domin_domin/E+ via Getty Images
domin_domin/E+ via Getty Images
World famous pro golfer Gary Player once said, “Greatness isn’t just talent. It’s talent applied consistently.”
Basketball legend Michael Jordan seemed to agree with this statement: “I believe greatness is an evolutionary process that changes and evolves era to era.” And his secret to success was:
"You can practice shooting eight hours a day, but if your technique is wrong, then all you become is very good at shooting the wrong way. Get the fundamentals down and the level of everything you do will rise."
That kind of consistent focus on fundamentals works just as well with real estate investment trusts (REITs). Or stocks in general.
We want stocks that offer consistent profit margins: companies with above-average growth prospects.
And that includes through dividends. Their dependability is a big reason I own what I do. I have no interest in holding shares in companies that don’t grow theirs.
Especially not in this current environment.
One way to hedge against inflation is to own stocks that are likely to boost their dividends consistently. That also stands as the ultimate sign of corporate strength, since it reflects earnings stability.
As investor and author Josh Peters explains:
“Dividends represent a commitment by a company to its shareholders – a commitment that many of those shareholders are counting on for income.”
“Dividend increases provide the best possible evidence of dividend safety.”
This leads me to the five greatest dividend-increasing REITs of all time… many of which are buyable right now!
W. P. Carey Inc. (WPC) is one of the largest owners of net-lease assets – and among the top 25 REITs in the MSCI US REIT Index, with a $22 billion enterprise value.
The company owns 1,336 net-lease properties amounting to 157 million square feet primarily in the U.S. and Europe. Its portfolio is diversified with industrial, warehouse, office, retail and self-storage properties with 356 tenants.
WPC’s top 10 tenants represent 20.2% of annualized base rent (ABR). And, as illustrated below, it’s paid and increased its dividends for 25 years in a row.
WPC posted Q1 results on April 29, with sales up 12% year-over-year to $348.44 million. Meanwhile, adjusted funds from operations (AFFO) were $1.35 per share, up 10.7%.
This double-digit growth represents a nice acceleration from the negative AFFO growth results posted in recent years. CEO Jason Fox touched on the strong quarter during the earnings report, saying:
"The strong year-over-year AFFO growth we generated for the first quarter reflects both the sustained increase in our investment activity over the last 12 months and inflation beginning to more meaningfully appear in our same store rent growth.”
Yet WPC shares have sold off since with the rest of the market, sending shares down 7.25% last week. This weakness has pushed the stock down below our threshold of $80.00 to $78.34, at last check.
That’s fine by us!
Fox also highlighted his company’s ability to fight inflation, stating:
"… we believe we are uniquely positioned within net-lease for the current environment given the high proportion of our rent growth driven by inflation and the downside protection provided by our diversified approach and proven portfolio performance."
WPC’s ability to serve as a solid inflation hedge in today’s unique economic environment plays a starring role in our bullish thesis. Around 58% of its rents have CPI-based escalators included…
Making this one of our absolute favorite REITs to own in today’s high inflation environment.
After its CPA:18 merger – which is on track to close in Q3 with $2 billion of assets after dispositions – the company will pursue a pure-play triple-net-lease model. This should result in a higher premium being placed on its cash flows.
As W. P. Carey noted, it just collected 99.7% of its rents. So the pandemic might very well be totally behind it.
Therefore, moving forward, we think a pre-pandemic cash flow multiple makes more sense here than the stock’s current premium.
WPC currently trades with a blended p/AFFO multiple of approximately 15.6x. Using the midpoint of management’s recent 2022 AFFO guidance, shares are trading for roughly 14.95x n a forward-looking basis.
This sub-15x multiple is far below the ~17.5x forward multiples other high-quality net-lease stocks – such as Realty Income (O) and Agree Realty (ADC) – feature these days.
Prior to the COVID-19 crash, WPC was trading for 17x-18x AFFO. And even if you apply a discount to that because of the rising rate environment, you’re still talking about multiple expansion from the stock’s current price point.
We maintain a Buy for WPC with a 12-month total return target of 15%.
Essex Property Trust, Inc. (ESS) is an apartment REIT that was established in 1971 and listed shares in 1994. It owns around 250 properties in Northern and Southern California, and Seattle, Washington.
Together, those states represent the fifth-highest GDP in the world.
ESS is an S&P Dividend Aristocrat with a 28-year history of increasing cash dividends. Plus, shares have generated a 16.2% compound annual growth rate ("CAGR") since their IPO.
So this company is one of the top-performing stocks – not just REITs – during the last several decades. And recent data shows the supply/demand metrics that helped it generate such previous shareholder wealth clearly remain.
Now, one of the biggest critiques against ESS is its geographic concentration being a pure-play West Coast sharpshooter.
Unlike the other blue-chip multifamily REITs we cover, ESS management has built a West Coast-centric portfolio. To many, this presents unnecessary risk relative to other names that offer exposure to properties throughout the entire United States.
However, this decision has proven to be a great one. ESS has essentially ridden the massive demand wave created by the U.S. technology industry. It’s invested in properties and developments in areas with low supply, high demand, and a strong jobs market – largely due to the ongoing success of large U.S. tech companies.
Because of its reliably strong growth over the years, shares have traditionally traded with a high valuation premium attached. Understandably too…
Up to a certain point.
ESS has a strong balance sheet, just like WPC, with investment-grade ratings from Moody’s (Baa1) and S&P (BBB+).
In Q1-22, net debt-to-EBITDA (earnings before interest, taxes, depreciation, and amortization) was 6.1x compared to 6.6x at the heights of the pandemic. ESS expects this ratio will continue to improve throughout 2022.
The company has over $1 billion of liquidity, limited near-term funding needs, and multiple sources of capital available. So there’s little doubt in our minds that Essex deserves a premium valuation.
This is definitely a blue-chip stock. However, at the stock’s current valuation, we’re not looking to buy.
As you can see on the FAST Graph below, ESS currently trades with a blended p/AFFO of 27.1x. That’s well above its long-term historical average of approximately 23x.
For further comparison’s sake, ESS’ trailing five-year and trailing 10-year average ratios are 22.7x and 24.25x, respectively. Therefore, even with the stock’s about 14% 2022 AFFO growth expectations, shares are still trading with a premium well above longer-term averages.
We did take the opportunity to purchase shares in March and April 2020. We plan to hold onto them as long as fundamentals remain solid.
And based on history, we expect it to do that for quite a while.
Realty Income Corporation (O) is another net-lease REIT, this one established in 1969 and listed in 1994. It owns over 11,000 properties in 50 states and Europe.
The company has paid an increased dividends for 28 years in a row, making it a dividend aristocrat.
O has one of the most diversified REIT platforms, with over 1,000 customers in 60 different industries. Around 94% of its total rent is resilient to economic downturns and/or isolated from e-commerce pressures.
Despite exposure to gyms (4.7%) and theaters (3.4%), Realty Income grew earnings (AFFO per share) during the worst of Covid-19 – making it one of just three net-lease REITs that did during that time.
O has generated a median 5.1% historical growth since 1996, which is stronger than the larger sector’s historical growth rate of 3.9%. It’s also generated positive earnings growth in 25 of 26 years, with modest annual downside volatility of 2.8%.
Moreover, it has a proven track record of maintaining 5%+ earnings CAGR since listing. And that growth has only accelerated as portfolio real estate value crossed $10 billion: 6.4% per-share AFFO CAGR since 2012.
Recently, O announced a new deal into a new type of asset: the Encore Boston Harbor (Encore) Resort and Casino. The property is priced at $1.7 billion with a 5.9% cash cap rate. Meanwhile, the contract is for a 30-year triple-net lease with favorable annual escalators.
O’s exposure to the gaming sector is expected to be less than 3.5%. So this will preserve prudent diversification and also demonstrate the company’s larger business model growth potential.
Essentially, this move demonstrates that its growth opportunities are unconstrained by industry, property type, or geography.
Realty Income is another great REIT with a strong balance sheet. Moody’s rates it at A3 and S&P gives it an A-.
Within the REIT sector, there are just seven with A-rated balance sheets. And, clearly, Realty Income happens to be one of them.
It entered 2022 strong, with a net debt to annualized pro forma adjusted EBITDAR (EBITDA and restructuring/rent) of 5.3x. That included ample liquidity to capitalize on acquisition opportunities, with around $1.5 on the revolver and $259 million in cash.
Recently, the company announced its 622nd consecutive common stock monthly dividend. It’s now set at $0.247 per share, representing an annualized amount of $2.964.
The 19 analysts following it show an average 8.6% growth forecast. And the stock yields 4.5% with a payout ratio that’s in great shape at 76%.
We maintain a Buy for Realty Income with a 12-month total return target of 20%.
National Retail Properties, Inc. (NNN), yet another net-lease REIT, was established in 1984 and listed shares in 1994. The company owns 3,271 properties in 48 states and has paid an ever-increasing dividend for 32 years in a row.
In Q1, NNN’s occupancy ticked up 20 basis points to 99.2%, which remains above its long-term average of 98%. This increase is because its leasing department enjoyed a high level of interest by a number of strong national and regional tenants.
So it shouldn’t be surprising that NNN didn’t have any credit issues within the portfolio last quarter.
The company also maintains strong debt metrics (BBB+, Baa1, BBB+), with:
NNN ended Q1-22 with $54 million of cash and nothing outstanding on its $1.1 billion bank line. Its liquidity remains in great shape too, and the weighted average debt maturity is now 14.5 years.
This is among the longest in the industry.
NNN reported that AFFO per share was $0.79 in Q1, up $0.02 from Q4. And its AFFO dividend payout ratio was 68%, which is fairly consistent with historical levels.
The REIT increased its 2022 core FFO guidance from $2.93-$3.00 per share to $3.01-$3.08. It also increased AFFO guidance to $3.08-$3.15.
Analysts forecast modest growth for NNN at just 3% in 2022 and 2% in 2023. Currently, shares trade at $43.35 with a dividend yield of 4.9% and p/AFFO of 14.2x. (Its five-year average p/AFFO multiple is 15x.)
Still, we maintain a Buy for NNN with a 12-month total return target of 20%.
Federal Realty Investment Trust (FRT) is a shopping-center REIT that was established in 1962 and listed shares in 1967. It owns 104 properties that include around:
The company has paid an increased dividend for 54 years in a row, making it a dividend king.
We’ve always been a big fan of FRT’s focus on open-air properties in areas with high-population densities of well-to-do households. This has historically allowed it to maintain strong cash flows throughout periods of economic weakness.
Like most retail-oriented REITs, FRT struggled throughout 2020. However, it was a strong performer during 2021, as its operations bounced back from the Covid-19 crash.
Moving forward, we continue to like its growth prospects as well.
In Q1, FRT reported $1.50 per share. That beat both the Street and internal forecasts. And the company raised its annual earnings guidance $0.10 at the midpoint.
FRT’s residential base rents comprise 11% of the total rented base. And the upward pressure on apartment rents in many U.S. markets is also benefiting its bottom line.
A meaningful residential income stream is a unique incremental benefit of FRT.
FRT also has a fortress balance sheet, which is rated A-/Baa1. In Q1, it had over $1.3 billion of total available liquidity comprised of:
FRT has no maturities in 2022 with only near-term maturities being $275 million of unsecured notes that mature in mid-2023.
Leverage metrics include net debt to EBITDA of 6x. And the company expects to be back to its pre-Covid target of low- to mid-5x by late 2023.
Its fixed-charge coverage ratio is over 4x – which is above the targeted level – and 93% of its outstanding debt is fixed rate. Plus, FRT has significant dry powder against its $1.3+ billion of liquidity.
FRT shares are trading at $115.14 with a p/AFFO of 25.7x and dividend yield of 3.7%. In March, shares dropped beneath our Buy Below target, so…
We’re maintaining a Buy with a total return target of 12% over the next 12 -months.
I hope you enjoyed my GOAT (greatest of all time) REIT article based on dividend growth – which is arguably one of the most important metrics when evaluating a stock.
A low payout ratio is an indicator of a company’s ability to grow dividends.
Recently I wrote an article on two high yielding REITs to avoid, and it seems that more and more people are allocating capital, favoring high yield over safety.
For investors with sufficient time horizons, investing in dividend growth stocks is a great way to compound wealth… with the added benefit of providing a stream of cash along the way.
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This article was written by
Brad Thomas is the CEO of Wide Moat Research ("WMR"), a subscription-based publisher of financial information, serving over 6,000 investors around the world. WMR has a team of experienced multi-disciplined analysts covering all dividend categories, including REITs, MLPs, BDCs, and traditional C-Corps.
The WMR brands include: (1) The Intelligent REIT Investor (newsletter), (2) The Intelligent Dividend Investor (newsletter), (3) iREIT on Alpha (Seeking Alpha), and (4) The Dividend Kings (Seeking Alpha). Thomas is also the editor of The Forbes Real Estate Investor and the Property Chronicle North America.
Thomas has also been featured in Forbes Magazine, Kiplinger’s, US News & World Report, Money, NPR, Institutional Investor, GlobeStreet, CNN, Newsmax, and Fox. He is the #1 contributing analyst on Seeking Alpha in 2014, 2015, 2016, 2017, 2018, and 2019 (based on page views) and has over 96,000 followers (on Seeking Alpha). Thomas is also the author of The Intelligent REIT Investor Guide (Wiley).
Disclosure: I/we have a beneficial long position in the shares of WPC, ESS, O, NNN, FRT, ADC either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Author's note: Brad Thomas is a Wall Street writer, which means he's not always right with his predictions or recommendations. Since that also applies to his grammar, please excuse any typos you may find. Also, this article is free: written and distributed only to assist in research while providing a forum for second-level thinking.