Spirit Realty Capital Stock: A Recession-Resistant REIT (NYSE: SRC)
Despite an unprecedented global pandemic impacting the U.S. real estate market in 2020, Spirit Realty Capital (NYSE: CBC) plans to increase adjusted operating funds (per share) by up to 10% this year.
The trust is on track to hit $600 million in annualized base rent this year and will almost certainly increase dividend payments to shareholders in 2022. Given that Spirit Realty Capital stock has a low AFFO multiple, I believes it has the potential for attractive total returns in the future.
Recovery of all pandemic losses
In 2020, Spirit Realty Capital’s real estate business faced great uncertainty. However, as it became clear that the trust’s property portfolio was performing well and rent collection remained high, the stock rallied significantly. The stock has recouped most of its pandemic-related losses, and I see it as promising given rising rental income and strong portfolio performance.
A heavy security-focused REIT
Spirit Realty Capital primarily invests in industrial, commercial and office properties, but also purchases real estate in other categories when management sees an opportunity to deploy capital efficiently. Based on 2021 data, the trust’s total real estate assets consisted of approximately 2,000 properties valued at approximately $7.9 billion.
The occupancy rate, which I will discuss later, was 99.8%, giving the trust a near-perfect rental score. What’s worth noting here is that the trust has only experienced a small number of tenant defaults during the pandemic, losing less than 1% of its annualized base rent.
Spirit Realty Capital’s real estate portfolio is primarily comprised of service commercial properties, which represent 44.2% of the Trust’s total assets. Industrial properties, which include distribution, manufacturing and even country club properties, are the second largest asset class.
The real estate portfolio is spread across 35 different sectors, which significantly increases the diversification of the trust. More diversification statistics can be found in the Trust’s supplement presentation that accompanied the most recent earnings release.
The trust’s exceptional historical occupancy rates are the best reason to own Spirit Realty Capital. The occupancy rate dropped to 99.2% during the Covid-19 pandemic, demonstrating that the trust works with a very stable and solvent tenant base. About 85% of the trust’s tenants have annual incomes of $100 million or more, and about 22% are higher quality.
Spirit Realty Trust’s occupancy rate is among the best in the REIT category, despite the fact that the trust’s portfolio is potentially riskier due to the presence of more cyclical industrial real estate.
The pandemic has been a catalyst for growth
Spirit Realty Capital has amassed approximately 27% of its current portfolio since 2020 through aggressive capital deployment. In fact, the pandemic has proven to be a significant catalyst for confidence growth. Since 2020, the trust has spent $2.1 billion, or $266.9 million per quarter, on real estate purchases, primarily industrial and commercial properties, positioning the trust for long-term funds from growing operations. .
Going forward, acquisitions will be key to the Trust’s growth projections as Spirit Realty Capital intends to acquire a large number of properties in 2022. Spirit Realty Capital plans to invest between 1.3 and 1, 5 billion dollars in 2022.
AFFO forecast, multiple, payout ratio
Spirit Realty Capital expects adjusted operating funds to grow up to 10% year-on-year in 2022. Current forecasts call for a stock price of $3.52 to $3.58 and expenses in capital of at least $1.3 billion. The current outlook is even better than the trust’s 2019 guidance, which called for $3.52 per share in AFFO.
Spirit Realty Capital has a multiple of 12.8x based on the trust’s expected higher AFFO forecast for 2022, making it one of the cheapest REITs in the industry.
Spirit Realty Capital has a low payout ratio of 71.9%, implying that the dividend could increase. In terms of payout ratio, the trust ranks firmly in the middle of its peers and has an even lower payout percentage than Realty Income, which is the gold standard in the retail REIT industry and which I covered here.
Why Spirit Realty Capital might see a lower valuation
Spirit Realty Capital’s portfolio is doing well: the trust has optimal occupancy rates, funds from operations are growing (even during the pandemic), and the dividend is expected to increase. However, there are risks, even if they are mainly at the macro level rather than at the company level.
Interest rates and inflation are not significant risks for real estate investment trusts because real estate values tend to rise in line with inflation. The state of the economy is a macro risk factor for Spirit Realty Capital. A recession would almost certainly increase occupancy rates, reducing the trust’s AFFO outlook in the near term.
Spirit Realty Capital should be bought because of its recession-proof real estate portfolio, 99% or higher occupancy rate and low payout ratio. Other factors to consider include strong growth in adjusted funds from operations, good diversification indicators and the potential for dividend growth due to a low payout ratio.
Spirit Realty Capital is a REIT you can sleep well with at night, and the stock is also inexpensive.