Perhaps that is a bit of a trick question, since relatively small single-tenant triple-net REITs: $2.6 billion market cap Lexington Realty Trust (LXP 0.26%), $1.75 billion Select Income REIT (NYSE: SIR), and $1.3 billion STAG Industrial (STAG 0.08%) all appear to be poised for growth.
In fact, all three REITs have managed to steadily grow funds from operations, or FFO, which are used to pay investors a competitive dividend while maintaining a healthy balance sheet.
However, a closer look may reveal some important differences when it comes to choosing the right dividend stock for your portfolio.
Tale of the tape
Why own single-tenant triple-net REITs?
One reason why the single-tenant triple-net lease model is so popular with investors is that it is simple and straight-forward to understand. The REIT acting as the landlord leases a facility to a company who is responsible for paying: insurance, taxes, and almost all repairs, in addition to the monthly rent check.
There is relatively little management involved so it is easy to grow this business model by bolting-on more properties as long as the tenants are credit-worthy, and have a good operating history. This is important, because these leases are often for 10, 15, even 25 years or more.
Three different approaches
STAG Industrial is a bit of a lone wolf hunting all over the U.S. for mission critical single-tenant industrial and distribution warehouse buildings. This REIT does not butt heads with industrial REIT rivals such as industry giant Prologis, or DCT Industrial, because STAG pursues a unique strategy of seeking out Class B assets in secondary markets.
This has resulted in STAG acquiring properties with a high cap rate of ~9%. STAG announces acquisitions on a monthly basis, and pays investors a monthly dividends as well.
Since these facilities are located in smaller markets, investors should keep a close tabs on lease renewals, and vacancies. So far, so good.
Select Income REIT has a huge upside because 40% of its portfolio of assets are triple-net land leases surrounding Pearl Harbor, on the island of Oahu, Hawaii.
These leases are reset, or marked-to-market every five or 10 years, with increases that have averaged 37%. The balance of the assets are 37 office and industrial single-tenant triple-net facilities, consisting of over 8.2 million square feet located on the U.S. mainland.
It has a rock-solid balance sheet and currently pays a ~6.5% dividend yield. However, this REIT is externally managed by controversial RMR, or REIT Management & Research. Are the ~6.5% dividend and Hawaii upside worth the risks?
Lexington Realty is not only diversified geographically, but it has a diversified asset mix as well. This mixed asset portfolio may be the reason that Lexington is trading at a relatively low FFO multiple compared to pure-play industrial, office, and net lease REITs.
Just under 50% of Lexington assets are either office or multi-tenant. This could be the fly in the ointment.
Lexington Realty asset mix
Business models where cash flows are harder to predict
Multi-tenant properties require additional management and often require the landlord to build-out the space or offer a cash allowance for the tenant to reconfigure the space when it becomes vacant.
Office buildings often have a much higher degree of tenant finishes and build-out requirements than other asset classes. If there is a significant amount of vacant office space in a market, or ample raw land which can easily be entitled to build more office space, the tenants will have the upper hand when it comes time to negotiate a lease renewal.
The Lexington asset mix did not pass the stress test of the Great Recession, forcing the REIT to slash dividend payments to shareholders.
However, in Lexington's defense, only much larger triple-net industry stalwarts Realty Income, National Retail Properties, and W. P. Carey did not cut dividends when the U.S. economy took a nosedive.
Investor takeaway
Is the glass half-full for Lexington Realty? Is it undervalued relative to other pure-play REITs or will its office assets be a drag on earnings?
If you believe in its business model, Lexington would be a good choice for your portfolio, currently yielding ~6%.
STAG Industrial reports acquisitions and pays dividends each month. Buying industrial buildings in secondary markets has been a great strategy, but will its shorter average lease terms a blessing or a curse when it comes time to renew the leases?
Since its IPO, STAG has been on a growth tear, and currently pays a dividend over 5%.
Select Income REIT has a lot of eggs in the Hawaii land basket, leasing over 17 million square feet to over 200 tenants. It has been hampered by a boardroom tug-of-war that has only recently been won by external manager RMR.
Investors will have to decide if its strong balance sheet and high ~6.5% dividend yield outweigh the risks.
