The REIT (VNQ) market has been in a bear market for over two years now with the broader market averages dropping by over 25%.
But despite that, most REITs have kept growing their dividend.
Most of them hiked in 2022, 2023, and will hike again in 2024.
This is the ultimate proof that REITs are doing better than what the market appears to believe.
The reality is that rising interest rates have not had any major impact on most REITs and this is because:
- REIT leverage is at an all-time low at just 35% on average.
- REIT debt maturities are historically long at 7 years and well-staggered.
- Rents keep growing in most property sectors.
- Payout ratios are low at 75% on average, allowing for debt repayments and new acquisitions.
- Many REITs can still access capital at a cost that's inferior to the cap rates of their new acquisitions, allowing them to grow externally.
This explains why most REITs have managed to keep growing their cash flow and dividend payments even despite the surge in interest rates.
Here are three "Strong Buys" that will again hike their dividend later this year.
NNN REIT (NNN)
NNN is an easy pick for this list.
The net lease REIT has an even longer dividend growth track record than Realty Income (O). It has grown its dividend for 35 years in a row. That's despite the dotcom crash, the great financial crisis, the pandemic, and many other crises:
What is its secret?
It targets net lease properties that generate highly consistent and predictable income from 10+ year-long leases, and it then combines this defensive portfolio with a conservative balance sheet that can withstand severe crises.
Today, its portfolio is stronger and better diversified than ever with a clear focus on safer categories like grocery, convenience stores, and quick service restaurants in rapidly sunbelt markets:
Moreover, its average lease term is long at 10 years and it enjoys 1.5% average annual rent escalators. On top of that, the company's dividend payout ratio is today historically low at just 62% of its AFFO, which leaves them significant retained cash flow to keep acquiring additional properties that will support an ever-growing dividend:
The balance sheet is also among the strongest in the REIT world. It boasts a strong BBB+ investment grade rating, low debt at just ~30%, and exceptionally long average debt maturities at 13 years on average.
Even then, the surge in interest will still be a bit of a headwinds in the coming years as they have between $350 million to $400 million of debt maturities each year from 2024 through 2028.
But this is not the end of the world. It will reduce their growth rate in the near term, but the debt market is today predicting 100 basis point lower interest rates already within a year from now:
Therefore, we think that it is very likely that the dividend will keep rising in the coming years. The growth rate will likely be below its historic average because the management prefers to retain more cash flow since capital is more expensive today, but you don't need much growth to earn strong returns when you are priced at a ~7.7% cash flow yield and pay a ~5.5% dividend yield.
I believe that the shares will enjoy ~20% upside as they reprice at closer to 15x AFFO when interest rates are cut and while you wait, you will earn near double-digit total returns from the yield and growth. That's in line with what the company has historically achieved for its shareholders.
Sun Communities (SUI)
SUI is one of the leading REITs that specialize in manufactured housing communities.
But it also owns some RV parks and some marinas:
These are very desirable real estate investments because:
- Low capex: the landlord typically owns just the land and the associated infrastructure. The tenant then owns the home, RV, or boat, and therefore, the landlord has relatively little maintenance cost.
- Limited supply: It is difficult to get permits to build these communities these days because no one wants a new "trailer park" in their backyard, and there are only a limited number of suitable locations for marinas.
- Affordable housing: Despite the limited supply, the demand for affordable housing is ever-growing, and manufactured housing is a great solution for a lot of people.
- Defensive income: Your tenants often do not have a cheaper option, many of them are retirees with significant resources and/or a pension, and your tenant typically owns the home, RV, or boat. If they don't pay, this asset could be foreclosed, and moving to another location could also be costly and impractical.
For all these reasons, the same property growth of SUI has consistently beat that of apartment REITs over the years:
Last year, they grew their same property NOI by 9.6% and this year again, they have guided to grow it by another 5-6% in 2024.
The REIT hiked their dividend by 1% earlier this month and they will likely hike again later this year. Their payout ratio is historically low at just 50%, leaving plenty of room for growth.
The REIT also uses low leverage at 25% so the surge in interest rates won't have a major impact on the company.
The dividend yield may seem low at 3%, but keep in mind that this is because of the low payout ratio, the low leverage, and the low cap rate of its assets. These are highly desirable properties with high growth prospects so the market is pricing them accordingly.
Even then, between the yield and the growth, you should reach near double-digit total returns. Add to that a bit of upside from the rate cuts, and you are earning very strong risk-adjusted returns from a blue-chip REIT that has one of the best track records in the REIT world.
VICI Properties (VICI)
VICI is the leading casino net lease REIT. It owns a lot of trophy assets like the Caesars Palace (CZR) and the MGM Grand (MGM) - all under multi-decade long triple net leases that generate steadily rising cash flow:
VICI just recently announced its quarterly dividend and some investors were disappointed that it wasn't hiked.
But these investors appear to have missed that VICI typically hikes its dividend in the third quarter of the year:
And following very strong results in 2023 and continued growth in 2024, I have little doubt that it will hike again in September/October.
Last year, VICI generated a remarkable 11.8% growth in AFFO per share.
Its growth will slow down in 2024 because it will refinance $1 billion in debt maturities but even then, it is still guiding 4% growth in its AFFO per share.
Its payout ratio is today historically low at just around 70%, which is very conservative for a net lease REIT like VICI.
Therefore, another ~5% dividend hike is likely and that's all that's needed to reach double-digit total returns because the shares are today already priced at a 5.7% dividend yield.
Add to that about 20% upside from multiple expansions as interest rates are cut and you get to 15-20% annual total returns in the coming years. That's in line with its historic averages:
Closing Note
REITs are now historically cheap and continue to perform well for the most part. As interest rates are cut later this year, I expect them to recover and richly reward investors.
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