Andrii Dodonov
Introduction
As a longtime reader, and analyst here on Seeking Alpha, I can relate to readers when they mention the abundance of articles praising fan favorite, Realty Income (O). The stock is one of the most popular REITs here on the platform and for good reason.
Another favorite is VICI Properties (VICI). Both stocks have underperformed the broader market, but like anything else, you can always get something good, even when things are seemingly going wrong.
O, known for its attractive, monthly dividend, and VICI, known for the iconic properties and fast growth are not the only REITs, in my opinion, that are attractive.
So, I decided to give readers a different selection, although they’re not strangers to dividend investors. In this article I present two additional REITs, W. P. Carey (WPC) and NNN REIT (NNN), who may also be considered attractive investments for investors seeking income.
#1 NNN REIT
First up is NNN REIT. Aside from paying a quarterly dividend versus monthly like Realty Income, NNN REIT actually has a longer public track record of increasing dividends than the former with 34 years in comparison to 30 for O.
NNN raised their dividend by roughly 2.7% last year and using their annual dividend estimate, analysts’ anticipate an upcoming increase to $0.5750 next month.
I touched on this during my last buy rating with a dividend estimate between $0.58 – $0.585 this August. NNN REIT is a conservative company, but I think the stock will conduct a larger increase than analysts are anticipating. Of course this is all speculation, but I think the increase will be at least similar to the prior one due to the REIT’s conservative payout ratio. The last two dividend increases were 3.8% and 2.7% respectively.
But what also makes them attractive is this is well-covered with a payout ratio of 67.2% using their latest quarterly AFFO run rate of $0.84. Additionally, aside from a longer track record of dividend increases, NNN REIT has also outperformed O when it comes to total returns over the past 5 years.
Of course neither number is impressive, but REITs have been in a bear market for more than 2 of the last 5 years. Furthermore, investors shouldn’t expect a ton of capital appreciation from them as many are considered bond proxies. But what you can expect is a nice stream of dividend income, likely for many more years to come.
The company’s fundamentals also remain some of the strongest with a occupancy rating of 99.4%, higher than O’s 98.6%. Their balance sheet is also solid with a net debt to EBITDA of 5.5x and a fixed-charge coverage ratio of 4.5x during their latest quarter.
#2 W. P. Carey
W.P. Carey is a REIT that has left a sour taste for many investors due to the reduction in their dividend. I won’t beat a dead horse but with a quarterly dividend of $0.87, the stock is an attractive investment for some. They also increased the dividend by less than 1% this past March. During their latest quarter, the REIT brought in AFFO of $1.14 per share.
This gives WPC a well-covered dividend of roughly 76.3%. This is in comparison to Realty Income’s 75.8%. Now, some may not consider WPC an attractive investment because of the dividend cut due to the spin-off late last year.
This ruined the stock’s long history of dividend increases, but their fundamentals still remain strong. Their balance sheet is solid with a net debt to EBITDA of 5.3x, on the lower end of management’s target range.
This is lower than O’s 5.5x. They also had a higher fixed-charge coverage ratio of 4.7x in comparison to 4.5x for the former. Their occupancy rating was also higher too at 99.1% during their latest quarter. So, despite the punch to the gut, WPC’s fundamentals remain solid.
Valuations
With yields of 5.34% and 6.89% respectively, NNN & WPC also trade at attractive valuations currently. NNN REIT has a forward P/AFFO multiple of 12.64x, below the sector median’s 14.90x. This is likely a reason for the valuation grade of B- for NNN REIT and B for W. P. Carey at the moment.
For the record, I think NNN REIT will see stronger upside than WPC once interest rates are cut for the reasons mentioned in this article. I also touched on this during my last thesis on the stock back in February. However, WPC does have potential and a well-covered dividend.
From now until the end of 2025, where I anticipate interest rates to be much lower by then, NNN offers strong upside of more than 31%. Their earnings are also expected to grow at a rate of 3.1% over the next 3 years. Expected for NNN REIT.
So, while investors wait for potential upside, they also get a well-covered and growing dividend while they wait. To me, NNN REIT is a no-brainer for passive income investors looking a reliable income stream. It is the definition of a S.W.A.N. stock.
For W.P. Carey, they also offer an attractive entry point with a forward P/AFFO multiple of 11.71x and strong upside of 28.52% over the same period. Their earnings are expected to be lower over the next 3 years in comparison to their peer NNN REIT. WPC has an average growth rate of -1.54% in comparison to 3.1% for the former. But this is including the negative growth rate of 9.54% for 2024. In 2025 and 2026 earnings are expected to grow at an average rate of roughly 2.5%.
Although lower, some growth is better than no growth. Moreover, with REITs, they typically see slower growth in comparison to other sectors. But as primarily income vehicles, they remain attractive for those seeking passive income. One thing to note is these valuations are based on their 5-year normal P/AFFO multiples of 16.09x for NNN REIT and 14.55x for WPC.
And although I anticipate higher multiples in the next 6 – 12 months for REITs, there is no guarantee they will return to their prior (multiples). Especially for W.P. Carey. But I do anticipate both to continue paying well-covered and growing dividends for years to come and see some upside in the coming months.
Conclusion
REITs are the perfect investments for retirees looking for reliable and safe income. And although they may have disappointed investors for more than 2 years, I think (investors) will see some strong upside once interest rates are cut; some more so than others as a result of their higher-quality and dividends.
Moreover, investors should be taking advantage of the attractive entry points many REITs present currently. Not only do investors get upside potential, but they also get paid well-covered dividends yielding nearly 6% combined. For conservative, passive income investors, both of these REITs are great alternatives to Realty Income.