REIT Report

Market analysis by our public securities expert, Geoff Shaver

May 10, 2020

Which REITs are Most Likely to Cut their Dividends?

Geoff Shaver, Director of Public Securities

by Geoff Shaver
Director of Public Securities

Public REITs are seen as a great way to generate passive income, but the COVID-19 pandemic has resulted in numerous REITs recently moving to cut their dividends.

On May 7th , I hosted a webinar on this very topic with Origin Investments co-founder Dave Scherer. Since the webinar, at least six more real estate investments trusts (REITs) have announced suspensions, reductions or the intent to suspend or reduce their regularly recurring common dividend. Given the present circumstances surrounding the COVID-19 pandemic and the related toll on the U.S. and global economies, we expect there will be additional dividend cuts announced in the coming days, weeks, and months.

However, there will be some REITs capable of maintaining their current payout level over this challenging period and even a select few REITs that will increase their recurring dividend this year. Now more than ever is the time to do your homework on individual companies or hire a professional money manger to do it for you. In this article we wanted to list and provide some additional insight on a few of the individual securities that we mentioned on the webinar that we believe offer an attractive yield on a risk-adjusted basis at this time.

Two Preferred Stocks to Consider

QTS-A

QTS Realty Trust (QTS) is a data center REIT, and we recently wrote an extended report on their two preferred series of stock. We encourage you to read this report if you are interested in learning more about QTS or their preferred stock. In our analysis, we show that QTS covers their common and preferred dividends from operational cash flow, and they expect to increase this cash flow over the course of 2020. The QTS Series A Cumulative Redeemable Perpetual Preferred Stock (QTS-A) was issued in 2018 with a $25 par value and a 7.125% fixed coupon. It is generally not redeemable until March 2023.

QTS-A
Closing Price (5/7/20)1:$26.07
Strip Yield:6.9%
Yield-to-Call:5.7%
Common Equity Market Cap1:$3.9B
Debt to Total Enterprise Value2:26%3
Debt+Preferred to Total Enterprise Value2:33%3

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VNO-M

Vornado (VNO) is a diversified REIT that primarily owns New York City office and retail properties. The VNO Series M Cumulative Redeemable Preferred Shares (VNO-M) were issued in 2017 with a $25 par value and a 5.25% fixed coupon. They are generally not redeemable until December 2022.

We acknowledge that New York City and retail assets in general are going through a difficult time. While their common stock may be susceptible to a cut this year, we believe there will be no interruptions in their preferred stock dividend distributions. VNO maintains investment grade ratings from S&P, Moody’s, and Fitch on their long-term debt. As of March 31, 2020, they held in excess of $1.6B of cash.  This would represent about $8.24 of cash per common share or about 22% of the value of their common share price of $37.69 as of the May 7, 2020. In reality, debt and preferred holders would always have a claim to this cash before the common shareowners.

VNO also expects to receive additional cash proceeds as they close on the sale of units at their luxury NYC condo development, 220 Central Park South.

VNO-M
Closing Price (5/7/20)1:$21.78
Strip Yield:6.1%
Yield-to-Call:11.3% (but unlikely to be called at this price)
Common Equity Market Cap1:$7.5B
Debt to Total Enterprise Value2:54%
Debt+Preferred to Total Enterprise Value2:59%

Two Common Stocks to Consider

FRT

Federal Realty Investment Trust (FRT) is a shopping center REIT and also a member of the S&P 500 Dividend Aristocrats Index. In fact, FRT has increased their dividend every year for the past 52 years. There is no doubt that this will be one of their most challenging years, but with arguably the best quality assets in great locations and a fortified balance sheet, we believe FRT will keep their dividend streak alive.

We believe prudent management and conservative leverage, which have afforded FRT investment grade ratings of A- from S&P and A3 from Moody’s on their long-term debt, will allow them to weather this pandemic and still provide a dividend increase this year, even if only by a trivial amount.

FRT
Closing Price (5/7/20)1:$74.99
Current Yield:5.6%
Common Equity Market Cap1:$5.9B
Debt to Total Enterprise Value2:43%
Debt+Preferred to Total Enterprise Value2:44%

PEAK

Healthpeak Properties (PEAK) is a healthcare REIT and is colloquially know as one of the “Big 3.” We’ve mentioned PEAK before in an article on the growing demand for lab space, as about 30% of their assets are dedicated life science assets. PEAK declared their most recent dividend at a continuation of the previous level as recently as April 30, 2020.

On May 6, 2020, PEAK held their quarterly earnings call to discuss their first quarter 2020 earnings. They stated that the dividend was covered in the first quarter, and while there may be a shortfall for a quarter or two, they view this as temporary and paying at the current level is not an issue for them as they look to the long term.

PEAK
Closing Price (5/7/20)1:$23.45
Current Yield:6.3%
Common Equity Market Cap1:$13.0B
Debt to Total Enterprise Value2:34%
Debt+Preferred to Total Enterprise Value2:34%

Will Any Hotel REITs Maintain Previous Dividend Levels?

I knew we were going out on a limb on our recent webinar when discussing the possibility that Sunstone Hotel Investors (SHO) and Host Hotel & Resorts (HST) might be the only hotel REITs capable of maintaining their previous dividend levels, and that limb has snapped. Since the webinar, SHO has announced the suspension of their quarterly dividend, which will be revisited by their board of directors when they have a better grasp of the impact from COVID-19 and can resume forecasting their taxable income. HST also announced that they anticipate suspending or paying a nominal dividend until further notice.

Once HST finalizes their dividend declaration or suspension, it means essentially 100% of the hotel REITs have reduced or suspended their common dividends since the coronavirus pandemic began. The hotel and lodging REITs clearly have some challenges in front of them, but we still believe there is room for some price recovery for those hotel REITs with the best balance sheets and best positioned assets, once we can gain some clarity on seeing through to the other side of this pandemic. However, in the near term this group of REITs should not be counted on for providing passive streams of income.

(1) - From Yahoo Finance as of May 7, 2020.
(2) - Debt, preferred, and common share count from company 1st quarter 2020 earnings supplemental. Common share price as of May 7, 2020.
(3) - Common equity also includes pro forma for settlement of forward equity issuance.

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Geoff Shaver, Director of Public Securities

Geoff Shaver

Director of Public Securities

Geoff leads the construction and monitoring of the public real estate securities portfolios available in our Path by Origin app. Prior to Origin, Geoff spent the last 12+ years researching and investing in public REIT securities at both Duff & Phelps Investment Management Co. and J.P Morgan Asset Management.

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Disclaimer

Geoff Shaver and clients of Path by Origin, LLC own QTS-A, VNO-M, PEAK and HST.

Path by Origin, LLC (“Path”) is an SEC registered investment adviser.  Mr. Shaver is the Director of Public Securities of Path. The views expressed herein are subject to change, and no forecasts can be guaranteed. The comments provided are for educational purposes only and may not be relied upon as recommendations, investment advice or an indication of trading intent. In preparing this document, the author has relied upon and assumed, without independent verification, the accuracy and completeness of information available from public sources.  The stocks mentioned in this article have been highlighted based on some reported news, quality or characteristic and do not necessarily represent all of the securities recommended for a particular portfolio.  Path is not soliciting any action based on this communication.  Investments involve risk, including the possible loss of principal and fluctuation of value.  Past performance is not indicative of future results. Mr. Shaver and Path disclaim responsibility for updating any information herein. In addition, Mr. Shaver and Path disclaim responsibility for any third-party content.