Comparison of the two cheapest and most profitable net lease REITs
Spirit Realty Capital (NYSE: CBC) and Alpine Income Property Trust (NYSE: PIN) are the two highest net-yielding real estate investment trusts (REITs) that are diversified by tenant industry.
Specialized net rental REITs that are concentrated in a particular tenant industry, such as EPR Properties (EPR) in movie theaters and Innovative Industrial Properties (IIPR) in cannabis grow facilities, currently have higher returns, but SRC and PINE are the most efficient and the least expensive. among their comparable peers.
|Real estate spirit||Alpine income|
|Price at AFFO||12.0x||11.4x|
|Year-to-date payout ratio||74%||57%|
Besides being diverse by tenant industry, SRC and PINE share a few other things in common. For example, both are active in capital recycling and both raised their AFFO forecast per share for 2022 in the second quarter.
In this article, we’ll compare and contrast these two high-yielding net rental REITs and try to figure out which one makes the better buy today.
While SRC is managed internally, PINE is managed externally by the management team of CTO Realty Growth (CTO), a mall REIT. Although external management structures often misalign interests between management and shareholders, PINE’s structure avoids this pitfall with relatively low quarterly management fees. CTO also owns 16% of PINE, further aligning interests.
In addition, management has declared its intention to internalize the management structure of PINE once the portfolio has reached a critical mass capable of making it financially viable.
There is also a huge difference in size between the two REITs as SRC has been around for a long time, while PINE only went public at the end of 2019.
SRC is just over 17 times larger than PINE in enterprise value.
Although both REITs are actively acquiring properties, the larger a REIT’s portfolio, the more difficult it is to grow through acquisitions. Therefore, why PINE’s AFFO growth rate per share has been so much faster than SRC’s this year:
|Real estate spirit||Alpine Income|
|Q2 ’22 AFFO/sh Growth||4.7%||20.5%|
|2022 YTD AFFO/sh Growth||9.9%||15.9%|
While PINE’s double-digit growth is obviously impressive, SRC’s growth should not be ignored or minimized. For a REIT of its size, a growth rate per share of almost 10% YTD AFFO is nothing to sneeze at!
Below we find a direct comparison of some basic portfolio metrics:
|Real estate spirit||Alpine Income|
|Number of properties||2,078||143|
|WALT||10.3 years||8.0 years|
|Investment Grade Rental||21.8%||49%|
|Composition of the portfolio||71% Retail / 20% Industrial||100% retail|
|Avg. Rent increases||1.5% to 2%||0.75% to 1.25%|
First, notice the difference in the number of properties. SRC has almost 15 times more properties than PINE. Despite this, the occupation of SRC is practically identical to that of PINE.
Second, note that SRC’s weighted average lease term is over 10 years, while PINE is two years less in duration at 8 years. The SRC wins here.
Third, note that PINE has more than double the exposure of investment grade tenants than SRC. It’s a bit easier to have higher IG exposure when its portfolio is as small as PINE’s, because management can be more selective about acquisitions. PIN wins here.
Fourth, note that although PINE is 100% retail, SRC’s portfolio has increased its industrial segment to 1/5th of the NOI. These properties typically have higher rent increases and experience greater rent growth over time. The SRC wins here.
Fifth, note that SRC’s weighted average annual rent increases are almost double those of PINE (largely due to the latter’s focus on IG tenants and retail businesses like pharmacies, which feature often flat leases). The SRC wins here.
In terms of property types and tenant industries, SRC enjoys greater diversification in line with its much larger portfolio. It owns both commercial and industrial properties as well as a few select office buildings, country clubs and data centers. Within retail, its portfolio is split between service-oriented, discretionary and essential properties.
The REIT’s list of top tenants demonstrates management’s willingness to look virtually anywhere it can find a good deal.
The top 10 types of SRC properties are:
- Breakdown (10.5%)
- Health and fitness (8.2%)
- Manufacturing (7.5%)
- Convenience stores (6%)
- Fast food (5.1%)
- Casual dining (4.8%)
- Car washes (4.5%)
- Movie theaters (3.9%)
- Car dealerships (3.5%)
- Entertainment (3.4%)
Compare them to the top 10 property types of PINE:
By the credit quality of the tenants and the essentiality of the industries of its retail tenants, the portfolio of PINE is clearly stronger than that of SRC. You can see the difference by comparing the best tenant listings. Here is the one from PIN:
Each REIT’s portfolios have advantages and disadvantages. PINE’s strength is undoubtedly in the credit quality of its tenants. But SRC’s strength lies in its industrial exposure, higher rent increases and longer weighted average remaining lease term.
If PINE wins in overall portfolio quality, SRC is unquestionably the winner in balance sheet quality.
While SRC sports a premium credit rating of BBB, PINE does not have a credit rating. The company is simply too small to pursue one at this point.
The CBC’s weighted average interest rate on total debt is 2.92%, and the years remaining to maturity average over 6 years. Substantially 100% of the debt is unsecured, and the REIT has no debt maturities before 2026. Additionally, SRC has the second highest fixed charge coverage ratio in its peer group, behind only WP Carey (WPC), at 6.0x.
The image above does not show SRC’s net debt to EBITDA of 5.2x.
Compare that to PINE’s net debt to EBITDA of 8.3x.
Also compare SRC’s net debt at enterprise value of 36% to PINE’s of 55%.
Meanwhile, borrowings from the CBC credit facility represent 20% of total debt, while borrowings from the PINE credit facility represent 24%. And compared to SRC’s weighted average interest rate of 2.92%, PINE’s 3.0% rate is slightly higher. Moreover, this rate should increase a little faster for PINE than for SRC because PINE has drawn more on its credit facility.
By almost every measure, SRC has the stronger balance sheet than PINE.
One could surely argue the superiority of one or the other of these REITs over the other.
But it’s also important to note that both REITs are at a disadvantage in their pursuit of external growth due to relatively high costs of equity. Generally speaking, net lease REITs use a greater proportion of equity than debt to fund growth investments. With high dividend yields equating to high cash costs of equity, the weighted average cost of capital for both REITs is higher than that of their peer group.
To compensate for this, both REITs typically buy higher cap rate properties that are perceived by the market to be higher risk. SRC has sought higher capitalization rates for sale-leasebacks with niche tenants like LifeTime Fitness and ClubCorp (a golf course/country club operator). PINE sought higher capitalization rates by purchasing commercial properties with less term remaining on the lease and/or with less attractive locations.
While I recognize that the credit quality of PINE’s tenants is higher, I favor SRC due to its stronger balance sheet with no debt maturities through 2026 as well as its growing portfolio tilt towards industrial properties. .
With a dividend yield of 6.2%, SRC only needs to generate growth of around 4% per year to generate a total return of more than 10%, even if the market never attributes to the action a higher AFFO multiple. I believe that between rent increases, external growth and accretive recycling of capital, the SRC should easily be able to generate this level of growth, and I am therefore confident in its ability to perform well over the long term.
In addition, if the economy falls into recession in the next few years, the CBC will not have to face any debt maturities. And the dividend payout ratio in the low 70% range, along with the recent rise of around 4%, indicates that the dividend is likely to remain safe even in a difficult economic environment.