By Robert Gordon
By law, REITs are required to pay not less than 90% of earnings as dividends to shareholders. Since dividends are typically paid out of free cash flows (FCF), the dividend payout often exceeds the stated earnings of many REITs. In the following article, I will look at the four REITs that I think are the most solid from an FCF standpoint and could provide the most stable income among REITs for investors.
Annaly Capital Management, Inc. (NLY)
Annaly is among the largest, best known, and most successful REITs out there today. It specializes in mortgage related, usually government backed debt. Annaly stock was trading recently at almost $17 per share. Its 52 week range is from $18.79 to $14.05, and it is trading at a price to earnings ratio of 12.3. It has a market capitalization of $16.2 billion, and paid over the course of 2011 a total dividend of $2.28, for a suggested yield at today's price of 13.77%.
Annaly is struggling by its own standards due to the yield curve. Long term mortgages rates have declined to historic lows, prepayments of higher yielding mortgages are common place, and short term rates have gotten to about as low as they can get. The sum of these things is that Annaly's earnings, and dividend payments, are on a subtle but obvious decline. In its fourth quarter, Annaly posted earnings of $0.54 per share, compared to analysts' expectations of $0.57. The quarter's per share profit was the lowest for Annaly in any quarter since 2008. The single biggest reason was lowered revenues due to a declining interest rate spread, down in the quarter to 1.71%, down from 1.85% in the year ago quarter, and from 2.08% in the third quarter of 2011.
Annaly will announce its quarterly dividend in March, and let's say, without inside information, it cuts the dividend to $0.50 from the $0.64 paid a year ago. Let us further assume overall dividends of $2.00 per share are paid in 2012. Still, at today's price, that would involve an 11.9% yield. I can think of no safer or better investment virtually guaranteeing a double digit yield in today's stock market, and income investors would do well to consider Annaly.
Hospitality Properties Trust (HPT)
Hospitality is a REIT that owns nearly 300 hotels, and nearly 200 additional travel centers, distributed around the United States, Puerto Rico and Canada. Its stock was trading recently at about $25 per share. Its 52 week range is from $25.94 to $19.00, and its price to earnings ratio through the first three quarters of 2011, annualized, is 17.8. It has a market capitalization of $3.1 billion, and pays a quarterly dividend of $0.45 per share, for an annual yield of 7.2%.
Hospitality has not yet reported fourth quarter of full year 2011 earnings. However, based upon projections, it should earn $1.40 per share for the year, its best year since 2007. Analysts are expecting free cash from operations of $3.30 for 2011. As the owner of mostly higher end hotels, its business suffered greatly in the economic recession, and its travel service division, dependent upon trucking, also has somewhat of a cyclical nature. Key indicators of Hospitality's profits, such as occupancy rate at its hotels, has been trending up, indicating an even better 2012. Hospitality has also made a major purchase, Sonesta International Hotel Corporation, which closed earlier in 2012.
I like Hospitality. It cut its dividend by some 40% back in 2009, and I am sure is loath to do so again. And I am confident cash flow will continue to sustain the current payout. I expect earnings advances in 2012 and 2013, as well. I again endorse this stock for those seeking a generous income.
HCP, Inc. (HCP)
HCP is the country's largest healthcare REIT, with interests in nursing homes, medical buildings and hospitals among its 672 properties in 44 states. Its stock was trading recently at about $42 per share, toward the high point of its 52 week range of $42.48 to $28.76. It is trading at a price to earnings ratio of 18.1, and has a market capitalization of $17.2 billion. It recently raised its dividend to a quarterly payment of $0.50, for an annual yield of 4.75%.
HCP is in an advantageous situation as Congress will eventually try to figure ways to reign in healthcare spending. As the largest REIT healthcare operator, HCP will be in a position to take advantage of consolidation opportunities. As it is, HCP's earnings are rising, enabling its dividend to rise as well. Analysts expect full year earnings of $2.55 per share in 2011, and $2.79 per share in 2012. The dividend of obviously well covered.
While HCP's dividend yield is not currently as generous as the some other REITs, HCP's payout is likely to grow going forward. I view that as a highly attractive characteristic of any income stock, and the current yield is still well over twice the 10 year Treasury yield. Again, income investors take note.
Duke Realty Corporation (DRE)
Duke is the nation's largest "self administered" REIT. It historically has focused on industrial and office space in the South and Midwest. Its stock was trading recently at about $14 per share, near the high end of its 52 week range of from $15.63 to $9.29. It is trading at a price to earnings ratio of over 100, and has a market capitalization of $3.6 billion. It has paid a consistent quarterly dividend of $0.17 per share since 2009, for a current annual yield of 4.8%.
Duke has, not surprisingly had a rough go in the recent recession, and has aggressively taken steps to improve its margins, profitability and dividends. Historically, Duke's real estate holdings have trended heavily toward office and industrial. Duke has set targets to reorient its portfolio to 60% industrial, 25% office space, and 15% medical space. During 2011, Duke sold some $1 billion of mostly suburban office space to Blackrock Inc. (BLK). Duke has been utilizing the cash generated to acquire properties to align with its objectives.
In the fourth quarter of 2011, Duke technically continued its string of narrow losses, but its key FFO was $0.30 per share for the quarter and $1.15 for all of 2011. Management believes 2012 FFO to be between $0.95 and $1.05 per share.
Duke's underlying trends, such as occupancy and tenant retention, are all trending positive. I believe Duke has a secure future, and encourage you to lock in its nearly 5.0% yield.