Should you invest in Spirit Realty now?
DIvidends contain a lot of information, but it often takes a little digging to understand what is being shared. This is an important backdrop to remember when watching Real estate spirit (NYSE: CBC)which has a dividend yield of almost 6%, almost two full percentage points higher than its peers, and a net rental indicator, Real estate income (NYSE:O). Here’s a quick look at Spirit and why you may or may not want to invest in it right now.
Spirit, like Realty Income, is a net leasehold real estate investment trust (REIT). This means that he owns single-tenant properties where tenants are responsible for most of the operating costs of the assets they occupy. In a large enough portfolio, this is a fairly low-risk and reliable trading model. Spirit owns approximately 2,000 properties, giving it great diversification.
In this figure, there is also a little sectoral diversification. About 20% of rents come from industrial assets, including 70% from retail. About 10% is classified as “other”, including about 3% of office rents. The average duration of leases, meanwhile, is just over 10 years. All of these stats are pretty close to what you’ll find on Realty Income, only Realty Income has over 11,000 properties. So far, so good.
Spirit also has an investment-grade rate track record and leverage metrics similar to its peers, including Realty Income. Spirit’s adjusted funds from operations (FFO) payout ratio is also in line with its peers at around 72%. At first glance, there’s a lot to like here, including the high dividend yield.
Why so high?
The question you need to ask yourself before jumping in, however, is: what, exactly, given the relatively high yield, is driving investors to price Spirit so low relative to to the leading name in the industry? There are several things to consider.
For example, the dividend was cut in 2018 as the company sought to restructure its business. Notably, the company presents three versions of its wallet. One is the “kept” portfolio, another is the “acquired” portfolio, and then, finally, there is the “current” portfolio. The retained portfolio is largely commercial, has a lease term of 8.2 years and includes over 1,300 properties. The acquired portfolio is more heterogeneous by asset class, has a remaining lease term of 12.6 years and comprises just over 700 properties.
It looks like Spirit is clearly improving its business with the acquisitions it’s making, further diversifying its portfolio and increasing its average rental length. However, it’s hard to come out of this deeper look without thinking that this REIT is a work in progress to some degree. That’s not a bad thing, with the stats above suggesting a lot has been accomplished since the company spun off smaller assets in mid-2018. And the fact that Spirit raised its dividend in 2022, the first hike since the cut, is further evidence of the success of the overhaul effort.
But that just means Spirit finally finds its footing, which is a far cry from a company like Realty Income, which has operated with the same successful playbook for decades.
Overall, Spirit isn’t a bad net-lease REIT, but it doesn’t have the same track record of success as some of its better-known and less successful peers. This, in turn, means it’s most suitable for more aggressive types willing to pay close attention to portfolio moves made by management, as it seems to prove that its relatively new business model is going to be a winner. To date, adjusted funds from operations (FFO) results have been mixed (the coronavirus pandemic has not helped the company’s transition efforts), but the REIT currently expects notable growth of a year-on-year in 2022 by around 8% to 10% .
“It depends” is the answer
If you’re a conservative investor who values regular dividends over yield, then Spirit probably won’t be the right choice for you. The history is too short under the current business plan, noting that there has only been one dividend increase since the 2018 dividend cut. Real estate income or even WP Carey would probably be better options.
However, if you’re looking to maximize your passive income stream and are willing to go the extra mile to achieve that goal, Spirit’s higher yield might be worth investigating. Just be sure to watch closely where management takes the portfolio from here.
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Reuben Gregg Brewer holds roles at Realty Income and WP Carey. The Motley Fool has no position in the stocks mentioned. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.