For the REIT sector, an improving economy typically means rising commercial property values and the potential to increase rental rates, suggests Tim Plaehn, income expert and editor of The Dividend Hunter.
A significant portion of the REIT sector sees significantly greater benefits from economic growth than they experience from higher interest expense.
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These factors are especially true in the current market. Companies have had several years to prepare for higher rates. This means that well managed REITs have locked in low interest rates with long-term fixed rate debt.
These REITs should be able to improve profit margins by boosting lease rates, even as they keep interest expenses low.
With the recent retrenchment in REIT values, you can find shares with very attractive yields. The next step is to ferret out companies that will grow dividends at greater than the rate of inflation. Here are three to get started with.
MGM Growth Properties LLC (MGP) is a REIT that was spun-off by MGM Resorts International (MGM) in April 2016. In the IPO MGP received ownership to a larger portion of the MGM owned real estate, primarily casino hotel resorts.
The properties are leased back to MGM Resorts on a long-term master net lease. Lease terms are very favorable for MGM Growth Properties. The master lease means that MGM makes a single lease payment and cannot get out of paying for individual properties.
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All new acquisitions from MGM are added to the master lease. The lease includes annual rent escalators and profit sharing from the portfolio resorts.
The MGP dividend has been increased five times since the IPO and is forecast to grow by 8% in 2019. As the name states, this is a growth focused REIT. They have made offers on Las Vegas properties not owned by MGM. The stock currently yields 6.0%.
Hotels are a commercial real estate sector that benefit from economic growth and can quickly pass along higher costs as higher room rates.
Summit Hotel Properties (INN) recently announced very good 2018 results, with expectations of continued growth in 2019. Revenue per Available Room (RevPAR) is the metric to watch with hotel companies.
After two years of flat RevPAR, the metric took started to improve in 2018. Continued profit growth should lead to a 5% to 6% dividend increase this year. The current dividend rate is just 50% of FFO per share.
The continued positive economic outlook should allow INN to grow dividends in the high single digit range. The stock yields 6.3%.
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