Real estate investment trusts are dependable income vehicles for investors who seek to build a sizable nest egg for retirement. Lexington Realty Trust (NYSE:LXP) is such a promising income vehicle and focuses on commercial properties across the United States. Lexington Realty Trust convinces with a highly diversified real estate portfolio, a straight dividend record, a low valuation and further growth potential.
At the end of the day, REIT dividends are the result of a prudently managed and diversified real estate portfolio.
As such, investors should always pay close attention of whether a REIT, whether residential or commercial, has a high degree of geographic and tenant diversification. The more a REIT is diversified, the more sustainable its dividend stream is likely to be.
Lexington Realty Trust invests in single-tenant commercial properties and a variety of property types such as office, industrial, retail and others. Its most important tenant accounts for only 4.2% of base rent while its top 10 tenants account for only 27.1% of base rent. More than 40% of Lexington's revenue base originates from investment grade rated tenants.
The diversified REIT also has a large geographic footprint and is represented with investment properties in nearly every state in the United States.
Lexington's high degree of tenant, property and geographic diversification materially lowers its risk profile and supports at least moderate dividend growth.
Of course, one of the main selling points of REITs is how much it pays out to shareholders on a regular basis. Lexington Realty Trust presently shells out $0.68 annually to investors which equates to a healthy dividend yield of more than 6%. And dividends are likely to increase in the future, just like they did in the past.
Lexington Realty Trust's dividend history stretches back to the early 1990s. Even though its record is not as straight forward as the dividend record of Realty Income, for instance, the REIT still offers investors attractive distribution growth prospects.
3. Low valuation
Compared to other estimated 2014 FFO multiples, Lexington Realty Trust still appears to be cheap. Pure industrial REITs trade at a relatively high multiple of 17.6 times funds from operations.
On the other hand, office REITs and net lease REITs trade at approximately 15.0 and 13.4 times funds from operations respectively, but Lexington Realty Trust wins those two valuation comparison contests, too.
As part of its first quarter earnings release, Lexington Realty Trust reaffirmed its fiscal year 2014 adjusted FFO guidance of $1.11 to $1.15 per share. Based on a mid-point AFFO of $1.13 per share, Lexington Realty Trust currently trades at only 9.9 times AFFO.
Put differently, Lexington Realty Trust can currently bought at a more than 10% AFFO yield and a 6% dividend yield leaving many other REITs in the dust.
The Foolish Bottom Line
Lexington Realty Trust is an interesting diversified income play with a lot of potential going forward.
Its low valuation makes sure, that investors get an attractive initial dividend yield of more than 6% while the real estate asset class should be doing reasonable well in an expanding U.S. economy.