New investors often make the mistake of chasing high-yielding stocks without giving enough thought to the quality of those companies and the sustainability of the dividends.
With real estate investment trusts (REITs), one way to assess whether a company can continue paying out the current dividend in the future is to look at the dividend amount in relation to the forward funds from operations (FFO) with a simple formula called the "payout ratio."
The payout ratio is derived by dividing the annual dividend per share by the FFO per share. For example, a dividend of $1 with an annual FFO of $1.50 would create a 66.66% payout ratio. Payout ratios below 80% are generally considered safe, but the closer the payout ratio is to 100%, the more likely the yield could be unsustainable going forward, and that dividend is commonly referred to as a yield trap.
Take a look at three REITs that have payout ratios that no longer appear to be safe and could become big yield traps in the future.
Don't Miss:
- Investing in real estate just got a whole lot simpler. This Jeff Bezos-backed startup will allow you to become a landlord in just 10 minutes and you only need $100.
- Warren Buffett once said, "If you don't find a way to make money while you sleep, you will work until you die." Here's how to collect $1,000 per month from Buffett's favorite dividend stock.
Global Net Lease Inc. GNL is a New York-based net-lease diversified REIT, founded in 2011, with a current market cap of 1.1 billion. Its portfolio includes 39.3 million square feet in 311 properties located in 11 countries, with 61% of them in the U.S. and another 20% in the U.K. Its properties are 99.9% leased with a weighted average remaining lease term of 8.3 years. Contractual rent increases are included in 94.7% of its leases.
On May 23, Global Net Lease announced it was acquiring Necessity Retail REIT Inc. RTL in an all-stock transaction in which shareholders of Necessity Retail will receive 0.67 shares of Global Net Lease stock for each common share of Necessity Retail stock. The transaction was expected to close during the third quarter.
Despite opposition from major shareholder Orange Capital Venture LP, Global Net Lease shareholders approved the merger on Sept. 8, and the transaction is now subject to the shareholder vote at Necessity Retail REIT.
On Aug. 3, Global Net Lease released its second-quarter operating results. FFO of $0.27 beat the estimates of $0.27 but was below FFO of $0.48 in the second quarter of 2022. Revenue of $95.84 million was slightly ahead of estimates of $95.4 million and above revenue of $98.18 million in the second quarter of 2022.
The annual dividend of $1.60 per share is now greater than the FFO of $1.36 per share, setting up a safety risk on the company's ability to maintain that dividend. Necessity Retail increased its dividend from $0.2125 to $0.213 on July 3, and that dividend was paid on July 13. But Necessity Retail has also had lower FFO than its dividend payout for the last six months. This does not bode well for dividends going forward, assuming the merger is completed.
On Sept. 18, BTIG analyst Michael Gorman maintained a Buy rating on Global Net Lease but lowered the price target from $19 to $15. Global Net Lease's most recent closing price was $9.45, about 12% below the $10.73 closing price on the day of the BTIG report.
Generation Income Properties Inc. GIPR is a Tampa, Florida-based diversified REIT that owns 26 single-property retail, office and industrial net lease properties in densely populated areas in 13 states. Of its tenants, 72% are investment grade credit or equivalent. Founded in 2015, Generation Income is still a small company that went public in 2021.
On Aug. 14, Generation Income reported second-quarter FFO of negative $0.03, in line with expectations. Revenue of $1.33 million missed the estimates of $1.32 million and was down 5% from the second quarter of 2022.
The same day, Generation Income announced it acquired a portfolio including 11 retail and two office properties for $42 million from Modiv Industrial Inc. MDV.
Generation Income pays $0.48 per share annually and has a dividend yield of 11.97%. However, its forward FFO of negative 0.16 does not cover the annual dividend of $0.48 per share, so the present dividend seems to be unsustainable unless things turn around soon. The newly acquired properties should become accretive to earnings, but will that be enough to sustain the dividend?
Outfront Media Inc. OUT is a New York-based specialty REIT with 500,000 advertising displays across 70 U.S. markets. Advertising includes billboards, digital, transit and mobile assets to showcase its clients. Outfront Media's website claims that its media reaches 70% of all Americans weekly. Outfront says that it joins Lamar Advertising Co. LAMR as the only specialty REITs that exclusively own advertising space.
On Aug. 3, Outfront Media reported poor second-quarter operating results. FFO of negative $2.92 missed the estimate of $0.24 by 1,316.67% and was a 1,142.86% decrease from FFO of $0.28 in the second quarter of 2022. Revenue of $468.8 million missed the estimate of $472.7 million and was 4.13% below revenue of $450.2 million in the second quarter of 2022.
One recent positive to note: On Aug. 18, Executive VP and Chief Revenue Officer Clive A. Punter bought 9,000 shares of Outfront Media at an average price of $11.12 for a total of $100,080. The most recent closing price was $10.05.
Outfront Media pays a quarterly dividend of $0.30 per share and an annual dividend of $1.20 per share, which not long ago was below 6% but has now climbed to 11.94%. The annual dividend is well above the forward FFO of $0.84, so it would not be surprising to see a dividend cut if earnings don't improve. Third-quarter earnings will be announced on Nov. 1.
Weekly REIT Report: REITs are one of the most misunderstood investment options, making it difficult for investors to spot incredible opportunities until it's too late. Benzinga's in-house real estate research team has been working hard to identify the greatest opportunities in today's market, which you can gain access to for free by signing up for the Weekly REIT Report.
Read next:
© 2024 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.
Comments
Trade confidently with insights and alerts from analyst ratings, free reports and breaking news that affects the stocks you care about.
