When done right for positive reasons toward positive goals, consistency is a truly beautiful thing.
Defined in part by Dictionary.com as “steadfast adherence to the same principles, course, form, etc.,” consistency forms a path that is steady and sturdy and well-paved. You know where you’ve been, you know where you are, and you know where you’re going.
What’s not to love?
From a logic-only standpoint, there shouldn’t be anything to object about that game plan (again, if the consistency we’re talking about is a positive, profitable kind of predictability). Yet, let’s face the facts here…
We humans don’t operate from a logic-only standpoint. We operate as emotional creatures.
Very, very emotional ones.
That much is evidenced by the very, very true stock market mantra of running on either fear or greed. Prices fall whenever investors start to panic, and they rise whenever investors get their heads and hearts wound around the idea of making a mint.
This is Investor Psychology 101. It’s a firmly established understanding that is hard, if not impossible, to refute.
Plus, perhaps it’s time to admit that we might just be drama queens to boot.
Adrenaline Junkies
In investing – and in life in general – it really is far too easy to downplay the value of consistency. Too many of us believe that consistency is boring, and boring is to be avoided at all costs.
To our own detriment, might I add.
Whether this deeply rooted philosophy is born of nature or nurture is up for debate.
It does seem that, at least to some degree, we are each born with an innate desire for action in some form or another. If that weren’t true, why would we watch as many movies and read as many novels as we do every year?
We’re drawn to that type of fictional friction from a very early age, hence the reason why animation mavens like Disney can make the money they do.
If you don’t think that’s a sign of a drama-seeker, then consider it this way… Would you ever want to watch a movie or read a book about perfect characters in a perfect setting free from conflict?
Don’t kid yourself. The answer is a giant and immediate – maybe even visceral – no. Why? ‘Cause that would be boring.
You can’t even escape the “drama queen” classification if you’re not into the whole fiction scene. After all, what about sports? Even fellow football fans on the winning side of this year’s super bowl have to acknowledge how un-engaged they were with the bout.
It was an all-out snooze-fest. The standard, no-frills chips and dip out on the coffee table were more interesting than the game itself.
No matter your choice stimuli, you’ve got to admit that, deep down inside, you crave a bit more edge-of-your-seat action in your existence. Maybe even some downright drama to keep you feeling alert and alive.
Hold Your Horses. It’s for Your Own Good.
There’s a good side to this desire for action and adventure, of course. This drive for “drama” has led to civilizations being built, inventions being made, and real-life love stories coming together.
In that regard, go right ahead and feed the need for speed, as it were.
But don’t try applying those cravings to investing. You’re much better off sticking with consistency in the form of tried-and-true, steady and safe, dividend-paying REITs.
Essentially, you need to learn to love boring. Unlike the “exciting” investments out there, “boring” is almost assuredly going to love you back.
Stick with what you know to get where you want to be.
This idea was laid out quite well in the November 2011 issue of the Harvard Business Review. That installment included an article by Chris Zook and James Allen titled “The Great Repeatable Business Model.”
In it, they wrote:
The power of a repeatable business model lies in the way it turns the sources of differentiation into routines, behaviors, and activity systems that everyone in the organization can understand and follow so that when a company sets out on a particular path, it knows how to maintain the differentiation that led to its initial success.
Translation: When everyone in a business understands the strong, successful operations model their company grew from in the past, and when they base their current behavior on that same foundational core, they have a better chance of succeeding in the future.
The best of the best REITs work off of that basis. And, even better, they let you stand on that same firm ground by affording you steady, sturdy dividends on a consistent, predictable schedule.
That’s why I’m recommending the five following entities… some of the best-performing dividend payers and growers in the sector.
Consistent Companies for Consistent Profits
Our first dividend stalwart is no other than Tanger Outlets (SKT), the only “pure play” outlet center REIT, with a track record of 26 annual dividend increases in a row. More recently the company reported fourth-quarter and year-end 2018 results and approved a 1.4% increase in the annualized dividend (on its common shares) from $1.40 per share to $1.42 per share.
It’s important for investors to recognize that outlets are the most profitable brick-and-mortar platform, and being a low-cost provider is an important competitive advantage. As department stores close, many retailers are seeking the most economical channels and outlets are an effective tool to lure entry-level, budget-wise customers.
Over the years Tanger has become a highly effective partner - more than a landlord - to the best-in-class brands, and the demand for outlet space is underscored by the overall profitability of the operation. For that reason, Tanger’s business model holds up well during recessions.
The primary driver for Tanger’s model of dividend repeatability can be summed in one word: discipline.
Maintaining a strong balance sheet remains a strategic priority for Tanger and at the end of 2018, approximately 94% of square footage in the consolidated portfolio was not encumbered by mortgages (only $145 million was outstanding under the unsecured lines of credit), leaving 76% unused capacity, or approximately $455 million.
Even with deteriorating fundamentals, Tanger’s management team has done an excellent job managing vacancies. While growth has been weak (1% FFO growth in 2018), Tanger’s capital markets discipline has been the secret ingredient that makes this REIT one of my most recognizable Strong Buy participants.
Source: FAST Graphs
My next steadfast dividend grower is Federal Realty (FRT), the ONLY REIT that is on the highly-coveted “dividend king” list (50 years in a row of dividend growth) and this accomplishment is not only impressive but allows investors to “sleep well at night”.
Federal Realty’s balance sheet continues to improve and is very well positioned from a capital perspective as they head into the next phases of new development in the coming years. Last October, Fitch Ratings affirmed Federal Realty’s ratings, including its A- long-term issuer default rating with a stable.
The ratings and outlook reflect the company’s "consistent and steady" cash flow growth generated from its community shopping centers, as well as the prudent management of its balance sheet and its creative redevelopment and mixed-use development, Fitch said in a note.
Federal Realty is the ONLY publicly-traded shopping center REIT to grow NAREIT FFO per share every year since 2010 and is also one of two retail REITs (out of 24) to grow NAREIT FFO per share every year since 2010. Essentially this simply means that Federal Realty is “cycle tested” as the stalwart REIT has maintained a best-in-class track record of delivering consistent earnings growth.
Federal generated -8.1% returns in 2018 and has bounced back so far in 2019 (+12.7%). Given the year-to-date price appreciation, we have since moved the company back from a Strong to a Buy (current yield is 3.12%).
Source: FAST Graphs
The third model of REIT dividend repeatability is Urstadt Biddle (UBA), a much smaller shopping center REIT with an impressive dividend growth record of 25 years in a row of annual increases. In mid-December the company announced a quarterly dividend increase of $.245 per share, a 2.1% increase from the prior dividend (of $.24 per share). The dividend declared will represent the 196th consecutive quarterly dividend on common shares declared since the company began operating in 1969.
Urstadt Biddle’s properties are differentiated by their concentration in the strong demographic suburbs around New York City, one of the best suburban retail markets in the country. Also the company's focus on necessity-based retail and strong demographics has allowed it to generate higher rent per square foot (the 3rd best in the peer group). The company’s focus on high-barrier-to-entry markets and stable grocery-anchored revenue has allowed the company to maintain very stable occupancy.
Urstadt Biddle’s balance sheet is one of the lowest-leveraged REITs, with aggregate mortgage debt equal to only 27% of total book capitalization. The company’s total debt-to-total assets ratio was 23.8% and the fixed charge coverage ratio was 2.6x.
One of the keys to Urstadt Biddle’s success is that the portfolio currently consists of 84% grocery / pharmacy anchored centers with leading grocery/pharmacy focused tenants. Also the portfolio consists of 82% internet resistant tenants which is becoming vital as the brick and mortar neighborhood retail industry continues to evolve. The company concentrates on smaller properties that, due to their size, are below the radar for larger investors.
Given the relative success of Urstadt Biddle’s dividend record, we find the shares today attractive: the dividend yield is 5.3% and the P/FFO multiple is 14.3x. In 2018 the company returned -6.6% and so far in 2019 shares have returned +8.4%. We maintain a BUY.
Source: FAST Graphs
The next dividend champion “contender” is Digital Realty (DLR), a formidable model of repeatability with an impressive 15 years in a row of dividend growth. Digital is one of the oldest data center REITs in the world, having IPO’d in 2004 with an impressive growth record -the dividend has grown at 12% over that time, basically in line with its adjusted funds from operation or AFFO/share (REIT equivalent of free cash flow and what funds the payout).
This robust growth (even during the Great Recession when 78 REITs cut or suspended their dividends) is courtesy of Digital Realty's competitive advantages that have allowed it to become the second biggest data center REIT in the world and the 8th largest US REIT by market cap.
Digital Realty's first competitive advantage is scale. It owns 198 data centers in 12 countries, in 32 cities, making it second only to Equinix (EQIX) in market share. Those data centers serve over 2,300 corporate clients, including some of the biggest names in finance, technology, and media.
And another competitive advantage is cost of capital: Net Debt/Adjusted EBITDA is 5.2 (sector average 5.8), Interest Coverage Ratio is 5.0 (sector average 3.5), S&P Credit Rating is BBB, and Average Interest Rate is 3.6%. This balance sheet ensures Digital Realty can borrow long-term bonds at rates that are three times below its returns on invested capital and makes it easier to grow AFFO/share more quickly.
Digital returned -2.9% in 2018 and has returned +8.1% year-to-date. Given the blue-chip attributes, we consider Digital an attractive BUY, recognizing that being a low-cost leader is an admirable attribute for this SWAN. Thus, we are maintaining a BUY.
Source: FAST Graphs
Finally, the model of dividend repeatability that also deserves the tagline for dividend supremacy is Realty Income (O). Better known as “the monthly dividend company,” Realty Income recently is a dividend aristocrat, an S&P 500 companies with 25+ consecutive years of annual dividend growth.
The aristocrats have managed to outperform the S&P 500 by 25% annually over 28 years with 18% less volatility, and the key to this success has been falling less during bad years for stocks while keeping up with bull markets (not hitting grand slams but avoiding striking out).
Since its IPO, Realty Income (which was founded in 1969) has managed to not just massively outperform other REITs, but also the S&P 500, the Dow and even the tech-heavy and growth-focused Nasdaq.
Similar to the four other above-mentioned dividend stalwarts, Realty Income derives its competitive advantages from its highly disciplined balance sheet. In 2018, the company was upgraded to an “A-” credit rating and today is just one of nine REITs in America (out of nearly 400) to have an A- or better rating. That’s what allows it to borrow (87% fixed-rate) for an average of 7.4 years at just 3.9%.
Combine that with Realty Income's currently rich shares (pushing $70 per share), and the company enjoys a weighted-average cost of capital of about 4.4% which is how it can profitably buy a whopping $1.8 billion in real estate properties (in 2018) and increase AFFO per share by 4.2% to $3.19.
Keep in mind, blue-chip REITs like Realty Income earn their premium valuation by creating wide moats. This means that “the monthly dividend company” has one of the safest dividends with a modest payout ratio backed by highly stable, recurring and recession-resistant cash flow.
We are very close to trimming shares in Realty Income (our Trim Target is $70.00), recognizing that the way to buy shares and earn historically superb returns from this slow-growing aristocrat, is by buying it at fair value or better. And to be clear, we are not initiating a Sell, as our thesis is rooted in long-term investing - and I will likely own shares in this SWAN for quite some time (maybe forever).
Source: FAST Graphs
In closing: In the book, Repeatability: Build Enduring Businesses for a World of Constant Change, the co-authors explain that “the power of a repeatable model lies in the way it turns the sources of differentiation into routines, behaviors, and activity systems that everyone in the organization can understand and follow so that when a company sets out on a particular path, it knows how to maintain differentiation that led to its initial success.”
The authors go on to explain that the “strongest source of differentiation in a company’s business are its crown jewels.” Benjamin Graham recognized the power of repeatability as he explained in The Intelligent Investor:
One of the most persuasive tests of high quality is an uninterrupted record of dividend payments going back over many years. We think that a record of continuous dividend payments for the last 20 years or more is an important plus factor in the company’s quality rating.
Source: Rhino Real Estate Advisors
Author's note: Brad Thomas is a Wall Street writer, and that means he's not always right with his predictions or recommendations. That also applies to his grammar. Please excuse any typos and be assured that he will do his best to correct any errors if they are overlooked.
Finally, this article is free, and the sole purpose for writing it is to assist with research, while also providing a forum for second-level thinking.
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