Spirit Realty Looks Like A Good Deal

Summary

• Spirit Realty is an attractive net lease REIT with a quality portfolio of mostly industrial and e-commerce resistant assets.
• It's seeing robust deal activity that mostly revolves around the growing industrial property segment.
• It pays an attractive and well-covered dividend yield while trading at a substantial discount to net lease peers.
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It’s easy to question a high yield strategy these days, especially when CDs and Treasuries are offering competitive yields. That’s a key reason for why many income REITs and BDCs are trading well under their 52-week highs.

While it may be tempting to layer into popular names such as Realty Income (O) and Agree Realty (ADC), those looking for higher yields to buffer the immediate impact of inflation may want to look closer at lesser followed names that also demonstrate quality attributes.

Such I find the case to be with Spirit Realty (NYSE:SRC), which trades at a valuation well under those aforementioned names while providing a much higher yield. Let's explore what makes SRC an ideal choice for investors seeking higher income and quality real estate.

Why SRC?

Spirit Realty Capital is an internally-managed net lease REIT that owns a large number of properties across the U.S. It's made great strides in improving its risk profile since its current CEO, Jackson Hsieh, came on board in 2017, spinning off its lower quality properties and improving its balance sheet profile.

At present, SRC enjoys a very high occupancy rate of 99.9%, and carries a diverse portfolio of 2,115 retail, industrial, and other properties across 49 states, and leased to 351 tenants in 34 diverse industries.

SRC has low exposure to office properties and high exposure to industrial properties (distribution & manufacturing), which represent 20% of its annual base rent. Beyond that, SRC's top tenant industries are comprised of e-commerce and recession resistant industries such as health & fitness, convenience stores, quick service restaurants, and car washes, as shown below.

Investor Presentation

Meanwhile, SRC recently closed another busy quarter, investing $351 million 24 properties with a long weighted average remaining lease term of 15.6 years and an attractive cash capitalization rate of 7.3%. Importantly, growth is flowing to the bottom line, as SRC saw $0.03 YoY AFFO per share growth to $0.88.

Also encouraging, the vast majority of these newly acquired assets (88%) were industrial assets, including distribution, light manufacturing, and industrial outdoor storage. 90% of these transactions were sale-leaseback, which is generally viewed as being favorable, given the implied tenant familiarity with the underlying property and locality.

Looking forward, SRC is well positioned to grow, as management expects $800 million worth of capital deployments this year at the midpoint. This is to be partially by $250 million worth of dispositions at the midpoint. Management highlighted the benefits from this program during the recent conference call:

Our capital recycling program, which started early in 2022, has been very successful. It has allowed us to further reshape the portfolio and accretively redeploy capital into asset classes and industries that we find attractive today. We expect continued success with dispositions this year, in total through acquisitions and dispositions, Spirit has successfully completed more than 150 transactions in 2022, which is a testament to our people and the robust processes we have established.

Importantly, SRC also maintains a strong BBB rated balance sheet with a net debt to EBITDAre ratio of 5.2x (5.5x including preferred stock), and has high liquidity of $1.7 billion comprised of cash on hand and availability on its credit facility.

This lends support to the 6.5% dividend yield, which is well-covered by a 75% payout ratio (based on Q4 AFFO per share of $0.88). Notably, SRC didn't cut its dividend during the pandemic, and a key reason is due to higher operating margins (compared to other real estate segments) that come with triple net lease nature of the portfolio, and grew the dividend by 4% last year.

Turning to valuation, I find SRC to be attractive at the current price of $40.98 with a forward P/FFO of 11.0, sitting well below its normal P/FFO of 13.2. This is also meaningfully below that of peers Realty Income and Agree Realty, which carry forward P/FFOs of 15.5 and 17.6, respectively.

Analysts have a conservative price target of $44.31, which still equates to an attractive 15% potential total return over the next 12 months.

Seeking Alpha

Investor Takeaway

SRC is an attractive net lease REIT due to its quality portfolio of mostly industrial and e-commerce and recession resistant properties. It carries a very high occupancy rate of 99.9% and appears to be finding a number of attractive deals in the current environment.

Its forward acquisition pipeline is supported by a strong balance sheet and liquidity profile. Lastly, SRC appears to be bargain priced compared to its higher valued peers, while giving income investors an attractive 6.5% yield.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of SRC either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

I am not an investment advisor. This article is for informational purposes and does not constitute as financial advice. Readers are encouraged and expected to perform due diligence and draw their own conclusions prior to making any investment decisions.

Comments

[retire47]

Any thought on why the common and preferred are trading at very similar dividend yields? Seems there should be a higher spread.

[Jerlyn111]

Good article. Thanks for your insight.

[Here2Learn&Earn]

Looks like SRC has a beta high enough to expect a good sell off when the market is dumped; I'll wait until play time is over and the overall market prices are dropped closer to reality. Thanks for the article though.

[Steve Rasher]

@Gen Alpha Thanks for the article. After reading your article and yesterday's article by @Samuel Smith, I have done my own due diligence and have bought a position today, albeit at a higher price than yesterday. Still I believe that $SRC will be a nice addition to my portfolio. Steve

[mdpath]

How would you compare it to ERPT.

[MojoRisin1]

@mdpath - EPRT? I personally own both SRC and EPRT.

[User 57458081]

Thanks, Gen Alpha, for your write-up, analysis and commentary on SRC. Good stuff!

(Long SRC)