REIT Investment Analysis: Comparing Individual REITs with VNQ (Vanguard Real Estate ETF)

ntroduction

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.

Understanding REIT Financial Metrics

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.

Understanding Average True Range (ATR)

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 Overview (Benchmark)

Market Price: $96.81
Dividends Per Share (TTM): $3.49
Dividend Yield: 4.16%
Operating Profit Margin: 20.75%
Market Cap: $25.57 billion
Average True Range (ATR):
- Weekly ATR: $2.72
- Daily ATR: $1.19

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.

Individual REIT Analysis

1. LTC Properties (LTC)

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: 6.60%

LTC offers a higher dividend yield than VNQ, making it attractive for income-focused investors.

Payout Ratio:

Approximately 80% based on AFFO

Using AFFO, LTC's payout ratio is sustainable, indicating that dividend payments are supported by operational cash flows.

Profitability:

Return on Equity (ROE): 10.35%
Operating Margin: 41.18%

LTC outperforms VNQ in profitability and operational efficiency.

Volatility (ATR):

Weekly ATR: $1.35
Daily ATR: $0.52
Comparison to VNQ:
- Weekly ATR: Lower than VNQ ($1.35 vs. $2.72)
- Daily ATR: Lower than VNQ ($0.52 vs. $1.19)
Expected Movement for 100 Shares:
- Daily Movement: 100 shares × $0.52 = $52
- Weekly Movement: 100 shares × $1.35 = $135

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.

2. Realty Income Corporation (O)

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:

Realty Income (O): 4.73%

Payout Ratio:

Approximately 80% based on AFFO

Realty Income's payout ratio is sustainable when calculated based on AFFO.

Profitability:

ROE: 4.08%
Operating Margin: 30.99%

Profitability metrics are solid, though not as high as some peers.

Volatility (ATR):

Weekly ATR: $2.01
Daily ATR: $0.89
Comparison to VNQ:
- Weekly ATR: Lower than VNQ ($2.01 vs. $2.72)
- Daily ATR: Slightly lower than VNQ ($0.89 vs. $1.19)
Expected Movement for 100 Shares:
- Daily Movement: 100 shares × $0.89 = $89
- Weekly Movement: 100 shares × $2.01 = $201

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.

3. VICI Properties (VICI)

Company Summary:

VICI Properties is an experiential REIT owning gaming, hospitality, and entertainment destinations, including iconic Las Vegas properties.

Dividend Yield:

VICI: 5.79%

VICI's dividend yield is higher than VNQ's, appealing to income investors.

Payout Ratio:

Approximately 75% based on AFFO

VICI's payout ratio is sustainable and supported by strong operational cash flows.

Profitability:

ROE: 10.66%
Operating Margin: 47.07%

VICI outperforms many peers in profitability, indicating efficient operations.

Volatility (ATR):

Weekly ATR: $1.06
Daily ATR: $0.38
Comparison to VNQ:
- Weekly ATR: Significantly lower than VNQ ($1.06 vs. $2.72)
- Daily ATR: Lower than VNQ ($0.38 vs. $1.19)
Expected Movement for 100 Shares:
- Daily Movement: 100 shares × $0.38 = $38
- Weekly Movement: 100 shares × $1.06 = $106

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.

4. Ares Commercial Real Estate Corporation (ACRE)

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:

ACRE: 17.44%

An exceptionally high dividend yield, but caution is advised.

Payout Ratio:

Exceeds 100% based on earnings

This suggests ACRE is paying out more than it earns, raising sustainability concerns.

Profitability:

ROE: -5.66%
Operating Margin: 44.66%

Negative ROE indicates profitability challenges despite operational efficiency.

Volatility (ATR):

Weekly ATR: $0.45
Daily ATR: $0.14
Comparison to VNQ:
- Weekly ATR: Significantly lower than VNQ ($0.45 vs. $2.72)
- Daily ATR: Much lower than VNQ ($0.14 vs. $1.19)
Expected Movement for 100 Shares:
- Daily Movement: 100 shares × $0.14 = $14
- Weekly Movement: 100 shares × $0.45 = $45

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.

5. Medical Properties Trust (MPW)

Company Summary:

MPW focuses on acquiring and developing net-leased hospital facilities, with a portfolio of over 430 hospitals across multiple countries.

Dividend Yield:

MPW: 13.92%

A high dividend yield, but underlying financials require scrutiny.

Payout Ratio:

Over 100% based on net income; closer to 90% using FFO

Concerns remain due to recent earnings declines.

Profitability:

ROE: -6.83%
Operating Margin: 37.41%

Negative ROE highlights profitability issues.

Volatility (ATR):

Weekly ATR: $0.70
Daily ATR: $0.23
Comparison to VNQ:
- Weekly ATR: Lower than VNQ ($0.70 vs. $2.72)
- Daily ATR: Lower than VNQ ($0.23 vs. $1.19)
Expected Movement for 100 Shares:
- Daily Movement: 100 shares × $0.23 = $23
- Weekly Movement: 100 shares × $0.70 = $70

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.

6. Modiv Industrial, Inc. (MDV)

Company Summary:

An internally managed REIT, MDV focuses on single-tenant net-leased industrial manufacturing real estate.

Dividend Yield:

MDV: 8.13%

Offers a higher yield than VNQ, with growth potential in industrial real estate.

Payout Ratio:

Exceeds 100% due to negative earnings

Profitability issues may jeopardize dividend sustainability.

Profitability:

ROE: -3.73%
Operating Margin: 89.06%

Strong operating margin indicates efficiency, but negative ROE is a concern.

Volatility (ATR):

Weekly ATR: $1.07
Daily ATR: $0.46
Comparison to VNQ:
- Weekly ATR: Lower than VNQ ($1.07 vs. $2.72)
- Daily ATR: Lower than VNQ ($0.46 vs. $1.19)
Expected Movement for 100 Shares:
- Daily Movement: 100 shares × $0.46 = $46
- Weekly Movement: 100 shares × $1.07 = $107

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.

7. Global Net Lease (GNL)

Company Summary:

GNL acquires commercial properties across the U.S. and Europe, emphasizing sale-leaseback transactions.

Dividend Yield:

GNL: 18.16%

An extremely high dividend yield, but sustainability is questionable.

Payout Ratio:

Exceeds 1000%, indicating unsustainability

Dividends are not supported by earnings.

Profitability:

ROE: -10.35%
Operating Margin: 70.75%

Negative ROE signals financial instability despite operational efficiency.

Volatility (ATR):

Weekly ATR: $0.10
Daily ATR: $0.20
Comparison to VNQ:
- Weekly ATR: Significantly lower than VNQ ($0.10 vs. $2.72)
- Daily ATR: Much lower than VNQ ($0.20 vs. $1.19)
Expected Movement for 100 Shares:
- Daily Movement: 100 shares × $0.20 = $20
- Weekly Movement: 100 shares × $0.10 = $10

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.

8. STAG Industrial, Inc. (STAG)

Company Summary:

STAG focuses on acquiring and operating industrial properties throughout the U.S.

Dividend Yield:

STAG: 4.07%

Comparable to VNQ, offering stable income.

Payout Ratio:

Approximately 80% based on AFFO

The payout ratio is sustainable and within industry norms.

Profitability:

ROE: 5.71%
Operating Margin: 80.80%

High profitability and operational efficiency position STAG favorably.

Volatility (ATR):

Weekly ATR: $1.45
Daily ATR: $0.60
Comparison to VNQ:
- Weekly ATR: Lower than VNQ ($1.45 vs. $2.72)
- Daily ATR: Lower than VNQ ($0.60 vs. $1.19)
Expected Movement for 100 Shares:
- Daily Movement: 100 shares × $0.60 = $60
- Weekly Movement: 100 shares × $1.45 = $145

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.

Overall Ranking (with VNQ as a Benchmark)

VICI Properties (VICI) – High dividend yield with strong profitability, sustainable payout ratio, and lower volatility. Attractive for exposure to entertainment and experiential real estate.
STAG Industrial (STAG) – Balanced dividend yield, solid profitability, sustainable payout ratio, and moderate volatility. Focus on industrial properties and robust metrics.
LTC Properties (LTC) – Higher yield than VNQ, solid profitability, sustainable payout ratio, and lower volatility. Well-positioned in the healthcare sector.
Realty Income Corporation (O) – Reliable dividend with sustainable payout ratio, strong track record, and slightly lower volatility. Ideal for conservative investors.
Modiv Industrial (MDV) – Potential due to focus on industrial properties and moderate volatility but needs to address profitability for dividend sustainability.
Medical Properties Trust (MPW) – Defensive qualities and lower volatility, but financial health concerns place it lower in the ranking.
Ares Commercial Real Estate Corporation (ACRE) – High dividend yield and low volatility countered by profitability challenges and dividend sustainability concerns.
Global Net Lease (GNL) – Extremely high dividend yield overshadowed by significant sustainability concerns, negative profitability, and potential liquidity issues.

Conclusion

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.

Considerations for Investors

Volatility Awareness: Understanding ATR helps gauge potential price movements. Lower ATR values indicate less volatility, which may be preferable for risk-averse investors.
Sustainable Dividends: Focus on REITs with payout ratios supported by FFO or AFFO to ensure dividend sustainability.
Profitability Metrics: High ROE and operating margins indicate efficient operations and the ability to maintain dividend payouts.
Sector Exposure: Industrial, healthcare, and experiential properties are poised for growth, especially during quantitative easing.
Risk Management: High dividend yields should not overshadow financial stability. Extremely high yields with negative profitability and unsustainable payout ratios may signal high risk.

Example of Potential Investment Movement:

An investor considering a 100-share investment in VICI Properties (VICI) can expect:

Daily Price Movement: Approximately $38 (100 shares × $0.38 daily ATR)
Weekly Price Movement: Approximately $106 (100 shares × $1.06 weekly ATR)

This indicates relatively low volatility, making VICI a potentially stable investment for income-focused portfolios.

Recommendation

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.

‍