The Truth Must Be Told: Industrial REITs Have Not Been a Breeding Ground to Harvest Hefty Dividends

chart01Last November, we asked ourselves why First Industrial had not been generous enough with its shareholders. Although the dividend has grown at a double digit every year since it was reinstated in 2013, the dividend yield was way below its peers; in fact, it is one of the lowest among equity REITs. For the fourth quarter, the company decided to correct this situation and its dividend has gone up by almost 50%.

The company’s quarterly dividend rate went up from $0.13 to 0.19, equalizing an annualized yield of 3.7% with the sector median. Its previous yield was on par with the 10-year U.S. Treasury yield, likely the most obvious reason why management decided to bump it up. Also, the AFFO payout was below 60%, which made room for aggressive increases.

chart02.png The truth must be told: Industrial REITs have not been a breeding ground to harvest hefty dividends. Except for STAG Industrial, Liberty Property Trust, and Monmouth Real Estate Investment Corporation, all others have yielded below the equity REIT average. STAG Industrial has been the most popular for investing in secondary and tertiary markets. First Industrial, in turn, invests in the top industrial real estate markets in the U.S.

First Industrial went through tough times during the great recession, turning itself very stringent about dividend distributions. Its share price reached the bottom at $1.91 on March 03, 2009, after reaching its all-time peak of $50.52 in November 2006. On March 31, 2009, its total debt to total market capitalization reached 84%. Its FFO per share plummeted in 2008 and went negative in 2010. For that reason, liquidity has become an important component of its strategy. In 2009, they announced that they would distribute the minimum amount of dividends required to maintain the REIT status.

chart03.png Fast forward to December 31, 2015, and the situation had completely changed. Its share price had surpassed $20. Its total debt to total market capitalization had plummeted to 36% and last September the company was granted investment grade status by Standard & Poor’s. That recognition must have also encouraged the company’s decision to make the dividend policy less stringent.

Last year, First Industrial stock performed well. Its total return was just under 10%, which was better than most of its peers. Only PS Business Parks and Terreno did better than First. Since management expects its FFO per share will increase by 15% in 2016, there’s a good chance that the company can continue its stock performance in 2016. In terms of AFFO multiple, the company is comparatively cheap. While the peer average is 18x, First has been trading at 16x. It is not as blatantly cheap as STAG (which is trading at 11x), but there’s certainly room for appreciation.

The only caveat is that First shares tend to be as volatile as the market. In 2016, we’ve seen a significant drop of 5%, a bit more than S&P500’s drop of 7%. Given that the Q4 results last Friday were strong, this could be a good entry point.

chart04

Source: First Industrial Realty Trust(NYSE:FR), Fast Graphs

Disclaimer: This newsletter is not engaged in rendering tax, accounting, or other professional advice through this publication. No statement in this issue is to be construed as a recommendation to buy or sell any security or other investment. Please do your own due diligence before making any investment decision. Some information presented in this publication has been obtained from third-party sources considered to be reliable. Sources are not required to make representations as to the accuracy of the information, however, and consequently the publisher cannot guarantee accuracy.

Disclosure: The author has no positions in any shares mentioned, and no plans to initiate any positions within the next 72 hours.

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