Revealed on March ninth, 2023 by Nathan Parsh

Actual Property Funding Trusts – or REITs, for brief – generally is a unbelievable supply of yield, security, and progress for dividend traders. For instance, Alternative Properties Actual Property Funding Belief (PPRQF) has a 5.2% dividend yield.

Alternative Properties additionally pays its dividends on a month-to-month foundation, which is uncommon in a world the place the overwhelming majority of dividend shares make quarterly payouts.

There are solely 69 month-to-month dividend shares that we at present cowl. You’ll be able to see our full record of month-to-month dividend shares (together with price-to-earnings ratios, dividend yields, and payout ratios) by clicking on the hyperlink under:

 

Alternative Properties’ excessive dividend yield and month-to-month dividend funds make it an intriguing inventory for dividend traders, regardless that its dividend fee has been largely stagnant in recent times.

This text will analyze the funding prospects of Alternative Properties.

Enterprise Overview

Alternative Properties is a Canadian REIT with concentrated operations in a lot of Canada’s largest markets. It’s one in every of Canada’s premier REITs given its dimension and scale, and the truth that its operations are solely targeted in Canada. The belief has wager huge on Canada’s actual property market, and up to now, the technique has labored.

The corporate has a high-quality actual property portfolio of over 700 properties which make up practically 64 million sq. toes of gross leasable space (GLA).

Supply: Investor Presentation

Properties embrace retail, industrial, workplace, multi-family, and improvement property. Over 500 of Alternative Properties’ investments are to their largest tenant, Canada’s largest retailer, Loblaw.

From an funding perspective, Alternative Properties has some fascinating traits, not the least of which is its yield. Nonetheless, it additionally has an uncommon dependency on one tenant, a scarcity of diversification that we discover considerably troubling.

Whereas grocery shops are usually fairly secure, this stage of focus on what quantities to 1 tenant may be very uncommon. This lack of diversification is a major consideration for traders which might be taking a look at Alternative Properties.

Whereas it will be preferable for the corporate to diversify to repair its focus, that may be a sluggish course of. As well as, because the tenant it’s so dependent upon is mostly secure, we don’t essentially see an enormous threat because of the trade struggling. Nonetheless, this form of focus on one tenant is extraordinarily uncommon for a REIT, and it’s price noting.

Progress Prospects

Alternative Properties has struggled with progress because it got here public in 2013. For the reason that finish of 2014, the belief’s first full 12 months of operations as a public firm, it has compounded adjusted funds-from-operations per share at a charge of simply ~0% per 12 months.

The belief has grown steadily by way of portfolio dimension and income, however comparatively excessive working prices and dilution from share issuances have stored a lid on returns for shareholders. Historical past has proven Alternative Properties can exhibit sturdy progress traits on a greenback foundation, however as soon as translated to a per-share foundation, traders have been left wanting.

The corporate has made enhancements in 2021 the place FFO grew 27% in comparison with 2020. Nonetheless, outcomes had been as soon as once more poor final 12 months.

For instance, Alternative Properties reported fourth-quarter and full 12 months outcomes on February sixteenth, 2023. Web loss for the quarter was $579 million, which in comparison with a web lack of $163.1 million within the fourth-quarter of 2021. Income fell 3.5% to $314.4 million. The rise within the web loss was largely because of the unfavorable adjustment of $486.8 million to the honest worth of the belief’s exchangeable items.

The belief collected practically all of its lease throughout the quarter. The occupancy charge expanded 70 foundation factors to 97.8% on the finish of the latest quarter. In the meantime, the corporate accomplished over $74.6 million of acquisitions in This fall, together with buying two strategic retail properties within the better Toronto Space.

We see Alternative Properties as persevering with to develop at a charge of 6.7% per 12 months over the following 5 years. The focus of the belief’s portfolio and fixed dilution make Alternative Properties unattractive from a progress perspective. When fixed share issuances are factored in, the outlook turns into even much less engaging.

Supply: Investor Presentation

Dividend Evaluation

Along with its progress woes, Alternative Properties’ dividend seems to be shaky in the meanwhile. The anticipated dividend payout ratio for 2023 is 119%. Lengthy-term, that is unsustainable, however we venture that the payout ratio will finally drop right down to 88% by 2028, which is near the place the belief’s long-term common has been since 2013.

Whereas even that payout ratio is excessive, it’s also true that REITs usually distribute near all of their revenue, so it’s hardly uncommon that Alternative’s payout ratio over 80%. Alternative Properties’ present distribution offers the inventory a 5.2% yield, which is a sexy dividend yield.

Notice: As a Canadian inventory, a 15% dividend tax might be imposed on US traders investing within the firm exterior of a retirement account. See our information on Canadian taxes for US traders right here.

Buyers mustn’t anticipate Alternative Properties to be a dividend progress inventory, because the distribution has remained comparatively flat since Might 2017. The belief did enhance its dividend by 1.4% to a complete annual distribution of $0.75 throughout the latest quarter. That stated, with the payout ratio as excessive as it’s, and FFO-per-share progress muted, traders mustn’t anticipate the payout to see a large increase anytime quickly.

Alternative Properties has additionally not minimize the distribution, and we don’t see an imminent risk of that proper now. However it’s price mentioning that if FFO-per-share deteriorates considerably going ahead, the belief will probably have to chop the distribution resulting from its excessive payout ratio.

That is significantly true as a result of we see Alternative Properties’ borrowing capability as restricted, given its already-high leverage. Alternative Properties has a debt to fairness ratio of just about 2, which in keeping with the corporate is under the trade friends, however remains to be alarmingly excessive.

As well as, it has massive quantities of debt coming due in phases within the coming years, so we see the belief’s debt financing as close to capability as we speak. Alternative has regular debt maturities within the coming years, and whereas they’re unfold out, the quantities are important. Alternative has no potential to pay these off as they mature, so refinancing seems to be the one viable choice.

Ought to it expertise a downturn in earnings, Alternative Properties must flip to extra dilution for extra capital. Whereas we don’t see a dividend minimize within the close to future, the mixture of a scarcity of adjusted FFO-per-share progress, the excessive payout ratio, and a excessive stage of debt seems dangerous.

Last Ideas

Alternative Properties is a excessive dividend inventory and its month-to-month dividend funds make it stand out to revenue traders. Nonetheless, quite a few components make us cautious about Alternative Properties as we speak, akin to its lack of diversification inside its property portfolio, and its alarmingly excessive stage of debt.

With a considerably dangerous dividend, we view the inventory as unattractive for risk-averse revenue traders. Buyers in search of a REIT that pays month-to-month dividends have higher decisions with extra favorable progress prospects, larger yields, and safer dividends.

If you’re all for discovering extra high-quality dividend progress shares appropriate for long-term funding, the next Certain Dividend databases might be helpful:

The most important home inventory market indices are one other strong useful resource for locating funding concepts. Certain Dividend compiles the next inventory market databases and updates them month-to-month: