There are two broad types of real estate investment trusts (REITs), one that owns properties and one that owns mortgages or loans. They are very different types of companies, and most investors should probably stick to property-owning REITs.
An interesting exception to that rule is Hannon Armstrong Sustainable Infrastructure Capital (HASI 2.12%). Here's why this mortgage REIT is different from other mortgage REITs and why its 6.5% yield looks well supported.
Normal and abnormal
Mortgage REITs (or mREITS) mostly own exactly what the name implies, mortgages. In general, mREITs are a lot more complex than property-owning REITs. And there are more risks to consider, given that interest rates play a major role in the mortgage space, as do property market dynamics.
Some mREITs also use debt to buy mortgages that have been bundled together into marketable securities, which means investor sentiment and leverage are additional problems to consider. Hannon Armstrong is a bit different.
Image source: Getty Images.
This mREIT issues mortgages on clean energy assets. The cash flow generated by those assets, meanwhile, is generally backed by long-term power agreements. So there is a significant amount of clarity when it comes to the ability of Hannon Armstrong's customers to cover their mortgage expenses.
And given the gains expected in the clean energy sector, there's likely a long runway for portfolio growth in the years ahead. This is all good news for investors looking to collect Hannon Armstrong's roughly 6.5% dividend yield. That's materially more than the average REIT's yield of 4.3%, using the Vanguard Real Estate ETF as a proxy.
But just how desirable is that yield? Digging a bit into the company's business helps shed some light on that.
Safety and growth
One of the first things that investors look at with a dividend is the payout ratio. In the case of Hannon Armstrong, the key figure is distributable earnings, which came in at $0.53 per share in the first quarter. The first-quarter dividend was $0.395 per share. Thus, the payout ratio was a very comfortable 75%. That leaves plenty of room for adversity before a dividend cut would be an issue.
The interesting part of the story is that the mREIT's portfolio grew by 25% over the past 12 months. It was able to close 18% more deals in the first quarter of 2023 than it did in the same period of 2022.
This is a testament to the strong demand for capital in the fast-growing renewable power space. The company estimates that it has a roughly $5 billion pipeline of deals that it can consider funding. All of those deals won't come to fruition, but it seems likely that robust portfolio growth is set to continue. And that should lead to sustainable dividend growth over time.
HASI dividend per share (quarterly); data by YCharts.
This is all backed by an investment-grade balance sheet and a company that has big plans. For example, management believes it can expand distributable earnings by 10% to 13% a year for the foreseeable future thanks to its sizable business pipeline. That, in turn, will support dividend growth of between 5% and 8%.
Add that to the sizable 6.5% yield, and this differentiated mREIT starts to look very attractive.
Dividend investors will like this mREIT
Generally, conservative investors should avoid mortgage REITs because they are complex, and some of the most notable companies in the space have terrible dividend histories. But Hannon Armstrong is a vastly different animal.
Not only is its growing dividend backed by assets with predictable income streams, but it also has a huge growth opportunity. The stock has fallen as Wall Street's excitement over clean energy has waned, but this clean energy mREIT still looks like an attractive dividend stock regardless of whether or not you have an environmental, social, and governance focus.
