A high dividend yield can be both an opportunity and a warning sign at the same time. It can be challenging to determine whether the dividend yield of real estate investment trusts (REITs) is sustainable due to their typically high yields. Whether earnings cover the dividend and whether earnings are rising or falling overall is crucial to determining sustainability. One REIT has what appears to be a sustainable dividend, while the other has a dividend that is a little uncertain.
It is a leading mall REIT that benefits from strong consumer spending. Additionally, the company owns stakes in numerous North American and European retailers as well as a non-controlling stake in Taubman Group. The company owned ownership interests in 230 properties totaling 184 million square feet as of the end of 2022.
As wage inflation has pushed up incomes, consumer spending has been robust despite the rapid rise in interest rates.
As a result, sales have increased. When compared to a year ago, retail sales per square foot increased by 5.6 percent to $753. Since the COVID-19 pandemic, occupancy has increased, reaching 94.9% from 93.4% a year ago.
Funds from operations (FFO) increased 3.8% in 2022 compared to the previous year. Because depreciation and amortization is such a significant deduction from net income that is reported in accordance with generally accepted accounting principles (GAAP).Earnings per share typically understate the company’s capacity to generate cash because depreciation and amortization is a noncash charge—that is, the company does not write a check for it.
Simon recently increased its dividend, and the stock yields 6% at current prices. The company’s FFO per share of $11.87 easily covers the dividend of $7.20 per share. The REIT industry as a whole will continue to be hampered by rising interest rates, but Simon is one of the best-performing retail REITs and customers are in good shape.
Annaly Capital (NLY -1.28%) is a mortgage real estate investment trust (REIT) that invests in mortgage-backed securities, mortgage servicing rights, and whole loans. Annaly invests in debt for real estate; that is to say, mortgages.
The mortgage industry as a whole faced particularly challenging times in the past year due to the Federal Reserve’s decision to raise the federal funds rate to ease inflationary pressures.
Mortgage-backed securities are particularly vulnerable to volatility because of the rapid rise in rates. Mortgage-backed securities lost value as interest rates rose, and Annaly’s interest rate hedges weren’t enough to make up for the portfolio’s losses. At the end of 2022, book value per share was $20.79, down from $31.88 at the end of 2021.
Although Annaly’s dividend yield of 16.9% is impressive, it may not be accurate. The dividends of the majority of mortgage REITs were cut last year, and Annaly’s yield is lower than that of peers like AGNC Investment (AGNC -1.94%). Earnings available for distribution of $0.89 barely covered Annaly’s $0.88 quarterly dividend.
Annaly is exposed to nonguaranteed mortgages, and some of these loans, which are underwritten based on anticipated rental income, may begin taking credit losses in the event of a recession in the United States and a decline in the real estate market. Annaly’s problem is that its extremely high dividend is barely covered, and for it to be sustainable, everything needs to go right.