Chambers Street Properties (NYSE: CSG) is a real estate investment trust, or REIT, that owns and operates industrial and office properties. The company leases properties to a diverse group of high-quality tenants, with the main goal of providing a steady, predictable stream of monthly income to shareholders.
Chambers Street currently pays out an annual dividend yield of about 6.3%, which is a pretty attractive income stream. Is the company a good choice for income investors? And could the REIT also be a good fit for investors seeking long-term growth?
Diverse tenants and predictable rental income mean stability
On average, Chambers Street Properties' 15 largest tenants each account for less than 3% of the company's rental income. Not only does Chambers Street have a diverse group of tenants, but the overall quality of those tenants is excellent.
Among the company's major tenants are household names such as Amazon.com, JPMorgan Chase, Clorox, and Raytheon, to name just a few. More than half of the tenants have an investment-grade credit rating, and under 10% have less than an investment-grade credit rating. The rest aren't rated, which is fairly common among smaller and nonpublic companies.
The company's tenants represent 24 different industries, with the largest (financial services) representing 13.2% of Chambers Street's rental income.
Source: company investor presentation.
The portfolio is also geographically diverse, with properties in many major U.S. metropolitan areas, as well as in the United Kingdom, France, and Germany. Other than the New Jersey/New York City metro area, which encompasses about 15% of the company's properties, no other market has more than 9% of the total.
Source: company investor presentation.
Most of the tenants are on triple-net leases, which means the rental income is much more predictable than it would be with, say, residential properties. Under these leases, which generally last for 10 years or so, tenants are responsible for all property taxes, insurance costs, and maintenance on the property. So all Chambers Street really has to do is find a tenant and collect the rent.
Why do we care about monthly dividends?
Obviously, monthly dividends are desirable for investors who rely on their stocks for income to cover their living expenses. It's nice to get a "paycheck" every month, as opposed to every three months.
However, many growth investors don't realize that monthly dividends can actually increase the effect of compounded gains over time by producing higher investment returns from the same exact dividend. Simply put, the more often your returns are compounded, the faster your money will grow.
Let's look at how this could affect Chambers Street Properties' investors. Chambers Street's exact dividend yield is 6.32%. If the company decided to make quarterly dividend payments, the effective annualized yield (the rate your investment compounds over time) would be about 6.47%.
However, since the company pays out monthly, it raises this rate slightly to 6.51%. While this might not sound like much, it can make a substantial difference over time. A $10,000 initial investment compounded over 30 years could mean an extra $1,800 in returns, assuming the stock price appreciates by 3% each year.
Not only does a monthly dividend mean more frequent income for those who need it, but it also gives your long-term performance a nice little boost.
Is it a buy?
I believe it is. The company makes more than enough money to cover its dividend, and I think there could be substantial increases in the future.
REITs support their dividend using funds from operations, which for Chambers Street were $0.17 per share for the most recent quarter, far above the $0.126 the company paid out. Bear in mind that REITs have to distribute at least 90% of their income to shareholders, so if this keeps up, the company will be sitting on an excess of cash.
That's exactly what analysts expect to happen. The company is projeccted to earn $0.68 per share in 2014 and $0.70 per share in 2015. A quick calculation shows that 90% of these amounts is about $0.61 and $0.63, respectively. So we could easily see a nice dividend raise considering the rate at which Chambers Street is making money.
If you have a positive outlook for commercial real estate and rental prices in coming years, Chambers Street might be worthy of consideration, especially if having a steady, growing income stream is important to you.
