
TimAbramowitz
I’ll admit it is a click-bait title. However earlier than you flip away, the precise article is something “butt.”
No actually. Let me clarify…
I’m positive a lot of you now have flatulence on the thoughts. Wherein case, right here’s an excerpt from The Definitive Fart Ebook (1961):
“Humorous, all people does it, however no person desires anyone to know they’re the any individual who: minimize the cheese, handed the fuel, let one rip, shot a bunny, copped a pop, popped a bubble, cranked a smoker, pinched an egg, and so on.…”
I don’t learn about you, however I don’t acknowledge a few of these phrases. Perhaps they’re regional issues. Or perhaps they’ve “handed” in reputation for the reason that Sixties.
Regardless, my title and the article it’s hooked up to is a few very completely different sort of cheese altogether.
In modern-day slang, “cheese” is a synonym for cash. In case you’re questioning, I imagine it has one thing to do with welfare advantages and the way they used to incorporate precise cheese allocations.
(Although perhaps it is best to look it up your self simply to make sure.)
Regardless, somebody ran with it… another person accepted it… and it’s now generally understood and accepted lingo.
As such, it appears completely permissible to make use of it instead of dividends. Ipso facto, I’m going to spotlight actual property funding trusts (REITs) which might be more likely to minimize their dividends.
Eight of them, the truth is.
Learn on to see which of them are in danger.
Danger-Associated Analysis
I’ll admit, the concept behind the article ought to be credited to Barron’s author Al Root. He just lately penned an article titled “8 Corporations That Might Reduce Their Dividends,” the place he defined:
“… some vital firms will minimize their dividends in 2024. It’s inevitable. Exterior of economic disaster, 1% to 2% of all dividend payers minimize dividends every year… the hot button is to determine them and keep away till the payout is slashed.”
In that very same article, Wolf Analysis strategist Chris Senyek identified eight firms which might be more likely to “minimize the cheese.”
- Vail Resorts (MTN)
- Hasbro (HAS)
- Whirlpool (WHR)
- Wendy’s (WEN)
- Cracker Barrel Previous Nation Retailer (CBRL)
- Legget & Platt (LEG)
- LCI Industries (LCII)
- Kohl’s (KSS).
Senyek estimates that these eight firms pays out roughly 100% of estimated 2024 free money circulate as dividends. Evaluate that to the S&P 500’s common payout ratio of 55%.
Studying all of that, in fact, made me take into consideration REITs which might be in the identical dangerous scenario. So right here’s my record of eight REITs that would “minimize the cheese.”
(iREIT®)
Now let’s talk about eight of them…
Healthcare Realty Belief (HR)
HR is an internally managed actual property funding belief (“REIT”) that focuses on the event, acquisition, financing, and administration of healthcare properties with a portfolio that primarily consists of medical outpatient buildings that are positioned round main hospital campuses all through the U.S.
Healthcare Realty has a market cap of roughly $6.2 billion and a roughly 40.0 million SF portfolio comprised of 700 properties positioned throughout 35 states and concentrated in 15 high-growth markets.
The corporate owns and operates medical properties which might be for essentially the most half related to the supply of outpatient medical companies and appears to develop its portfolio by improvement and acquisition.
HR is the primary REIT with a major deal with medical outpatient buildings and has constructed a portfolio consisting primarily of multi-tenant medical properties which might be on-campus and related to prime healthcare techniques.
The proximity of HR’s properties to main healthcare techniques is crucial to the connection between physicians and hospitals. As of September 30, 2023, 72% of their medical properties had been on or adjoining to a hospital campus, 21% had been affiliated, and seven% had been off-campus.
HR – IR
I eliminated the 2022 merger associated particular dividend from the chart beneath as a way to normalize their dividend historical past. HR’s most up-to-date dividend minimize was made within the fourth quarter of 2022 when its quarterly dividend went from $0.325 to $0.31 per share.
Annualized, the dividend in 2022 got here in at $1.28 per share (excluding the particular dividend) whereas the annual dividend paid in 2023 got here in at $1.24, representing a minimize of roughly 3%.
What’s extra regarding is that analyst projections for 2023, 2024, and 2025 have HR’s dividend exceeding their free money circulate or adjusted funds from operations (“AFFO”).
Analysts anticipate the dividend price to stay fixed at $1.24 per share however anticipate AFFO per share in 2023 will decline by -13%, then improve by 3% in 2024, after which fall -1% in 2025.
This might translate into AFFO payout ratios of 106.90%, 104.20%, and 105.08% within the years 2023, 2024, and 2025, respectively.
FAST Graphs (compiled by iREIT®)
The inventory pays a excessive dividend yield of seven.47% however we’re involved that the anticipated payout is greater than the free money circulate / AFFO generated by operations and we’re not assured the dividend may be sustained.
Presently the inventory is buying and selling at a P/AFFO of 14.28x, in comparison with its common AFFO a number of of 20.05x.
We’ve a speculative purchase score on HR given the valuation the inventory is at present buying and selling at, however warning traders that the present dividend may very well be minimize if HR is unable to enhance operations and return to progress.
We price Healthcare Realty Belief a Spec Purchase.
FAST Graphs
Easterly Authorities Properties (DEA)
DEA is an workplace REIT that focuses on the event and acquisition of Class A workplace properties which might be primarily leased to U.S. Authorities companies which serve important and crucial capabilities.
The workplace REIT has a market cap of roughly $1.2 billion and an 8.9 million SF portfolio comprised of 90 working properties with a weighted common age of 14.2 years and a weighted common remaining lease time period of 10.4 years. As of their newest replace, DEA’s portfolio was 97.5% leased.
DEA seems to be for U.S. Authorities companies which have essentially the most crucial and enduring missions after which identifies an important buildings inside these companies for potential acquisition.
Their largest tenant is the Division of Veteran Affairs (“VA”) which makes up 28.5% of their annual lease revenue, adopted by the Federal Bureau of Investigation (“FBI”) and the Drug Enforcement Administration (“DEA”) which makes up 17.0% and 9.0% respectively.
Based mostly on annual lease revenue, 51% of DEA’s portfolio is made up of workplace properties, 27% of the portfolio consists of VA Outpatient facilities, 9% of the portfolio is made up of labs, and 5% is made up of courthouses.
DEA – IR
Within the chart beneath you possibly can see that DEA’s dividend was equal to or better than its AFFO per share in 2017, 2018, 2019, and 2020.
What’s extra regarding is that analysts anticipate the dividend to be maintained at $1.06 per share by 2025, whereas they challenge AFFO per share to fall by -23% in 2023, improve by 1% in 2024, after which fall by -2% in 2025.
If this pans out, it should translate into an AFFO payout ratio of 109.28% in 2023, 108.16% in 2024, after which 110.42% in 2025. Manner too excessive for my consolation stage.
FAST Graphs (compiled by iREIT®)
DEA pays a dividend yield of 8.28% that isn’t lined with their 2023 anticipated AFFO and analysts see this development persevering with with the 2025 anticipated dividend of $1.06 exceeding their anticipated 2025 AFFO per share by roughly 10%.
Shares are at present buying and selling at a P/AFFO of 13.19x, in comparison with its common AFFO a number of of 19.38x.
Even with the discounted valuation we keep a Maintain primarily based on enhanced dividend danger.
We price Easterly Authorities Properties a Maintain.
FAST Graphs
Omega Healthcare Traders (OHI)
OHI is a healthcare REIT that invests in Expert Nursing Services (“SNF”) and Assisted Dwelling Services (“ALF”) by offering capital and / or financing to 65 nationwide and regional healthcare suppliers in the USA and the UK.
The healthcare REIT went public in 1992 and has at present has a market cap of roughly $7.0 billion and a portfolio comprised of 883 properties containing 86,201 beds positioned throughout 42 states and the U.Okay.
Their leased properties are primarily structured on a triple-net foundation, and by facility sort, roughly 73% of OHI’s portfolio consists of Expert Nursing and 27% consists of Senior Housing.
Roughly 82.5% of OHI’s portfolio is made up of rental properties, 10.9% is made up of from actual property loans curiosity revenue, 2.9% is described as different, and 1.7% is made up of actual property tax and floor leases.
OHI – IR
OHI pays a 9.31% dividend yield that isn’t lined by its 2023 AFFO with an anticipated payout ratio of 101.52%.
The healthcare REIT has not elevated its dividend since 2020 however AFFO per share fell by roughly -12% in 2022 and is predicted to fall by one other -5% in 2023.
Analysts are calling for 4% AFFO per share progress in 2024 and 2025 which might translate into an AFFO payout ratio of 97.81% in 2024 and 94.37% in 2025, assuming the dividend stays unchanged.
FAST Graphs (compiled by iREIT®)
We just like the long-term prospects for expert nursing and assisted dwelling actual property because the “silver tsunami” ought to be a requirement catalyst for years to return.
Nonetheless, we’re uneasy with OHI’s 2023 anticipated AFFO payout ratio of 101.52%.
We imagine there’s a affordable probability for the payout ratio to return down beneath 100% with analysts’ projections for AFFO per share to extend by 4% in 2024 and 2025.
Whereas we’re hopeful, we’re conserving an in depth eye on OHI quarterly experiences to make sure satisfactory dividend protection is in place. OHI is ready to report its 4Q-23 earnings on February 7th after the market closes.
Presently OHI is buying and selling at a slight low cost, with a present P/AFFO of 10.87x, in comparison with its common AFFO a number of of 11.26x.
We price Omega Healthcare a Spec Purchase.
FAST Graphs
Service Properties Belief (SVC)
SVC is an externally managed REIT (managed by RMR Group) that invests in lodges and internet lease retail properties which might be primarily service-oriented.
For extra on the exterior supervisor RMR Group please see my latest article discussing the exterior supervisor in additional element.
Service Properties has a market cap of roughly $1.29 billion and a portfolio that holds 221 lodges with roughly 37,700 rooms positioned in the USA, in addition to Puerto Rico and Canada.
Measured by service stage, 40.1% of their lodges are full service, 37.3% are prolonged keep, and 22.6% are choose service.
Along with their resort properties, SVC has a 13.4 million SF portfolio consisting of 761 internet lease retail properties positioned throughout 46 states throughout the U.S.
Their largest internet lease tenant is TravelCenters of America which made up 67.8% of their annualized minimal lease and reported lease protection of two.26x.
SVC – IR
SVC has not but totally recovered from the pandemic in 2020 when its AFFO fell to $0.67 per share, down from $3.23 per share the earlier 12 months, representing a -79% decline. In 2020, SVC was compelled to chop its dividend from $2.15 per share to $0.57 per share.
The next 12 months AFFO fell one other -49% to $0.34 per share and the dividend was minimize to only $0.04 per share in 2021.
In 2022 earnings (AFFO) rebounded to $1.50 per share and the dividend was elevated from $0.04 to $0.23 per share, solely to be adopted by a tricky 12 months in 2023 as analyst estimates present AFFO declining by -80%, to only $0.30 per share.
If analysts’ estimates are appropriate, it might put the 2023 AFFO payout ratio at 266.67%!
FAST Graphs (compiled by iREIT®)
Even worse is that analysts predict SVC to generate adverse money circulate (‘AFFO’) per share in each 2024 and 2025.
With the present obscenely excessive payout ratio and analysts’ future projections we imagine there’s a possible probability for an additional dividend minimize on the horizon.
On prime of every part else, SVC is at present buying and selling at a premium in comparison with its regular buying and selling a number of. Presently shares are buying and selling at a P/AFFO of 28.53x, in comparison with their common AFFO a number of of 9.20x.
The present above common buying and selling a number of just isn’t as a result of worth operating away, however quite the deterioration of earnings.
We advise traders keep away from Service Properties Belief.
FAST Graphs
Ares Industrial Actual Property (ACRE)
ACRE is an externally managed mortgage REIT (“mREIT”) that focuses on the origination and administration of economic actual property (“CRE”) debt-related investments.
The mREIT has a market cap of roughly $544 million and a mortgage portfolio that has $2.2 billion in excellent principal steadiness.
ACRE gives a wide range of financing options however primarily holds senior mortgage loans with roughly 98% of their mortgage portfolio consisting of senior loans.
Along with senior loans, the specialty finance firm gives subordinate financing, most well-liked fairness, and mezzanine loans.
For all of its debt merchandise, ACRE sometimes holds its loans for funding as a way to generate curiosity revenue quite than securitizing and promoting the debt devices.
By area, ACRE’s largest presence is within the Mid-Atlantic / Northeast which represents 29% of their mortgage portfolio, adopted by the Southeast which represents roughly 24%.
By property sort, ACRE’s largest sort of collateral is workplace properties which represents 39% of its mortgage portfolio, adopted by multifamily which represents roughly 26%.
ACRE – IR
Like most mortgage REITs, ACRE sometimes pays out near 100% of its earnings.
When measured in opposition to their adjusted working earnings per share (“EPS”), ACRE had a dividend payout ratio above 90% in 6 years between 2014 and 2022, and analysts anticipate the dividend payout ratio to go as excessive as 302.22% in 2023.
The excessive payout ratio is because of deteriorating earnings with EPS going from $1.55 in 2022, to an anticipated $0.45 per share in 2023, representing earnings decline of roughly 71%.
Analysts anticipate earnings to rebound with an estimated improve of 126% in 2024 and a 13% improve in 2025.
Nonetheless, after accounting for the lofty progress projections, the estimated EPS in 2025 involves $1.15 per share, in comparison with the anticipated dividend of $1.27 per share, representing an anticipated EPS dividend payout ratio of 110.43% in 2025.
FAST Graphs (compiled by iREIT®)
ACRE at present pays a 13.08% dividend yield and trades at a P/E of 20.72 in comparison with its common P/E ratio of 10.63x. Whereas the P/E ratio is double the traditional common, the present ratio is excessive as a result of anticipated earnings decline in 2023.
The value has not run away, however earnings are anticipated to fall sharply in 2023 after which rebound with a 126% improve anticipated in 2024. Utilizing the anticipated EPS in 2024 of $1.02 per share would give a ahead P/E ratio of roughly 9.89x.
We price ARES Industrial Actual Property a Maintain.
FAST Graphs
Granite Level Mortgage Belief (GPMT)
GPMT is an internally managed mREIT that focuses on the origination and administration of a portfolio of debt-related devices which primarily consists of senior loans which might be floating-rate and collateralized by CRE properties throughout the USA.
The mREIT has a market cap of roughly $301 million and a $3.1 billion mortgage portfolio comprised of 77 investments. The portfolio has an impressive precept steadiness of $2.9 billion and $3.1 billion in whole mortgage commitments.
GPMT’s complete funding portfolio consists of loans, 99% that are senior loans and 98% which might be floating price. The mortgage REIT originates loans for a number of property varieties together with Workplace, Multifamily, Retail, Lodge, and Industrial.
Nearly all of their portfolio is made up of loans for workplace and multifamily properties which characterize 43.7% and 32.5% of GPMT’s portfolio respectively.
On the finish of 3Q-23, GPMT’s mortgage portfolio had a realized yield of 8.4% and a weighted common stabilized loan-to-value (“LTV”) of 63.3%.
GPMT – IR
Along with being a serial dividend cutter, GPMT’s earnings have been eroding away since 2019.
In 2019, GPMT reported adjusted working earnings (“EPS”) at $1.40 per share. EPS fell by -16% to $1.17 per share in 2020, then fell by -15% in 2021, after which fell by -72%, to only $0.28 per share in 2022.
The dividend adopted swimsuit with a dividend minimize of -61.31% in 2020, a dividend minimize of -5% in 2022, and a dividend minimize of -15.79% in 2023. In 2019 GPMT paid a dividend of $1.68 per share, in comparison with simply $0.80 per share in 2023.
Despite the a number of dividend cuts, the mortgage REIT’s dividend payout ratio has been absurdly excessive since 2019.
In every year between 2019 and 2023, GPMT had a dividend payout ratio over 100% apart from 2020 after they slashed the dividend by -61.31%, pushing the dividend payout ratio all the way down to 55.56%.
FAST Graphs (compiled by iREIT®)
Up to now, GPMT has demonstrated a previous observe report of worth destruction. EPS fell in 2019 (-8%), in 2020 (-16%), in 2021 (-15%), and in 2022 (-72%). Analysts anticipate 2023 EPS to extend by 14% however then fall by practically 40% in 2024.
All in all, analysts anticipate 2024 EPS to return in at $0.20 per share in comparison with $1.40 per share reported in 2019.
The inventory pays a 13.77% dividend yield that we imagine is unsustainable and trades at a P/E of 18.63x, in comparison with its common P/E ratio of 12.25x.
We suggest that traders keep away from Granite Level Mortgage Belief.
FAST Graphs
International Internet Lease (GNL)
GNL is an internally managed internet lease REIT that focuses on the acquisition and administration of a diversified portfolio of economic properties with a deal with sale-leaseback transactions on mission crucial, single tenant properties.
Its portfolio is made up of a number of asst varieties together with single-tenant internet lease properties, single-tenant mission crucial workplace properties, and single-tenant Industrial properties and distribution facilities.
In whole, its single tenants properties characterize roughly 73% of its portfolio when measured by straight-line lease (“SLR”).
Along with its single-tenant properties, GNL invests in multi-tenant retail properties with a deal with open-air retail properties which might be sometimes anchored by a grocery retailer or energy middle.
GNL has a market cap of roughly $2.0 billion and a 66.8 million SF portfolio comprised of over 1,300 properties unfold throughout 11 nations together with the USA, the UK, Germany, Finland and the Netherlands.
Nearly all of International Internet Leases’ SLR is derived from the USA and Canada with 80.9% coming from these two nations, whereas the nations in Europe generate roughly 19.1% of its SLR.
On the finish of the third quarter, GNL’s portfolio was 96% leased to 815 tenants with a weighted common lease time period of 6.9 years. Moreover, 58% of its SLR is derived from funding grade tenants.
GNL – IR
Since 2017, GNL had a blended common AFFO progress price of adverse -3.65%. Administration has accomplished an efficient job of eroding AFFO per share over time.
For example, the record beneath reveals AFFO progress or declines for every year between 2017-2023:
- 2017 – AFFO per share fell -7%
- 2018 – AFFO per share elevated +1%
- 2019 – AFFO per share fell -13%
- 2020 – AFFO per share fell -3%
- 2021 – AFFO per share fell -1%
- 2022 – AFFO per share fell -6%
- 2023 – AFFO per share is predicted to fall by -8%
Since 2017 to 2023, GNL has diluted its AFFO per share in 6 of the years, whereas AFFO per share elevated in only one 12 months, and solely by 1%.
One level to remember that applies to all REITs (and C-Corps for that matter) is that the standard of the dividend is barely pretty much as good as the standard of earnings.
If money circulate / AFFO per share expertise consecutive years of declines, relying on the severity, GNL will both be compelled to chop its dividend, gradual the expansion of its dividend, or keep its dividend at unsustainable payout charges. None of that are good choices.
Over its latest historical past, GNL has exhibited the power to each minimize its dividend and keep at an unsustainable payout ratio, which is a troubling signal.
In 2017 and 2018 GNL’s didn’t improve their dividend. In 2019 they minimize the dividend by -16.67%, adopted by a divided minimize in 2020 of -2.39% and a dividend minimize in 2021 of -7.65%. The dividend was not improve in 2022 and was minimize by -2.88% in 2023.
Even with the a number of dividend cuts, GNL has been unable to attain a conservative AFFO payout ratio. It exceeded 100% in 2014 and 2018 and exceeded 90% between 2019 and 2022. Analyst anticipate the 2023 AFFO payout ratio to return in at 100.65%.
FAST Graphs (compiled by iREIT®)
Whereas GNL is buying and selling at a steep low cost, with a present P/AFFO of 5.79x, in comparison with its common AFFO a number of of 9.35x, and pays a excessive yield of 15.91%, we’re involved over the excessive AFFO payout ratios which may probably result in a dividend minimize down the street.
We price International Internet Lease a Maintain.
FAST Graphs
AFC Gamma (AFCG)
AFCG is an externally managed mREIT that focuses on institutional lending to the industrial actual property (“CRE”) sector with a specialised deal with loans issued to state-licensed hashish operators.
The mREIT was based in 2020 and primarily originates, underwrites, constructions, and invests in senior secured CRE loans and different kinds of debt securities.
Along with its major deal with financing senior secured CRE loans, the corporate gives direct loans and bridge loans that sometimes vary between $5 million and $100 million.
AFC Gamma, like most hashish REITs, was fashioned as a way to fill the void in hashish lending as a result of lack of conventional financing obtainable, given the authorized standing of hashish on the nationwide stage.
Nonetheless, not like different hashish REITs, AFCG considerably modified its enterprise mannequin just lately by increasing its funding standards to incorporate a number of kinds of CRE outdoors of hashish, in addition to provide further kinds of loans as an alternative of their prior sole deal with first lien mortgage loans issued to hashish operators.
The expanded funding tips allow the corporate to problem first lien and subordinate loans to operators outdoors of the hashish business.
We’re involved that this mortgage REIT made drastic modifications to its funding technique simply a number of years after being fashioned.
AFC Gamma paints an image of merely benefiting from different alternative units in CRE sectors since conventional banks have been pulling again from CRE lending.
Is that basically why they overhauled their authentic funding thesis to take a position outdoors of the hashish sector, the place they don’t have the identical experience or deep business data?
Do the brand new alternative units require the corporate so as to add danger by issuing subordinate loans?
Or was its authentic enterprise mannequin failing, forcing AFCG to develop its funding standards and transfer up the danger curve?
AFCH – 10Q
AFCG was fashioned in 2020 and went public the next 12 months so we don’t have numerous historic information to have a look at.
Nonetheless, from the data we’ve got, adjusted working earnings per share (“EPS”) fell from $2.51 in 2022 to $2.05 in 2023, representing a year-over-year decline in earnings of roughly 18%.
Analysts anticipate EPS to extend by +1% in 2024, however then fall to $1.99 per share by 2025, in comparison with earnings of $2.51 per share in 2022.
In its quick historical past, AFCG has already minimize its dividend when it decreased the quarterly price from $0.56 per share in 1Q-23, to $0.48 per share in 2Q-23, representing a dividend minimize of roughly 14.28% in comparison with the prior quarter.
Even after the dividend minimize, AFCG’s dividend payout ratio got here in at 97.56% in 2023, up from 88.84% in 2022. Analysts anticipate AFCG 2024 dividend payout ratio to enhance barely to 92.75% however then improve to roughly 96.5% by 2025.
FAST Graphs (compiled by iREIT®)
Along with its excessive dividend payout ratio, the corporate seems to lack route, going from a specialty hashish mREIT to a specialty lender outdoors of their core competencies.
Moreover, we’re involved that AFCG “new technique” now takes on additional danger with the origination of subordinate debt.
Presently AFCG pays a 16.76% dividend yield however we query whether or not it may be sustained. As beforehand talked about, the corporate is already paying out nearly all of its earnings so there may be little room for error.
On the identical time, it seems that the corporate remains to be “discovering itself”, which doesn’t improve our confidence in administration’s planning and execution or the security of AFCG’s dividend.
AFCG is buying and selling at a P/E ratio of 5.82x, in comparison with its short-term common P/E ratio of 9.28x. Whereas the low cost and excessive yield are engaging, we expect traders could be setting themselves up for a sucker yield and suggest that they keep away from AFCG in the interim.
We suggest that traders keep away from AFC Gamma.
FAST Graphs
Who’s The Sucker?
In my new ebook, I clarify sucker yield as follows:
REITs for Dummies (Wiley)
As I clarify. “Corporations that function sucker yields are inclined to have unpredictable and unreliable earnings histories crammed with unsafe dividend payouts.”
The subsequent time period is “SWAN“.
REITs for Dummies (Wiley)
My portfolio is custom-built for SWANs and I’ve zero “sucker yields” in it.
That’s by design by the way in which.
I hope you loved my “minimize the cheese” article and I stay up for your feedback beneath.
Joyful SWAN Investing!
Writer’s be aware: Brad Thomas is a Wall Road author, which suggests he’s not at all times proper together with his predictions or suggestions. Since that additionally applies to his grammar, please excuse any typos chances are you’ll discover. Additionally, this text is free: written and distributed solely to help in analysis whereas offering a discussion board for second-level considering.