2 Dividend Picks From A Resilient REIT Sector

Summary

• These 2 industrial REITs have collected almost all their rents during April.
• The triple-net lease model combined with long leases make the cashflows more predictable.
• Collect the 5% yield on those 2 attractively valued REITs with potential for capital appreciation.

Thesis

Industrial triple-net lease REITs are performing well, in spite of the coronavirus pandemic. They have been able to collect a very high percentage of rent payments during this turbulent time and are actually expanding their portfolios. Both companies benefit from the tailwinds of e-commerce which has been further accelerated by the coronavirus pandemic. Whilst the business performance has remained strong, shares have still sold off significantly, providing investors the chance to benefit from the dislocation between business performance and stock price. For dividend investors this means higher starting yields.

My two preferred picks in this space are Monmouth Real Estate Investment Corporation (MNR) and STAG Industrial(STAG).

As I tend to look for higher yields in my personal portfolio, the yields offered by the two companies are very attractive right now.

Overview

Portfolio Quality vs Tenant Diversification

MNR has a higher quality portfolio as evidenced by the strong occupancy rate and the annual base rent per square foot. It does however strongly rely on one tenant - FedEX(FDX)

Whilst the % of rent from investment grade tenants strongly favours MNR in this case, we have to pay attention to the fact that 55% of MNR's total rent revenue comes from FedEx or its subsidiaries.

FedEx is a great tenant to have, as it's an investment grade company. However, were things to change dramatically worse for FedEx, MNR is not in a great negotiating position as the company strongly relies on FedEx. It's worth noting that in 2019 MNR actually acquired 2 new properties that were leased out to FedEx so instead of shrinking their footprint, FedEx is actually leasing more and more properties from MNR.

CoVid impact on Rent Collections

Having a high % of rent checks coming from investment grade tenants is really paying off in current uncertain times. This is shown by MNR collecting almost all its rent in April.

STAG is also not doing bad compared to other REITs, but not quite at MNR's level. We have to take into account that STAG is much more diversified and therefore has more tenants whose business is affected by the pandemic.

* As of 21/05/2020, MNR had collected 96% of May rents as well.

Dividend

Both companies are offering >5% yields which suits my personal goals well as I have around half a decade until retirement.

STAG is well known for paying its dividend monthly, whilst MNR's dividend payments go out each quarter.

The criticism for MNR is that the company doesn't raise the dividend yearly, rather bump it up every few years or so.

STAG's dividend growth has been much more streamlined but for both companies, the CAGR growth rates over a 5-yr period have been very similar.

Not much to separate the 2 REITs on dividend metrics.

Balance Sheet

I have no significant concerns about either company on the balance sheet front. Both have ample liquidity which has allowed both companies to acquire new properties even during this economic uncertainty.

STAGs debt maturities in 2020 represented just under 53% of annualised 2020 FFO, which was slightly elevated for me. However, STAGs management moved quickly to eliminate that risk, refinancing the loans due to mature by 2020 and 2021 ($150 million each) with the option to extend the maturity until 2022.

It's also worth noting that MNR has extremely long-term loans with an average duration of 11.5 years.

Valuation

Both REITs are valued reasonably based on forward funds from operations. At the time of writing STAG is slightly better valued at under 14x forward FFO, whilst MNR is trading at just under 15x forward FFO.

STAG is trading 24% below its 52-wk high and MNR's share price is currently 20% below 52-wk high.

I believe the valuation is reasonable for both companies right now. Whilst they are not the bargains they were during March lows, they are still attractively valued and well below 52-wk highs.

Risks

Whilst tenants benefiting from e-commerce have benefited, other tenants in sectors such as auto, retail and apparel that rent from those REITs have suffered. Auto sector tenants have been possibly the hardest hit, as many plants have fully closed. However, those are essential locations for the car and car part makers and unless the tenants go bankrupt, they are unlikely to look to negotiate to terminate the leases.

Monmouth has a high percentage of rents coming from investment grade tenants, but the high concentration of revenues (55%) coming from one tenant carries risks with it.

Monmouth also holds investments in public REITs. Around 4.6% of MNR's assets are in marketable REIT securities. The investment portfolio is currently worth $99 million with unrealised losses of $136.1 million by last quarter's end. The securities do generate around $11 million in annual dividends but on a whole the company doesn't have a great investing track record in the public REIT space. The company has stopped buying securities since around a year ago.

Summary

Both REITs have shown great resilience during a turbulent period and are collecting a very high percentage of rents. The current high dividend yields that are covered by safe payout ratios offer a great opportunity for dividend investors looking for income right now or in the near future. Whilst the dividends are growing in the low single-digits, they make up for that in safety. I rate both companies as a "BUY" as they have been punished by the market regardless of their strong operating figures. For me personally, I slightly prefer MNR due to higher % of rent from investment grade tenants, longer leases and better quality of portfolio as evidenced by average rent per sq ft. However, with MNR you get extremely high exposure to just one tenant so it's a decision every investor has to make within their investment plan and risk tolerance.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in MNR over the next 72 hours. 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.