We just celebrated Labor Day on Monday, a welcome break for corporate America, many union workers, and government employees.
If you want to know a little something about the holiday without having to rely on the never-quite-reputable Wikipedia… check out the Department of Labor’s page here. When you do, you’ll see this explanation:
"Labor Day, the first Monday in September, is a creation of the labor movement and is dedicated to the social and economic achievements of American workers. It constitutes a yearly national tribute to the contributions workers have made to the strength, prosperity, and well being of our country."
Perhaps ironically, there are scores of workers – the very “little people” Labor Day was allegedly designed to celebrate – who still have to punch their time clocks regardless. But that’s neither here nor there.
What's worth focusing on in this article is this much more unifying fact. No matter whether we wear a suit and tie, jeans and a hard hat, or an apron and name tag… none of us are going to object to having legally-obtained, ethically=affiliated extra cash on hand every month.
Even if we have enough every month to pay the bills and buy our food, additional income is rarely unwelcome. We can put that extra money toward repairs and renovations, next year’s family vacation, or some sort of savings plan.
There are stocks to buy, dreams to build, educational advancements to prepare for, and so much more.
Therefore, just because I’m directing the next two segments at retirees doesn’t mean the following recommendations aren’t for you too. These monthly-paying real estate investment trusts (REITs) are practically perfect paths toward becoming more prepared for when retirement does happen.
You’ll see why as you keep reading.
Making the Case for Monthly-Paying REITs
The larger principle at work here is one I’ve written about before. Early on in August, I published my thoughts on “The Benefits of Investing in Monthly-Paying REITs.” But that was for Forbes, and it wasn’t from a retiree’s point of view.
For those two reasons – as well as my sincere goal to make sure that my new readers are just as informed as my regulars – I’m going to cover it again, beginning with this quote from the aforementioned article.
"The only problem with monthly paying dividend stocks as a whole is that there aren’t enough of them. This includes the ones in my exact area of expertise: Real estate investment trusts."
Now, again, I wrote that specifically for non-retirees who wanted to eventually become happy, healthy retirees. But the same statement applies just as well for happy, healthy retirees who want to remain happy, healthy retirees.
Monthly-paying REITs simply offer more practical income in this regard.
It’s true that we’re supposed to prepare for life’s downs as well as its ups. And I’m the last person to criticize the “save now, spend later” mentality.
Societies and individuals alike waste far too much money trying to keep up with the Joneses. We buy items we think we want in the moment, only to set them aside a year later… a month later… or worse, mere weeks, days or hours later… since we’ve found some other temporary item to complete us.
Temporarily.
That’s foolish behavior, to say the least. It’s much, much smarter and safer to prepare for the future than get so caught up in the present.
With that said, we do live in the present. And, despite our most admirable efforts, the future isn’t always predictable.
Moreover, once we’re retired, such unpredictability can become more difficult to deal with.
The Monthly-Paying REITs’ Case Continues
It’s that larger unpredictability that makes monthly-paying REITs so practical.
While, no, I can’t promise you that an evil wizard won’t put a curse on them, causing them to crash… I can safely say that the chances of them falling apart aren’t high at all. These are stable businesses with noteworthy track records of keeping their commitments.
Therefore, it’s much more likely that, say, you find yourself faced with:
- A plumbing disaster
- A bad filing with the IRS, which leads to you having to pay back taxes
- Your kids deciding to extend the family vacation an extra week and your grandchildren masterfully manipulating you into agreeing. (OK, they just asked, but they had those puppy-dog eyes when they did, and you only get to see them in person twice a year as it is…)
While I sincerely hope that none of that happens to you – minus, perhaps, the last possibility – you just never know. In which case, it’s nice to have extra income coming in once a month instead of once a quarter.
Sometimes, it can even be crucial.
That way, you can look at the unexpected problem, evaluate what to do, and better plan accordingly.
If that sounds like preferable planning to you too, then let’s get right to our four featured monthly-paying REITs.
LTC Gives Good TLC
LTC Properties (LTC) is a healthcare REIT that focuses on senior housing and long-term healthcare property types, including:
- Skilled nursing (49.3%)
- Assisted living (48.5%)
- Independent living (2.2%).
It owns a portfolio of 199 properties, three development projects, and four land parcels (in 29 states).
Although LTC hasn’t been immune to skilled nursing challenges, it’s done a terrific job resolving those problems and putting itself in a great position to grow the portfolio. Several operators such as Senior Care Centers (filed BK), Thrive (successfully transitioned) and Anthem (meeting LTC’s increased rent expectations) are stabilizing and there appears to be much greater visibility.
LTC always has maintained an impressive balance sheet (just $12 million on the line of credit as of Q2-19) with $441 million available. LTC prefers to utilize net lease contracts (no RIDEA) so the company matches the long-term debt contracts with the projected free cash flow (no significant debt maturities over the next five years).
At the end of Q2-19, LTC’s credit metrics were well matched to its healthcare REIT peers, with debt to analyzed adjusted EBITDA of 4.5x and an annualized adjusted fixed charge coverage ratio of 4.8x and against the enterprise value of 27.1%. The strength of the balance sheet speaks volumes to LTC’s risk management practices and so does the fact that the company has never cut its dividend since 2001.
Although LTC did not increase its dividend in 2019, we believe it will commence again in 2020. The estimated 2019 FFO per share is $3.03 leaving plenty of cushion (75% payout ratio) for the $2.28 annual dividend. Year-to-date shares have returned 20% and the current dividend yield is 4.7%. Analysts forecast FFO to grow by around 3% in 2020, and we maintain a buy with an expected annualized total return of 10%.
Source: F.A.S.T. Graphs
This Monthly-Paying REIT Is Set to Stay
STAG Industrial (STAG) has become a popular monthly-paying REIT and part of the attraction is the fact that the company has maintained an impressive dividend growth history. Since going public in 2011, STAG has built an impressive portfolio of 409 industrial buildings in 39 states. This means that the company has strong diversification – with 367 tenants and a well-laddered lease maturity schedule (weighted average lease term of 5.3 years).
STAG is internally managed and operates a comprehensive operating platform capable of addressing every physical aspect and tenant scenario related to industrial real estate ownership The company has in-house construction and engineering professionals overseeing capital projects including expansions, roof replacements, general site and tenant-specific work. This active management arrangement is a key differentiator for the company and the primary reason it has achieved approximately 72% tenant retention since the IPO (and leased ~48 million square feet during that time).
Similar to LTC, STAG also maintains a conservative balance sheet with low leverage: Debt+ preferred / total capitalization of 26.7% and net debt + preferred / Real Estate Cost Basis of 36.7%. STAG also has well-laddered debt maturities with no greater than 15% of debt maturing in any one year, excluding the revolver. As of Q2-19 the company had around $545 of liquidity including an undrawn $175 million unsecured term loan. The current investment grade ratings are from Moody's (Baa3 / stable) and Fitch (BBB / stable).
While STAG has been raising its payouts every year since it went public, it’s been doing so at token rates designed to let the REIT grow into its initial high dividend, which is necessary to attract investor interest. However, the payout ratio is now in much better shape (~79% based on FFO) and earnings (or FFO) is expected to grow by around 5% in 2020.
STAG shares have returned ~20% year-to-date, not as strong as the larger peers Prologis (PLD) +44% YTD and Eastgroup (EG) +39% YTD. We consider the shares soundly valued today at $29.08 with a P/FFO of 16.1x. We would recommend “leaning into this one” (or waiting on a modest pullback). The dividend yield is just shy of 5% (4.92%) and we forecast annualized total returns of 10% to 12%.
Source: F.A.S.T. Graphs
Farming Out Monthly-Paying Dividends
The next monthly-paying REIT is Gladstone Land (LAND) and as of Q2-19 owns 92 farms with 79,796 total acres in 10 states, valued at approximately $735 million (acreage is currently 100% leased). LAND primarily buys farmland used to grow healthy foods, such as fruits, vegetables and nuts, and the primary focus is acquiring land to be purchased and rented for annual (or more frequent) plantings to grow fresh fruits and vegetables (grown mostly in California, Florida and adjoining states).
During Q2-18 LAND’s total assets increased by about $53 million, or 9% due to new acquisitions that were funded through cash proceeds (new equity issuances) and fixed rate borrowings. 100% of borrowings are at fixed rates and the weighted-average effective interest rate of debt is 3.59%, fixed for 5.8 years.
Although LAND has higher debt (49% LTV) than most REITs, the company believes that the relative safety of farmland as an overall asset class allows it to borrow at levels that enhance returns while maintaining the security provided by a strong and stable asset base.
In Q2-18 LAND’s net income was $174,000 and AFFO was ~$2.3 million, a decrease of approximately $127,000, or 5.2%, from the prior quarter, while AFFO per common share was approximately $0.13 for both quarters. Meanwhile the company increased the distribution run rate by 0.11%, declaring monthly cash distributions of 0.04455 per share of common stock (including OP Units held by non-controlling third parties) for each of July, August, and September 2019. This marks the 15th distribution increase over the past 55 months (and increased the distribution run rate by a total of 48.5%).
As I explained to Marketplace members, “LAND’s AFFO payout ratio is above 100% and overtime we must see this coming down, and as Gladstone (the CEO) told me, “we’re in the day-cropping business so we essentially get a piece of the action” in terms of percentage rent. The company is expecting to receive an amount equal to or greater than the approximately $1.2 million it recorded during 2018, which should provide adequate dividend coverage.”
Source: F.A.S.T. Graphs
Make Yourself at Home
We recently completed a research report for Marketplace members on the lodging REIT sector. While working on it, we noticed how most all of the lodging REITs were forecasted for muted-to-flat growth in 2020. Mainly because “many hotels cannot sustain current NOI levels as a result of higher wages (remember, labor comprises roughly 50% of the expense base of a hotel).”
Upon further investigation, we consider Apple Hospitality (APLE) one of the few names worth recommending, primarily because it has a such a diversified portfolio of 234 limited service hotels in 34 states. We’ve always liked limited service hotels because they generate higher operating margins that provide a more stable cash flow stream.
Apple is highly concentrated, with the largest owners for both Hilton and Marriott. That provides it with a tremendous scale advantage. Having more than 13,000 hotels worldwide across 100-plus countries and territories creates strong consumer awareness. Also, scale ownership within specific brands yields comparable hotel operating data to benchmark and drive performance.
Apple has low debt and staggered maturities that facilitate its disciplined balance sheet policies. At the end of Q2-19, the net debt-to-EBITDA was 3.2x, around three turns better than the select service peers.
Plus it had approximately undrawn capacity on the unsecured credit facilities of $232 million. Total debt to capitalization was approximately 28%, which provides financial flexibility, fund capital requirements and acquisitions (had seven hotels under contract for acquisition for a total expected purchase price of $216 million).
To be clear, we are underweight lodging, but we consider Apple to be an excellent income-generator as shares now yield 7.53%. The growth is estimated at 1% in 2020 and 2% in 2021. We consider the dividend safe, although we would like to see forward progress (dividend increases) in the future. Maintain buy.
Source: F.A.S.T. Graphs
Note: We are putting together a portfolio of 20 preferreds that pay monthly for members of The Dividend Kings and iREIT on Alpha.
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.
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