Show Me The Mailbox Money, Monthly

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Includes: APLE, CLDT, EPR, LAND, LTC, O, STAG
by: Brad Thomas
Summary

At its most basic, compounding is the passive act of making more money off of money you’ve already made.

More frequent payments mean more opportunities to compound at a faster rate.

The only problem with monthly-paying dividend REITs as a whole is that there aren’t enough of them.

I’m a big advocate of shareholders reinvesting their dividends. It’s a great way to build up your portfolio’s potential, along with your retirement’s exact degree and style of enjoyment.

There are two aspects to dividend reinvesting that make it the worthwhile practice that it is. For starters, there’s the concept of saving up for a rainy day: Setting money aside that you don’t need now for something bigger, better, and probably, more necessary.

Maybe even much more necessary. Like… say… retirement.

I know it’s difficult to exist in a society where keeping up with the Joneses is put on such a pedestal. You don’t have to be a rag-mag connoisseur to know what the various celebrities are sporting these days via apparel, accessories, and fast and shiny cars.

You might not know each star's and starlet’s exact income levels, but you at least have a good idea of what these flashy individuals make. And, what they make almost is certainly more than you do. It’s hard not to conclude that when their images are splashed everywhere in random ads and stories across the Internet, in the grocery store check-out aisle and all over the TV.

“So and So Is Wearing Such and Such.”

“Guess Which Household Name Owns These 17 Fast-and-Furious Sportscars?”

“6 Hollywood Vacation Spots You Can’t Afford but Should Check Out Anyway!”

It’s OK to admit if you find yourself envious every once in a while. Or more.

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If You Don’t Got It, Save

Yet those sharp clothes and shiny rims and insanely luxurious getaways are fleeting commodities.

They stand out in the moment well enough, I know. (OK, they intensely stand out in the very long, very impressive moment well enough.) And, if those celebrities have the money to afford what they’re rocking while still saving up for retirement, then good for them.

But, as we’ve already established, that’s them. Chances are it’s not you. So, it’s best to put some blinders on in this regard and focus on the future. Don’t be like the “too many people” in that Will Rogers’ quote we’re all sick of hearing by now:

“Too many people spend money they haven’t earned to buy things they don’t want to impress people that they don’t like.”

Whatever non-necessity purchase might feel like it’s worth it in the moment, but you won’t be thinking that same way the next time a rainy day comes around.

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The Power of Compounding

So, that’s the first aspect of why dividends are such valuable resources.

They give you extra money to put toward your savings goals, whether those goals are short term to help fund your 14-year-old kid’s upcoming college degree… mid term like accruing enough money to make a sizable down payment on a new house in 10 years… or long term like the retirement cushion we’ve already discussed.

Now, here’s the second part of this worthwhile equation: By being one of those thrifty shareholders who reinvest their dividends, you’re not just saving money. You’re making money as well.

And, sometimes, you’re making quite a bit.

These are hardly instant millions we’re talking about. Please don’t misunderstand me. You’re not playing the lottery here.

However, depending on how much you’re investing in the first place, you could make extra thousands or tens of thousands – maybe even more – over time. This is the power of compounding at work.

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The Song That Never Ends

At its most basic, compounding is the passive act of making more money off of money you’ve already made. For that matter, at its most complicated, compounding isn’t much more difficult to understand.

You invest in a dividend-yielding stock. You receive that dividend income. You put that dividend income back into the stock, buying up more shares that yield more dividend income that you put back into the stock to buy up more shares that yield more dividend income…

Like “The Song That Never Ends," it’s a continuous cycle until you get sick of it.

Unlike “The Song That Never Ends,” I don’t really think you will.

If anything, I think you’ll want more of it. The more wisely saved money, the better. Right?

That’s why I like the concept of monthly paying dividend stocks so much more than the quarterly paying examples Americans like me are most familiar with. More frequent payments mean more opportunities to compound at a faster rate.

That’s a good thing stacked on top of another good thing that I, for one, don’t want to ignore.

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12 Compoundable Dividend Payments a Year

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.

Canada has them aplenty. That’s actually the norm for their REITs, and, in this regard, I wish the U.S. would take a page out of its northerly neighbor’s playbook. Monthly dividends aren’t difficult to switch over to, and they benefit retirement-focused folks every bit as much as those who’ve already retired.

If there’s a collective downside to the notion, don’t ask me. I’d much rather spend the rest of this article filling you in on the select few U.S. REITs that do make the monthly cut. Naturally, I’ve narrowed the small list down further still by assessing their fundamentals.

The stocks down below are solid. And so are their dividends – all 12 of them per year.

Our Monthly Dividend Portfolio

As referenced above, in Canada, most all REITs pay monthly, but in the U.S., there are only around two dozen that pay out monthly dividends. Going forward, we would like to see more REITs convert to monthly models. This switch would require very little effort on their part while offering investors automatic and obvious benefits.

As part of our newsletter service, we provide a monthly REIT portfolio in which we screen for the safest dividends. Unfortunately, because there's a small pool of monthly paying REITs the portfolio is not very diversified. Here's a snapshot of these REITs:

EPR Properties (EPR) is a net lease REIT that owns properties with an “experiential” orientation, which means the properties have enhanced customer experiences, such as a ski resort. In 1997, EPR began as a REIT focused solely on theaters, and over the years the company has evolved into a more diversified platform specialized in select highly enduring real estate segments: entertainment, recreation, and education.

This diversification makes EPR less susceptible to weather changes in any one region or changes in education policy in any one area, helping to create a consistency of earnings from their various business lines. In addition to their well-diversified geographic exposure, the REIT is in the process of further diversifying their sector exposure.

In 2018, EPR delivered record results with both total revenue and FFO as adjusted per share increasing by 22% vs. the prior year. For 2019, EPR introduced FFO guidance per share of $5.30 to $5.50. The midpoint of this range reflects over 4% earnings growth after excluding the non-education related prepayment fees received in 2018. EPR’s investment spending guidance range is $600 million to $800 million, with disposition proceeds expected to total from $100 million to $200 million.

We are maintaining a hold on EPR currently due to concerns over the company’s exposure to Top Golf (~11.4% exposure and now the second largest operator) and the fact that many of the locations are ground leased. Because Top Golf is not investment grade rated and has higher costs of capital, we question whether EPR is taking on too much risk (and putting shareholder equity at risk).

(Note: In Q1-19, all REITs must disclose the present value of leased assets under new accounting rules guidelines. It will be interesting to view EPR’s assets because of the new transparency, and we suspect that the underlying Top Golf leases will expose the fact that the 9% cap rate deals are subordinate to underlying ground leases that are viewed as much higher risk).

In addition, EPR’s AFFO growth is forecasted to be negative in 2019, and in our view, this puts the dividend at a higher risk. There are better opportunities in our view, and we would like to see EPR begin to reduce exposure to Top Golf and invest in fee-simple properties (ground lease deals provide an element of risk to the capital stack).

Source: FAST Graphs

STAG Industrial (STAG) is an industrial REIT that's different from most industrial REIT peers because it focuses on secondary markets. The acquisition strategy is unique in that the cash flows are diversified in such a way that the company is able to mitigate the risk and enhance the stability of the dividend income derived from the stable and diversified portfolio.

By strategically targeting single-tenant industrial properties, STAG has consistently delivered a combination of both stable income and steady growth to its shareholders. In other words, asset selectivity is very good, and the prospectus for continued pipeline fulfillment looks extremely promising. Currently, STAG owns 381 buildings in 37 states, with approximately 75.4 million in rentable square feet. The company's average building size is around 215,000 square feet.

STAG’s balance sheet remains defensively positioned with ample liquidity. In Q4 2018, the company achieved its second investment grade rating (by Moody's) that allowed it to reduce interest expenses by approximately $2 million per year on unsecured term loans and the revolving credit facility. STAG’s fixed charge coverage is 4.6x with liquidity of $577 million.

In Q4-18, STAG’s core FFO per share was $0.46 and $1.79 for the year, an increase of 5.3% compared to 2017. The 2018 acquisitions totaled $677 million with a stabilized cap rate of 6.9%. This volume included $29 million of value-add acquisitions across three assets, which are expected to stabilize at a yield of 7.2%. In 2019, STAG expects to acquire $600 million to $700 million of stabilized assets with an expected cap rate range of 6.5% to 7%.

The strength of STAG’s management team is reflected in the company’s retention: 81% for the quarter and 83% for the year. We are maintaining a buy, but we believe that buying after a “pullback” is warranted. Shares have returned more than 30% in a year, and we believe prudent investors should consider an entry price of around $27.50.

Source: FAST Graphs

Realty Income (O), aka the “monthly dividend company,” is “the number one build-and-hold forever pick.” Most know this REIT invests in free-standing net leases buildings with a portfolio of more than 5,000 properties located in 49 states (all but Hawaii).

Although the company has considerable exposure to retail tenants, many of them are service oriented (i.e. Home Depot), non-discretionary (i.e. Walgreens), or low price point (i.e. Sam’s Club), so there's less risk of threats to e-commerce. Also, Realty Income owns industrial buildings, office buildings (primarily leased to WAG), and land (leased to Diego).

In addition to scale, Realty Income has the low cost of capital advantage, that simply means it has the cheapest weighted average cost of capital than any of the peers. So by generating the healthiest capital, Realty Income is able to be very selective with its investments, insisting on the highest quality tenants (the company is able to avoid lease structures with above-market rents).

For investors who purchased Realty Income in the past, congratulations, you are the proud owner of one of the safest dividend payers in the REIT sector. The company has a remarkable track record of dividend performance that includes 100 dividend increases since the company went public in 1994. For prospective investors, we must heed some caution, only because shares are a tad rich, which is why we are recommending a pullback at this time. (Our official recommendation is trim).

Source: FAST Graphs

Apple Hospitality (APLE) is a lodging REIT that invests in limited-service hotels (lack in-house drinking and dining options, full-service hotels often have at least one cocktail lounge and restaurant). Limited service hotels charge less for offering less, and business travelers are especially fond of hotels that provide guests with good value in which revenue optimization and cost control are essential.

One of the reasons that we like Apple is because of the company’s focus on limited service, and more specifically, upscale extended-stay and premium-branded select service hotels. We like this category because the hotels have higher profit margins than full service with a higher growth profile as it relates to consumer demand.

Apple’s portfolio consists of 234 hotels with more than 30,000 guest rooms located in 87 markets throughout 34 states. Franchised with industry-leading brands, Apple’s portfolio comprises 108 Marriott-branded hotels, 125 Hilton (NYSE:HLT) branded hotels and one Hyatt (NYSE:H) branded hotel.

In 2018, Apple invested $71 million in capital expenditures and the company anticipates spending $80 million to $90 million in capital expenditures in 2019. The company finished the year with $1.4 billion in outstanding debt with a weighted average maturity of approximately 5.2 years at an average rate of 3.7%. The availability under the credit facilities totaled $231 million at the end of the year.

Apple’s total revenue in Q4 2018 was $295 million, an increase of 2% from Q4 2017, and for the year, total revenue was $1.3 billion, an increase of 30% from 2017. Adjusted EBITDA was $95 million (in Q4-18) and $449 million for the full-year of 2018, both an increase of 2% from the same periods in 2017. Modified FFO per share was $0.36 per share, flat compared to Q4 2018 and down 1.0% to $1.72 per share for the full year compared to 2017.

During Q4 2018, Apple paid distributions of $0.30 per share, or a total of approximately $69 million, and for the full year, the company paid distributions of $1.20 per share or a total of $276 million annualized. Although Apple has not grown its dividend, we find the 7.2% dividend yield attractive.

Source: FAST Graphs

LTC Properties (LTC) is a healthcare REIT that invests primarily in senior housing and long-term healthcare property types, including skilled nursing properties (49.1%), assisted living properties (48.4%), independent living properties, and combinations thereof. The company owns a portfolio of 201 properties, three development projects and four land parcels (in 29 states) and has been around for more than 25 years (was incorporated on May 12, 1992).

LTC has a well-balanced geographic footprint, and Texas has the highest concentration (17.1%), followed by Michigan (14.1%) and Wisconsin (8.0%) (Michigan is the second-largest state for LTC, and that's due to the company's loan portfolio. In Michigan, most healthcare REIT deals are done as loans due to the state Medicaid reimbursement regulations).

Like many skilled nursing REITs, LTC has not been immune to operator problems (i.e. Senior Care Centers, Thrive, and Anthem), and given the experienced leadership at LTC, the company has managed to navigate the turbulence quite well. In 2019, FFO per share is expected to be between $3.00 and $3.02 per share for the full year, which reflects a $0.03 reduction for Senior Care remaining on the cash basis.

One of the keys to LTC’s success has been its disciplined balance sheet that provides the company with substantial flexibility and the capacity to fund current and future growth initiatives. The company has $461.6 million available under its line of credit, $98 million under its shelf agreement with Prudential and $184.1 million under its ATM program, providing total liquidity of $743.7 million (as of Q4 2018).

The long-term debt to maturity profile remains well matched to the company’s projected free cash flow, helping moderate future refinancing risk. LTC also has no significant long-term debt maturities over the next five years. At the end of Q4 2018, debt to annualized adjusted EBITDA was 4.2x, and the annualized adjusted fixed charge coverage ratio was 5.1x (debt to enterprise value was just 28%).

LTC did not increase the dividend in 2018, and the company continues to fund the $0.19 per share monthly dividend. The current dividend yield is 5.0%, and we maintain a BUY rating on the shares.

Source: FAST Graphs

Chatham Lodging (CLDT) is similar to Apple Hospitality in that the company invests in limited service hotels. One notable difference is that Chatham is much smaller than Apple, with a portfolio of 42 premium-branded hotels. In addition, Chatham has a coastal preference: 41% of the portfolio is located on the West Coast and 29% in the Northeast. Chatham has the second-highest exposure to West Coast markets of all U.S. lodging REITs.

Chatham's premium branded, select service hotels generate RevPAR higher than other select service brands and comparable to full-service brands. For Q4 2018, the company reported strong Q4 2018 results as the overall portfolio RevPAR growth of 4% easily exceeded the company’s original guidance range of -1% to +1%. In Q4 2018, Chatham’s adjusted FFO per share was $0.39, which represents an increase of 8.3% from the $0.36 per share generated in Q4 2017.

In 2018, Chatham improved its capital structure with the refinancing of the $250 million credit facility, reducing credit spreads along with improving certain terms and extending maturities. Additionally, since 2017, Chatham raised more than $200 million of equity and along with proceeds from the sale of one asset to fully fund acquisitions over that time.

For 2019, Chatham expects FFO per share of $1.78 to $1.88, the midpoint of $1.83 (a $0.12 decline from the $1.95 per share generated in 2018). Chatham’s annual dividend is expected to remain at a $1.32 per share in 2019, a level maintained since midway through 2016 and represents an attractive 6.1% yield. On the earnings call, the company said it “remains comfortable with the current dividend and producing free cash flow after dividends and CapEx in 2019.” The CEO added,

“Our long term goal is to increase free cash flow and guide strategic efforts to pursue incremental cash flow wherever we get.”

We are maintaining a buy with Chatham recognizing that the 6.6% dividend yield is attractive. We’re glad to see the company’s latest acquisitions (investing approximately $70 million for the Courtyard, Dallas Downtown and the Residence Inn Charleston, Summerville) that should provide increasing FFO over the ramp-up period.

Source: FAST Graphs

Gladstone Land (LAND) is a farmland REIT that has historically invested in farmland used to grow healthy foods, such as fruits, vegetables and nuts. The company's primary focus is acquiring land to be purchased and rented for annual (or more frequent) plantings to grow fresh fruits and vegetables. These crops are grown mostly in California, Florida, and adjoining states.

The company is a small-cap REIT so it’s too small for a credit rating. From a leverage standpoint, on a fair value basis, the company’s loan to value ratio on its total farmland holdings was about 57%. The company is “comfortable with these levels” given the relative low risk of quality farmland as an overall asset class. About 98% of borrowings are currently at fixed rates and on a weighted average basis the rates are fixed at 3.55% (for another six plus years).

Gladstone has a high payout ratio (close to 100%), and the company raised its dividend by a small amount every quarter and is now paying $0.04445 per share, per month over the past 49 months and has raised the dividend 13 times (overall increase of about 48% in the monthly distributions rate).

The company’s CEO pointed out to me that “all young REITs have high payout ratios.” He said that the company is “increasing the AFFO and slowly increasing the rate of the payout in dividends.” We like the fact that insiders own around 13.5% of the company and the CEO explained that he “loves paying dividends, and underlying every dividend is an asset that pays income or rent or gains. The search is always on to find assets that do not change in value often. Farmland has no meaningful correlation to the stock market, so it is wonderful.”

In 2018, the company acquired 13 farms for $89 million and as of Q4 2018. All of the farms are 100% leased and less than 2% of the total minimum annualized rent from leases expires over the next six months. The company has about $35 million of dry powder, which translates into roughly $85 million of buying power for straight cash acquisitions. We are maintaining a buy.

Source: FAST Graphs

Author's note: Brad Thomas is a Wall Street writer, and that 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, and the sole purpose for writing it is to assist with research, while also providing a forum for second-level thinking.

Disclosure: I am/we are long O, STAG, CLDT, APLE, LTC, LAND.