Up to date on September twelfth, 2024 by Felix Martinez
Actual Property Funding Trusts have lots to supply traders who want increased ranges of funding revenue, together with retirees. As an example, Gladstone Industrial Company (GOOD) is a REIT with a excessive dividend yield of seven.8%.
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Gladstone Industrial seems to be a gorgeous dividend inventory, particularly contemplating the obtainable options. The S&P 500 Index, on common, has a couple of ~1.6% dividend yield. Plus, Gladstone Industrial pays its dividend every month.
You may obtain our full Excel spreadsheet of all month-to-month dividend shares (together with metrics that matter like dividend yield and payout ratio) by clicking on the hyperlink under:
Nevertheless, Gladstone Industrial’s dividend is way from assured. Its payout ratio is nearly 100%, leaving little room for error in sustaining the dividend.
This text will talk about the belief’s enterprise mannequin and monetary efficiency, and why its dividend could also be riskier than meets the attention.
Enterprise Overview
Gladstone Industrial is a Actual Property Funding Belief, or REIT, that invests primarily in single-tenant, and anchored multi-tenant web leased belongings. It owns 16.2 million sq. toes of workplace and industrial actual property within the U.S.
Gladstone Industrial has a really diversified portfolio. As of the top of December 2022, the belief’s portfolio consisted of 136 properties in 27 states, leased to over 100 completely different tenants in 19 industries.
Supply: Investor presentation
The belief’s portfolio is usually geared towards long-term agreements. As well as, Gladstone Industrial enjoys excessive occupancy charges, together with a present price of 98.5%. Impressively, occupancy has by no means fallen under 95% because the belief’s IPO in 2003.
Roughly 53% of Gladstone Industrial’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 Industrial’s lease streams.
Gladstone reported its second-quarter earnings on August sixth, 2024, exceeding expectations for each income and earnings. Funds from operations (FFO) had been 36 cents per share, beating estimates by 1 cent and up from 34 cents in Q1. This improve was largely resulting from accelerated lease from a termination charge associated to a property sale in the course of the quarter.
Though income dropped 4% year-over-year, it nonetheless surpassed estimates by $1.1 million, totaling $37.1 million. The corporate collected 100% of its money rents in the course of the quarter, a development that continued into July.
Working bills rose to $25.9 million, in comparison with $23.3 million in Q1. Leased sq. footage dipped barely from 98.9% to 98.5%.
Gladstone additionally acquired a five-property portfolio with 142,000 sq. toes for $12 million at a 12.3% cap price and offered one other property for $2.6 million. Based mostly on the primary half outcomes, the corporate now expects full-year FFO to be $1.40 per share.
Progress Prospects
The belief has generated spectacular income development previously, however backside line development has leveled off recently. This creates some degree of uncertainty with regard to the distribution’s security. FY2023 core FFO expectations are robust although, which might carry down the payout ratio for the yr.
Gladstone’s FFO-per-share has been between $1.50 and $1.60 for a lot of the previous decade because the belief continues to difficulty new shares and debt to fund acquisitions, however these acquisitions fail to offer an financial acquire for shareholders after accounting for share issuance and value of debt. In different phrases, whereas the belief’s new properties present development on a greenback foundation, when the price of these acquisitions is factored in, it’s primarily no acquire on a per-share foundation.
Given the place the distribution is right this moment, that would current an issue because the belief’s payout ratio is approaching 100%. Nevertheless, regardless of the favorable fundamentals of the belief’s portfolio, its headwinds to earnings development (dilution and working bills) are nonetheless very a lot current.
Nonetheless, the corporate has efficiently grown its asset base at a double-digit annual compound development price within the final decade. And since 2003, the portfolio has maintained excessive occupancy exceeding 95%.
With restricted lease expirations in 2023, the corporate is concentrated on development. They’re involved in growing the economic allocation of the portfolio. At the moment, industrial properties account for roughly half of the property portfolio. Workplace properties make up a lot of the the rest of the property portfolio, with retail and medical workplaces rounding it out.
Dividend Evaluation
Gladstone Industrial has a present month-to-month dividend fee of $0.10 per share. On an annualized foundation, the dividend fee is $1.20 per share, good for a excessive 7.8% dividend yield.
The distribution has been stagnant at $0.125 per share month-to-month since January 2008, reflecting the belief’s struggles with development. Nevertheless, lately, the corporate determined to chop the dividend, decreasing the month-to-month fee to $0.10 per share in January 2023.
To its credit score, Gladstone Industrial has paid month-to-month dividends for greater than 16 consecutive years, a formidable monitor report of constant payouts.
Since Gladstone Industrial’s 2003 preliminary public providing, the belief has not missed a distribution, nor had it lowered the distribution at any time till only in the near past, which continues to be fairly spectacular for a REIT given the big selection of financial situations which have existed on this time-frame.
One other vital consideration when shopping for dividend shares is stability sheet power.
An excessive amount of debt can jeopardize a belief’s dividends. On a constructive notice, Gladstone Industrial has labored to considerably cut back its leverage over the previous a number of years, and now has a balanced maturity schedule. Moreover, its lowered dividend payout degree will additional ease the burden on its stability sheet.
Supply: Investor Presentation
About 97% of Gladstone Industrial’s debt is both fixed-rate or hedged, which might assist mitigate the impression 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.
If the belief’s fundamentals deteriorate over the following few years, there’s a likelihood it might not have the ability to maintain its dividend even on the lowered present degree. We see this because the principal threat of proudly owning Gladstone Industrial right this moment.
Closing Ideas
Gladstone Industrial’s very excessive dividend yield is enticing 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 robust rental charges as nicely.
Because of this, traders might want to monitor the belief’s outcomes carefully to verify FFO doesn’t decline a lot from current ranges. Certainly, even a modest decline might jeopardize the dividend.
Gladstone’s yield is enticing to revenue traders, however there seems to be little in the way in which of earnings development. The month-to-month fee schedule is a bonus with the excessive yield, however traders should take note of outcomes and regulate the payout ratio.
Don’t miss the sources under for extra month-to-month dividend inventory investing analysis.
And see the sources under for extra compelling funding concepts for dividend development shares and/or high-yield funding securities.
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