By Serkan Unal
Equity Real Estate Investment Trusts (REITs) had a strong year in 2012. The FTSE NAREIT Equity REITs produced a total return of 18.06% last year, beating the S&P 500 Index return by little more than 2 percentage points. Last year marked the fourth consecutive year in which equity REITs outperformed the broad-market indices. Earlier this year, JPMorgan said it expected the equity REIT sector to continue to post strong total returns in 2013, as market outlook and fundamentals continue to improve and valuation appears "reasonable." The investment bank projected a 10% total return for equity REITs this year, "driven by 7% earnings growth, 3-4% dividend income, and no change in trading multiples."
REITs pay attractive income as they are legally mandated to distribute at least 90% of their taxable income to their unit-holders. The dividend/distribution yield for equity REITs averaged 3.6% in February 2013. We have selected five REITs that pay dividend/distribution yields well above this average, providing strong and reliable income for their investors. Also, the following five REITs look poised to benefit from positive market trends.
The GEO Group, Inc. (GEO), one of the world's largest providers of correctional, detention, and community reentry services, pays a dividend/distribution yield of 5.6% on a payout ratio of 70% of its 2013 adjusted FFO (based on the guidance midpoint). The REIT's current distribution yield is based on a $2.00 annual dividend. However, the company's payout in 2013 is expected to be in the range of $2.20-$2.40 per unit, which implies additional distribution hikes going forward. GEO's adjusted FFO has been growing at a 17% CAGR over the past five years. This year, its adjusted FFO is likely to dip by about 4.7% from last year, mainly due to healthcare operations divestitures. This REIT has 73,000 beds and 101 facilities (94 in the United States and 7 internationally, including Australia, South Africa and UK). The company operates in an industry with major barriers to entry and recession resistant revenues. Investors pursuing GEO for its high income will not overpay for their units. Even though GEO has nearly doubled in value over the past year, it is currently trading at 12.8x forward adjusted FFO. Its larger rival, Corrections Corporation of America Inc. (CXW), is selling at a forward multiple of 13.7x. Among hedge funds, Scopia Capital is bullish about this REIT.
National Retail Properties, Inc. (NNN), a retail REIT that acquires and owns single-tenant net lease retail properties, is an avid dividend grower, boasting 23 years of consecutive annual dividend/distribution increases. The company grew its dividends at a 12.3% CAGR over the past five years. NNN has also outperformed REIT and equity averages over most historical periods. The REIT currently pays a distribution yield of 4.5% on a payout ratio of 83% of its 2013 adjusted FFO (based on the guidance midpoint). NNN's assets expanded through acquisitions over the past few years, which propped up NNN's adjusted FFO growth of about 8% annually over the past two years. In 2013, NNN expects to grow its adjusted FFO at a more moderate 3.8%. This REIT derives almost a third of its rents from Texas and Florida, which currently works to its favor, given the strong economic conditions in these two states. The favorable market environment is reflected in NNN's persistently high occupancy rate, which between 2003 and 2012 never fell below 96.4% (see the firm's latest investor update). Up some 31% over the past year, NNN is trading at 18.5x forward adjusted FFO versus 13.3x for its peer EPR Properties (EPR) and 18.8x for Realty Income Corporation (O). Last quarter, Ken Fisher held nearly $37 million worth of NNN.
LTC Properties, Inc. (LTC) is a healthcare REIT that invests in senior housing and long-term healthcare properties, including skilled nursing and assisted living properties, through facility lease transactions, mortgage loans, and other investments. It pays a dividend/distribution yield of 4.7% on a payout ratio of 75% of its 2013 normalized diluted FFO (guidance midpoint). The REIT's monthly cash distributions have grown at a CAGR of 3.8% over the past five years. Its investment rationale is based on the favorable population aging trends and the rising healthcare spending, with the "above-75" population forecasted to double by 2030 (compared to 2010) and healthcare spending expected to grow 5.8% annually through 2020, outpacing the average rate of economic growth over the same period. LTC operates in a traditionally defensive industry and boasts solid fundamentals. Following a 5.1% increase in its normalized diluted FFO per share in 2012, LTC expects to boost its normalized diluted FFO per share by 9.3% this year. Despite its 27.3% gain over the past year, LTC is trading at a price-to-FFO of 15.9x, compared with the multiples of 16.6x and 17.6x for much larger HCP Inc. (HCP) and Health Care REIT, Inc. (HCN), respectively. Last quarter, billionaire Cliff Asness trimmed his LTC stake by 5% to $10.7 million.
Digital Realty Trust, Inc. (DLR), a data center REIT leasing space to large technology and financial firms, pays a dividend/distribution yield of 4.7% on a payout ratio of 65% of its 2013 core FFO (guidance midpoint). The firm's dividends grew at a CAGR of 35.6% over the past half decade. The company owns 117 properties comprising 21.9 million rentable square feet. Its rent base is well diversified, with CenturyLink Inc. (CTL), Facebook (FB), and AT&T (T) representing some of its largest tenants. DLR has been grown at a CAGR of 18.7% between 2005 and 2012. While its FFO increased 9.0% in 2012 from the year before, the company expects to see its 2013 FFO growing between 5.4% and 8.7% from 2012. The rates of FFO growth have been decelerating; however, the outlook for the sector remains encouraging, given the robust growth in IP traffic worldwide; corporate data demand growth driven by social networking, mobile data services, online retail, and trading platforms; and positive cloud computing trends. In terms of valuation, DLR is trading at a 13.8x core FFO (based on its 2013 guidance midpoint) versus 13.0x and 19.8x for DuPont Fabros Technology Inc. (DFT) and CoreSite Realty Corporation (COR), respectively. In Q4 2012, hedge funders Ken Griffin and Steven Cohen were both bullish about DLR.
Monmouth Real Estate Investment Corp. (MNR) is a small-cap industrial REIT with 46 years in operation as a public REIT. It dividend/distribution yields 5.4% on a payout ratio of 93% of 2013 estimated FFO. The company's dividend payout has been unchanged since November 2005; however, it had been maintained even during the Great Recession. MNR's growth in gross leasable area [GLA] over the past several years has been fairly healthy. However, only one client, FedEx Corporation (FDX) accounts for 41% of the total GLA. This may be viewed as an advantage, as the relationship between MNR and FDX that extends over a couple of decades testifies to the company's ability to retain clients. While MNR's FFO has been rising over the past three years, on a per share basis that growth has been muted due to equity issuance/dilution. As-adjusted FFO per share has been on a downtrend since 2009. Going forward, positive factors for the REIT's outlook include its high occupancy rate (currently at 94%), improving outlook for industrial space, and robust e-commerce sales, which are pushing for the expansion of Fedex's capacity to ship goods sold online. MNR is not that cheap, as it has a price-to-FFO of 17.2x versus 16.2x for STAG Industrial Inc. (STAG). Last quarter, Jim Simons held a small MNR stake.