Ben Reynolds and the editorial team at Sure Dividend have just launched a new monthly advisory service entitled Top 10 REITs. Here, we begin a 5-part series that counts down their initial five favorite REITs.
Real estate investment trusts — or REITs, for short — can be fantastic securities for generating meaningful portfolio income. REITs widely offer higher dividend yields than the average stock.
The Top 10 REITs service ranks more than 110 REITs every month and analyzes the Top 10 REIT buys with 4%+ yields based on expected total returns and safety.
Four Corners Property Trust (FCPT) — our 5th top-ranked REIT — was formed after a spin-off from Darden Restaurants (DRI), in November of 2015. It is a real estate investment trust (REIT), which primarily acquires and leases restaurant properties.
The trust is structured as a triple-net lease, which means property maintenance, taxes, and insurance are the tenant's responsibility. This results in strong operating margins in the 80% to 90% range, much higher than the ~65% operating margins of most shopping center REITs.
FCPT has proven markedly resilient to the pandemic, as it has posted record funds from operations (FFO) per share in each of the last two years.
In the second quarter, FCPT collected 99.8% of its rental payments, thus confirming that essentially all its tenants are in healthy financial positions. Rental revenue grew 11% over last year’s quarter and adjusted funds from operations per share grew 12%, from $0.34 to $0.38.
FCPT acquired 23 properties for a combined purchase price of $45.6 million during the quarter, with an initial weighted average cash yield of 6.9% and a weighted average remaining lease term of 6.6 years.
The most significant competitive advantage of FCPT is its high-quality management. FCPT is offering an attractive 4.7% dividend yield. Its current payout ratio is high, at 83%, but the REIT has proved resilient to the pandemic.
While many REITs have been struggling and have cut their dividends during the coronavirus crisis, FCPT grew its revenues and its FFO per share by 7% and 4%, respectively, last year. As a result, it raised its dividend by 4% in late 2020.
In addition, FCPT has a healthy interest coverage ratio of 3.6 and a debt to equity ratio of 1.0. Overall, we view its 4.7% dividend as safe in the absence of a severe unexpected downturn.
As FCPT was formed in late 2015, it has a short history. Nevertheless, the trust has managed to grow its FFO per share every single year, from $1.22 in 2016 to an expected $1.55 this year, for a 4.9% average annual growth rate. We expect FCPT to continue growing its FFO per share at a rate close to its historical rate thanks to ample room for the continuation of profitable acquisitions of properties.
The market seems to agree on the promising growth prospects of FCPT, as it has rewarded the stock with an exceptionally high price-to-FFO ratio (P/FFO) throughout its 6-year history, close to 20.0. Based on expected 2021 FFO per share of $1.55, FCPT trades for a P/FFO of 17.8.
Our fair value estimate for this REIT is a P/FFO of 19.0. An expanding P/FFO multiple could boost shareholder returns by 1.1% per year over the next five years. We also expect annual growth of FFO per share of 5.0%, while the REIT has a 4.7% dividend yield. We expect total annual returns of 9.8% per year over the next five years.
