Real Estate Investment Trusts (REITs) are companies that bundle real estate properties and generate income from leasing those properties to others. There are all kinds of REITs, including apartments, retail, farmland, storage units, and data centers. REITs must pay out at least 90% of their taxable income to their shareholders as dividends, and in doing this, they avoid taxation on what is paid out.
Spirit Realty Capital (SRC) is a REIT focused mainly on the retail sector, but also has industrial and office building space property and operates in 48 states. SRC owns over $9 Billion in real estate investments. They have 2,118 properties leased to tenants, such as Home Depot, Dollar Tree/Family Dollar, Life Time Fitness, BJ’s Wholesale Club, and others. SRC’s properties are 99.8% occupied as of the end of September.
Spirit Realty uses long-term triple net leases with clauses that raise the rents periodically (usually annually) to help keep up with inflation. Triple net leases mean that the tenant, not Spirit Realty, pays property taxes, insurance, operating expenses, and repairs/improvements. This leaves more of the rental income for SRC to use to pay down debt, buy new properties, and pay dividends to shareholders. Speaking of debt, almost all REITs, Spirit Realty included, have a lot of debt. They use this leverage to generate better returns for their shareholders, hopefully. Spirit Realty has total debt of about $3.5 billion as of September 30, 2022. Higher interest rates may cause their earnings to decline as the debt matures, and they refinance that debt at higher rates.
As stated before, REITs must pay out at least 90% of their net income as dividends. Spirit Realty Capital just raised their dividend, now paying .663 per quarter for an annual yield of 6.6% based on a current stock price at the time of writing this $40.18. This is the third dividend raise in as many years. If you do not need the dividend to live on, reinvesting the hefty payout can buy you more shares to help compound your income from your investment.
Spirit Realty’s stock price is just above the middle of its 5-year range. It has reached a high of $54.63 and has dropped to a low of $18.37. Both events happened in 2020, with the low coming soon after the pandemic hit. I think at the current price, with a 6.6% yield, Spirit Realty Capital is a buy. If interest rates continue increasing, the stock price could decline and become a better buy. However, the dividend yield should help offset any temporary price decline and pay you to hold the stock while it recovers.
As always, do your due diligence and research before buying. Full disclosure, I own Spirit Realty Capital. Sources include Schwab and Seeking Alpha.
(Intentional Investing is a weekly column written by Kyle Smith from Floyd County, TX, based upon his investment knowledge and does not represent the views or opinions of the Floyd County Record. You can reach Mr. Smith via email insureddividends@gmail.com)
