Dallas, Texas-based triple net-lease and internally managed REIT Spirit Realty (NYSE:SRC) last declared a $0.663 per share quarterly dividend. This was in line with its prior payout for an annualized 6% yield. This yield is attractive against a macroeconomic backdrop defined by inflation at elevated levels and rising Fed funds rates.
The REIT’s quarterly dividend payout has been growing since the pandemic and is up by 3.54% over the last 12 months. However, this rate of growth is around 34% lower than its peer group median. Critically, any investment in Spirit will be based on how safe the current payout is and whether or not this payout is primed for growth. With the commons down by around 5.5% over the last 12 months, the dividend has done most of the heavy lifting to shift total returns to a small positive gain of 0.75%.
2,118 Owned Properties, Triple Net-Leases, And FFO Growth
Spirit has built a property portfolio made up of retail, industrial, and office tenants under long-term triple net leases. The REIT’s portfolio as of the end of its last reported fiscal 2022 third quarter held 2,118 properties with a total leasable area of 55.7 million square feet spread across 49 states and 346 tenants operating in 34 industries. The portfolio is in good shape with occupancy at around 99.8% and more than half of the portfolio being listed on either the NYSE or Nasdaq. Spirit counts Dollar Tree (DLTR), BJ’s Wholesale Club (BJ), and Life Time Fitness among its top tenants.
The inherent stability of the portfolio is further highlighted by its lack of disproportional overexposure to a single tenant. Around 22% of annualized base rent (ABR) coming from ten tenants and its largest tenant, Life Time Fitness, only forms 4.1% of ABR.
This is further diversified across a number of industries albeit with a 70.4% total exposure to retail. The REIT reported rental revenue of $180.3 million for the third quarter, up from $151.4 million in the year-ago comp. This was driven by $247.9 million in gross investments during the quarter with Spirit placing a heavy emphasis on the expansion of its industrial investments.
The REIT reported a net income of $74 million, around $0.54 per share and up from $0.32 per share in the year-ago quarter. Funds from operations (FFO) was $0.93 per share and adjusted FFO at $0.90 per share. Whilst Spirit is set to release its fiscal 2022 fourth quarter earnings before the market opens on February 28, 2023, the REIT has guided for total AFFO for the full year to come in at $3.57 per share. This would be a growth of 9.8% over fiscal 2021 to set the backdrop for continued dividend growth. The current annualized dividend of $2.65 per share is fully covered by AFFO with the payout ratio at 74%.
An Alternative With The Series A Preferreds
I like to also look at any relevant preferreds of REITs and Spirit’s 6.00% Series A Cumulative Preferred Stock (NYSE:SRC.PA) offers a different investment profile to more risk-averse investors. The fixed income like security pays out a $1.50 annual coupon for a 6.2% yield on cost. They’re also cumulative which is important in reducing the likelihood of a suspension of the coupon as any unpaid distribution accumulates as a liability to be repaid at a future redemption event.
The Series A is currently trading at $24.25, 3% below its $25 redemption value. This compares favourably with the commons which are currently trading at a 66.8% premium to a $26.41 tangible book value per share. Whilst they’re currently trading past their October 3, 2022 redemption date, it’s unlikely Spirit will redeem the full $150 million issue in the current calendar year with the Fed funds rates still rising to exert pressure on the financing market.
Total return performance against the commons over the last three years reflects the stable nature of the preferreds where most known risks are limited. However, the comparative total return performance over the last five years has the preferreds up by 36.31% versus 70% for the commons. Hence, the preferreds offer stability and outperformance in periods of downside volatility like we’ve seen over the last year on the back of high inflation and rising interest rates. However, the commons likely present the better long-term choice here and also offer exposure to future dividend increases.
A highly visceral pursuit of healthy income has been my dominant investment strategy over the last few months as my growth stocks got battered and my earnings were eroded by inflation. With that in mind, Spirit looks attractive. The growing REIT and its 6% yield form a good core long-term hold for its investors.