Spirit Realty Offers Lucrative Value and Dividends

The company is an asset to watch considering global inflation

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Jun 23, 2022
Summary
  • Spirit Realty's grown exponentially since 2019 with a cap rate north of 7%.
  • Net leases and long-duration contracts add significant value.
  • The REIT is undervalued based on key price to operations metrics.
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Many investors are opting to invest in high-dividend assets during these uncertain times, and real estate investment trusts are a hot commodity. Spirit Realty Capital Inc. (

SRC, Financial) exhibits best-in-class attributes in the real estate investment vehicle sector. The asset is in prime condition to prosper for several reasons.

Operational overview

Spirit Realty Capital is a diversified premier net-lease REIT that invests in various single-tenant real estate assets with long-term leases. The Dallas-based company's value add lies in its diversification as it owns more than 1,700 properties across 48 states. In addition, the company's net lease program means it passes most operating costs through to its tenants; thus, its capitalization rate is easily interpreted from an investor's viewpoint.

The REIT has acquired more than 31% of its assets since 2019, illustrating its illustrious growth. Since 2019, Spirit Realty has produced an economic capitalization rate of 7.62%, which is well above this year's first-quarter U.S. REIT average of 6.14%.

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Source: Simon Realty Capital

Furthermore, Spirit Realty's adjusted funds from operations are forecasted to expand at a compound annual growth rate of between 6.1% and 6.7% by the end of this year, which is certainly attractive.

Finally, Spirit Realty's risk profile is sublime, with its loss rent becoming negligible at 0.1% and its top 10 diversification shrinking to 21.3%.

REITs in the current economy

It is obvious that many of the gains in the REIT space have been realized already as inflation is set for a downturn with rising interest rates. However, the REIT environment has some life left in it as a diversification tool, while other asset classes wane due to a bear market. Furthermore, REITs will benefit from inflation until we are back to the 2% to 3% level as rents paid and property value appreciation still exceed equilibrium inflation.

Dividends and valuation

Spirit Realty is undervalued versus its normalized average. According to the asset's latest metrics, it is trading at a normalized five-year discount. Spirit's price-adjusted funds from operatons and price-funds from operations ratios are at discounts worth 34.95% and 33.16%, respectively, implying that a value gap is in play.

Additionally, Spirit Realty provides solid dividends. The REIT has a dividend payout ratio of 139.40% and provides a forward dividend yield of 6.71%. The payout ratio will eventually retreat below 100% as its current level is not attainable in the long run. Nevertheless, the company's long-term dividend prospects remain sound.

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Concluding thoughts

Spirit Realty Capital could be a go-to during this inflationary period as it provides generous dividends and value. Furthermore, real estate is a valuable diversification tool, which could come in handy considering the current market volatility.

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Disclosures

I/we have no positions in any stocks mentioned, and have no plans to buy any new positions in the stocks mentioned within the next 72 hours. Click for the complete disclosure
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