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As we navigate the evolving landscape of real estate investment, Real Estate Investment Trusts (REITs) continue to stand out for their attractive dividend payouts and potential for portfolio diversification. With the prospect of entering a period of quantitative easing, REITs may become even more appealing due to lower borrowing costs and the potential for expansion.
This analysis compares several individual REITs against VNQ, the Vanguard Real Estate ETF, which serves as a benchmark for the broader real estate sector. By assessing dividend sustainability, cash flow, profitability, payout ratios, and volatility—as measured by the Average True Range (ATR)—we aim to determine the best options for income-focused investors.
Traditional Metrics Limitations: For REITs, conventional metrics like Earnings Per Share (EPS) and payout ratios based on net income can be misleading due to high depreciation expenses. These non-cash charges reduce net income but don’t impact cash flow.
Funds From Operations (FFO) and Adjusted Funds From Operations (AFFO): To more accurately assess a REIT’s performance and dividend sustainability, investors should focus on FFO and AFFO, which add depreciation back into earnings and adjust for capital expenditures, respectively.
What is ATR? ATR is a technical analysis indicator that measures market volatility by decomposing the entire range of an asset price for a given period. A higher ATR indicates higher volatility.
Why ATR Matters for Investors: Understanding the ATR helps assess the potential price movement of an investment, which is crucial when considering the risk associated with holding a certain number of shares. Smaller price swings can lead to more consistent dividends and provide time to adjust positions if necessary.
VNQ represents the average performance of the REIT sector. While individual REITs may offer higher yields, VNQ provides diversification across the real estate sector, reducing company-specific risks. Its ATR values serve as a benchmark for comparing the volatility of individual REITs.
Company Summary:
LTC Properties invests in seniors housing and healthcare properties through sale-leasebacks, mortgage financing, joint ventures, and structured finance solutions. Its portfolio includes 201 properties across 26 states.
Dividend Yield:
LTC offers a higher dividend yield than VNQ, making it attractive for income-focused investors.
Payout Ratio:
Using AFFO, LTC’s payout ratio is sustainable, indicating that dividend payments are supported by operational cash flows.
Profitability:
LTC outperforms VNQ in profitability and operational efficiency.
Volatility (ATR):
Interpretation:
LTC exhibits lower volatility compared to VNQ, appealing to investors seeking more stable price movements. A 100-share investment in LTC is likely to experience smaller daily and weekly price swings.
Why LTC is of Interest:
Specializing in sectors with stable demand due to the aging U.S. population, LTC’s focus on healthcare properties positions it well for long-term growth. Low borrowing costs during quantitative easing can facilitate portfolio expansion. The lower volatility adds an extra layer of stability for investors.
Company Summary:
Known as “The Monthly Dividend Company,” Realty Income owns over 15,450 properties under long-term net lease agreements with commercial clients. It has declared over 600 consecutive monthly dividends and increased the dividend more than 100 times since its public listing in 1994.
Dividend Yield:
Payout Ratio:
Realty Income’s payout ratio is sustainable when calculated based on AFFO.
Profitability:
Profitability metrics are solid, though not as high as some peers.
Volatility (ATR):
Interpretation:
Realty Income has slightly lower volatility compared to VNQ, offering a balance between stability and potential for price movement.
Why Realty Income is of Interest:
Its diversified portfolio and consistent dividend history make it a reliable choice for conservative income investors. The monthly dividend payments are appealing for those seeking regular income.
Company Summary:
VICI Properties is an experiential REIT owning gaming, hospitality, and entertainment destinations, including iconic Las Vegas properties.
Dividend Yield:
VICI’s dividend yield is higher than VNQ’s, appealing to income investors.
Payout Ratio:
VICI’s payout ratio is sustainable and supported by strong operational cash flows.
Profitability:
VICI outperforms many peers in profitability, indicating efficient operations.
Volatility (ATR):
Interpretation:
VICI exhibits lower volatility compared to VNQ, making it attractive for investors seeking high yields with less price fluctuation.
Why VICI is of Interest:
Focusing on experiential real estate, VICI is well-positioned in a recovering economy. Strong operating performance supports its dividend yield, and quantitative easing offers opportunities for portfolio growth. Lower volatility enhances its appeal to risk-averse investors.
Company Summary:
ACRE is a specialty finance company that originates and invests in commercial real estate loans and related investments in the U.S.
Dividend Yield:
An exceptionally high dividend yield, but caution is advised.
Payout Ratio:
This suggests ACRE is paying out more than it earns, raising sustainability concerns.
Profitability:
Negative ROE indicates profitability challenges despite operational efficiency.
Volatility (ATR):
Interpretation:
ACRE has low volatility, which may seem appealing, but combined with financial challenges, it could indicate limited investor interest or liquidity issues.
Why ACRE is of Interest:
While ACRE may benefit from lower borrowing costs, its high dividend yield may not be sustainable without profitability improvements. The low volatility does not compensate for the financial risks involved.
Company Summary:
MPW focuses on acquiring and developing net-leased hospital facilities, with a portfolio of over 430 hospitals across multiple countries.
Dividend Yield:
A high dividend yield, but underlying financials require scrutiny.
Payout Ratio:
Concerns remain due to recent earnings declines.
Profitability:
Negative ROE highlights profitability issues.
Volatility (ATR):
Interpretation:
MPW shows lower volatility, but financial concerns may outweigh the benefits of reduced price fluctuations.
Why MPW is of Interest:
Specialization in essential healthcare facilities offers defensive characteristics. However, financial health concerns need addressing for dividend sustainability.
Company Summary:
An internally managed REIT, MDV focuses on single-tenant net-leased industrial manufacturing real estate.
Dividend Yield:
Offers a higher yield than VNQ, with growth potential in industrial real estate.
Payout Ratio:
Profitability issues may jeopardize dividend sustainability.
Profitability:
Strong operating margin indicates efficiency, but negative ROE is a concern.
Volatility (ATR):
Interpretation:
MDV exhibits moderate volatility, which may suit investors seeking less price fluctuation.
Why MDV is of Interest:
MDV’s focus on industrial properties aligns with growth sectors like logistics. Addressing profitability is crucial for maintaining dividends.
Company Summary:
GNL acquires commercial properties across the U.S. and Europe, emphasizing sale-leaseback transactions.
Dividend Yield:
An extremely high dividend yield, but sustainability is questionable.
Payout Ratio:
Dividends are not supported by earnings.
Profitability:
Negative ROE signals financial instability despite operational efficiency.
Volatility (ATR):
Note: The weekly ATR should typically be higher than the daily ATR. This inconsistency suggests potential data issues or low trading volume.
Interpretation:
GNL’s extremely low volatility may indicate low trading volume or liquidity issues. Combined with financial instability, this raises red flags.
Why GNL is of Interest:
While GNL’s business model provides some operational security, dividend sustainability is a significant concern. Unusually low volatility does not compensate for high financial risks.
Company Summary:
STAG focuses on acquiring and operating industrial properties throughout the U.S.
Dividend Yield:
Comparable to VNQ, offering stable income.
Payout Ratio:
The payout ratio is sustainable and within industry norms.
Profitability:
High profitability and operational efficiency position STAG favorably.
Volatility (ATR):
Interpretation:
STAG shows moderate volatility, suitable for investors seeking stability with potential for price appreciation.
Why STAG is of Interest:
STAG’s focus on industrial real estate in logistics and manufacturing sectors aligns with current economic trends. Quantitative easing can facilitate portfolio expansion.
Entering a period of quantitative easing, REITs capable of borrowing cheaply and managing cash flows effectively stand to benefit the most. VICI Properties (VICI) and STAG Industrial (STAG) emerge as the most attractive options, offering strong dividend yields supported by solid profitability, sustainable payout ratios, and lower volatility compared to VNQ. LTC Properties (LTC) and Realty Income Corporation (O) also present reliable choices for investors interested in healthcare and diversified commercial properties.
Example of Potential Investment Movement:
An investor considering a 100-share investment in VICI Properties (VICI) can expect:
This indicates relatively low volatility, making VICI a potentially stable investment for income-focused portfolios.
Investors should conduct thorough due diligence before investing, considering both quantitative metrics and qualitative factors such as management quality, property locations, and tenant creditworthiness. Understanding the volatility associated with each REIT can help align investments with individual risk tolerance levels. Consulting with a financial advisor can provide personalized investment guidance based on specific financial goals.
For those looking to deepen their understanding of Real Estate Investment Trusts, I highly recommend Investing in REITs: Real Estate Investment Trusts by Ralph L. Block. Now in its fourth edition, this definitive guide offers comprehensive insights into the REIT industry, including its history, how REITs compare with other investment options, strategies for valuing REIT stocks, and methods for building a diversified REIT portfolio. Ralph L. Block, with over 40 years of experience investing in REITs, is widely recognized as a leading authority in the field. His book is an invaluable resource for both individual and institutional investors seeking to navigate the world of REITs with confidence.
Disclaimer: This analysis is for informational purposes only and should not be considered financial advice. Past performance is not indicative of future results. Always consult with a financial professional before making investment decisions.