Ben Reynolds and the editorial team at Sure Dividend have just launched a new monthly advisory service entitled Top 10 REITs. Here, we continue 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.
Read Top REITs Part 1: Four Corners Property Trust here…
CareTrust REIT Inc. (CTRE) — our 4th top-ranked REIT — is a self-administered real estate investment trust (REIT) which acquires, develops, and leases skilled nursing, seniors housing, and other healthcare properties.
The company’s real estate portfolio comprises 225 skilled nursing facilities, multi-service campuses, and assisted living facilities which consist of 23,542 operational beds and units located in 28 states.
CareTrust released second-quarter results which saw net income increase 12.6% year-over-year to $21.3 million or $0.22 per share. Normalized funds from operations (FFO) grew 11.4% to $35.8 million or $0.37 per share. Normalized funds available for distribution (FAD) rose 13.5% to $0.40 per share compared to the same prior year period.
The Trust was able to collect 100% of contract rents in the first and second quarter. Leadership increased their previous fiscal 2021 guidance and anticipate normalized FFO to come in around $1.48 to $1.50 and for FAD to come in at a mid-point of $1.58. This increase would result in a 6.4% growth in FFO over 2020.
CareTrust has raised its dividend every year since it was spun off from The Ensign Group in mid-2014, for a total of six years to date. (The REIT paid a large special dividend in 2014 but has increased its normal quarterly dividend every year since 2014. )
The payout ratio has remained healthy throughout the trust’s history, with a bump in 2017 where the payout ratio reached its peak of 87%. If CTRE meets their provided guidance for FFO of $1.49, the company will achieve a payout ratio of 71% in 2021, a fairly conservative rate in the REIT space.
The Trust’s competitive strength lies in their geographically diverse property portfolio across 28 different states, and their long-term, triple-net lease structure which places many expenses on the operators rather than the trust.
While funds from operations have been somewhat volatile, the Trust has grown FFO by 13.1% and 9.1% on average in the past 6 and 5 years, which is solid. Going forward, we conservatively estimate they can continue growing FFO by 5.5% on the back of the pandemic.
The Trust will continue acquiring skilled nursing and senior care retirement homes to lease and build their real estate portfolio. Currently, CTRE has an active deal pipeline in the $125 million to $150 million range, in-line with historical levels.
Based on estimated fiscal 2021 FFO of $1.49, CareTrust trades for a price-to-FFO ratio (P/FFO) of ~14.6. Our fair value estimate is a P/FFO of 15. A higher P/E multiple could increase shareholder returns by approximately 0.2% per year over the next five years. In addition, when combined with the 5.5% expected growth rate and 4.9% starting dividend yield, we expect average total annual returns of 9.9% over the next five years.
