. They acquire, own, and manage free-standing, single-tenant commercial properties which are leased to middle-market companies that primarily operate in either a service oriented or experience based business.
EPRT targets properties used in industries that are insulated from e-commerce such as quick service restaurants, automotive services, car washes, health & fitness, early childhood education, medical services, and convenience stores.
As a percentage of their annualized base rent, their largest industry is car washes at 15.6%, followed by early childhood education at 12.0%, and quick service restaurants at 10.8%.
Their portfolio consists of 1,742 properties covering 17.2 million square feet across 48 states and are 99.9% leased. EPRT has 360 tenants operating in 16 separate industries and has a portfolio weighted average remaining lease term of 14.0 years.
EPRT has an investment-grade balance sheet with a BBB- credit rating from S&P Global. They have excellent debt metrics including a pro forma net debt to adjusted EBITDAre of 4.2x, a long-term debt to capital ratio of 33.79%, and an EBITDA to interest expense ratio of 6.11x.
They have no secured debt and a 100% unencumbered asset base. Their debt has a weighted average interest rate of 3.4% and a weighted average term to maturity of 5.2 years.
Additionally, they have no debt maturities until 2027 and $600.0 million of unused capacity under their revolving credit facility.
With the exception of 2020, EPRT has had positive AFFO per share growth each year since they became a publicly traded company in 2018. Since 2020 they have delivered a blended average AFFO growth rate of 8.30%. Analysts expect AFFO growth of 7% in 2023 and then 6% and 5% in the years 2024 and 2025 respectively.
Similarly, they have increased their dividend each year and have an average dividend growth rate of 6.90% over the past 3 years. EPRT has done a good job of keeping a conservative AFFO dividend payout ratio in their short history with the payout ratio staying under 80% in each year except 2020, when it came in at 83.78%.
Since that time, the company has improved its payout ratio, with a payout ratio of 74.63% and 70.59% in the years 2021 and 2022 and an estimated 2023 payout ratio of 68.29%.
EPRT has not been a publicly traded company for as long as the other two REITs discussed, but it has done an impressive job over its short history of growing AFFO and the dividend while maintaining a conservative amount of leverage and a low payout ratio.
EPRT pays a well-covered dividend yield of 4.82% and trades at a P/AFFO of 14.45x, which is a significant discount to their average AFFO multiple of 19.43x.
We rate Essential Properties Realty Trust a Buy.
Who Likes Safe and Growing Dividends?
Growing dividends from high-quality companies can make a significant positive impact on a portfolio.
Albert Einstein summed it up well when he called compound interest "the eighth wonder of the world."
Reinvested dividends are a driver of huge growth, much more than just market returns alone.
More than just providing a steady income stream, dividend-paying stocks can protect (your money) against inflation, making them ideal for today’s market conditions.
I hope you enjoyed my article...
The Safest Dividend Is The One That's Just Been Raised!
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The Safest Dividend Is The One That's Just Been Raised