Up to date on June 2nd, 2021 by Bob Ciura
Actual Property Funding Trusts have loads to supply traders who want increased ranges of funding earnings, equivalent to retirees. For example, Gladstone Business Company (GOOD) is a REIT with a excessive dividend yield of 6.8%.
You possibly can see the total record of 5%+ yielding shares by clicking right here.
Gladstone Business seems to be a lovely dividend inventory, particularly contemplating the accessible options. The S&P 500 Index, on common, has a couple of ~1.4% dividend yield. Plus, Gladstone Business is considered one of solely 54 shares that pays its dividend every month.
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Nevertheless, Gladstone Business’s dividend is way from assured. Its payout ratio is sort of 100%, leaving little room for error in the case of sustaining the dividend.
This text will focus on the belief’s enterprise mannequin and monetary efficiency, and why its dividend could also be riskier than meets the attention.
Gladstone Business is a Actual Property Funding Belief, or REIT, that invests primarily in single-tenant, and anchored multi-tenant web leased belongings. It owns 15.5 million sq. ft of workplace and industrial actual property within the U.S.
Gladstone Business has a really diversified portfolio. As of the top of March, the belief’s portfolio consisted of 120 properties in 27 states, leased to a 107 completely different tenants.
Supply: Investor presentation
The belief’s portfolio is usually geared towards long-term agreements. As well as, Gladstone Business enjoys excessive occupancy charges, together with a present charge of 95.5%. Impressively, occupancy has by no means fallen beneath 95% for the reason that belief’s IPO in 2003.
Roughly 56% of Gladstone Business’s tenants are rated funding grade or are the non-rated funding grade equal. This contributes to a high-quality portfolio of tenants that ought to climate minor financial downturns, and protect Gladstone Business’s lease streams.
The belief has generated spectacular income progress previously, however progress of the underside line has leveled off recently. This creates some degree of uncertainty with regard to the distribution’s security.
Gladstone reported first quarter earnings on Might 10th, 2021, and outcomes had been higher than anticipated on each the highest and backside traces. Core funds–from–operations, or FFO, got here to $15.4 million, a 15% improve from the prior quarter. Core FFO was up primarily as a consequence of a rise in lease income from new acquisitions, partially offset by a rise in curiosity expense, which was from increased charges on variable charge debt.
Gladstone collected 98% of money rents in the course of the first quarter throughout Q1. It additionally acquired a 180k square foot industrial facility in Ohio for $11.1 million, which is 100% leased to a single tenant for 14 years.
It bought two properties for complete proceeds of $5.5 million, and renewed leases on 193k sq. ft on two current properties. Gladstone additionally leased 189k of vacant sq. ft for five.2 years at one property.
After Q1, the belief mentioned it collected 98% of base April rents, and that occupancy was 95% as of the top of April.
Gladstone’s FFO–per–share has been between $1.50 and $1.60 for many of the previous decade because the belief continues to concern new shares and debt to fund acquisitions, however these acquisitions fail to supply an financial acquire. In different phrases, whereas the belief’s new properties present progress on a greenback foundation, when the price of these acquisitions is factored in, it’s basically no acquire on a per–share foundation.
Given the place the distribution is at this time, that might current an issue because the belief’s payout ratio may be very near 100%. Nevertheless, regardless of the favorable fundamentals of the belief’s portfolio, its headwinds to earnings progress (dilution and working bills) are nonetheless very a lot current.
Gladstone Business has a present month-to-month dividend fee of $0.12515 per share. On an annualized foundation, the dividend fee is $1.5018 per share, good for a 6.8% dividend yield.
The distribution had been stagnant at $0.125 per share month-to-month since January of 2008, reflecting the struggles the belief has had with respect to progress. Nevertheless, the distribution obtained a fractional elevate earlier in 2020 to the brand new degree of $0.12515 cents per share month-to-month.
To its credit score, Gladstone Business has paid month-to-month dividends for greater than 15 consecutive years, a powerful monitor document of constant payouts, though the distribution has been mainly flat for greater than a decade.
Since Gladstone Business’s 2003 preliminary public providing, the belief has not missed a distribution, nor has it decreased the distribution at any time, which may be very spectacular for a REIT given the big selection of financial circumstances which have existed on this timeframe.
One other necessary consideration when shopping for dividend shares is steadiness sheet energy.
An excessive amount of debt can jeopardize a belief’s dividends. On a optimistic notice, Gladstone Business has labored to considerably scale back its leverage over the previous a number of years, and now has a balanced maturity schedule.
Supply: Investor Presentation
Roughly two-thirds of Gladstone Business’s debt is fixed-rate, which may assist mitigate the influence of risky rates of interest.
As well as, giant maturities are a number of years away, which means the belief has time to generate money to pay them off, or discover higher methods to refinance them.
Nonetheless, there may be not a lot room for error as a result of the belief maintains a excessive payout ratio. We see FFO of $1.59 per share, which might barely cowl the annualized dividend payout of $1.50 per share.
This implies there may be little or no wiggle room for Gladstone Business’s FFO in the case of overlaying the distribution.
If the belief’s fundamentals deteriorate over the subsequent few years, there’s a likelihood it might not have the ability to maintain its dividend on the present degree. We see this because the principal threat of proudly owning Gladstone Business at this time.
Gladstone Business’s very excessive dividend yield is engaging and seems to be sustainable, a minimum of within the near-term, given the belief’s present degree of FFO. The belief enjoys excessive occupancy and powerful rental charges as nicely. However given the ~100% payout ratio, we nonetheless have issues about Gladstone’s dividend security.
Consequently, traders might want to monitor the belief’s outcomes intently to verify FFO doesn’t decline a lot from current ranges. Certainly, even a modest decline may jeopardize the dividend.
Gladstone’s yield is engaging, nevertheless it carries an elevated threat of a lower within the coming years, significantly if the present recession is worse than anticipated or drags on for a protracted interval.
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