Monthly Dividend Stock In Focus: Firm Capital Property Trust

Revealed on October tenth, 2024 by Aristofanis Papadatos

Agency Capital Property Belief (FRMUF) has three interesting funding traits:

#1: It’s a REIT so it has a positive tax construction and pays out the vast majority of its earnings as dividends.
Associated: Checklist of publicly traded REITs

#2: It’s a high-yield inventory based mostly on its 8.9% dividend yield.
Associated: Checklist of 5%+ yielding shares

#3: It pays dividends month-to-month as an alternative of quarterly.
Associated: Checklist of month-to-month dividend shares

You possibly can obtain our full Excel spreadsheet of all month-to-month dividend shares (together with metrics that matter like dividend yield and payout ratio) by clicking on the hyperlink under:

Monthly Dividend Stock In Focus: Firm Capital Property Trust

Agency Capital Property Belief’s trifecta of favorable tax standing as a REIT, a excessive dividend yield, and a month-to-month dividend make it interesting to particular person traders.

However there’s extra to the corporate than simply these components. Maintain studying this text to be taught extra about Agency Capital Property Belief.

Enterprise Overview

Agency Capital Property Belief is concentrated on creating long-term shareholder worth by way of capital preservation and disciplined investing.

In partnership with administration and trade leaders, the REIT co-owns a diversified property portfolio that features multi-residential, industrial, internet lease comfort retail and core service supplier skilled area.

Agency Capital Property Belief has a historical past of 36 years, with presence in the actual property markets of Canada and the U.S. As its administration immediately invests in some belongings of the REIT, its pursuits are aligned with these of the shareholders.

Supply: Investor Presentation

Agency Capital Property Belief at the moment has 64 industrial properties with a gross leasable space of 4.4 million sq. ft, pursuits in 5 condominium complexes, and 4 manufactured housing communities.

Because of its strong investing technique, Agency Capital Property Belief proved resilient all through the coronavirus disaster. In sharp distinction to many different REITs, which minimize their dividends, Agency Capital Property Belief saved rising its dividend in its native forex (CAD).

Agency Capital Property Belief at the moment enjoys first rate enterprise momentum however it’s going through a headwind from almost 23-year excessive rates of interest, which have enormously elevated the curiosity expense of the REIT. In 2023, Agency Capital Property Belief noticed its funds from operations (FFO) per unit lower 43% vs. 2021, partly on account of a 50% improve in curiosity expense.

Fortuitously for the REIT, the Fed simply started decreasing rates of interest and expects to scale back them additional, from 4.75%-5.0% to about 2.75%-3.0% after 2026. If the central financial institution executes as per its steerage, it’ll present a powerful tailwind to the outcomes of Agency Capital Property Belief.

Development Prospects

Agency Capital Property Belief goals to develop through strategic accretive acquisitions. It companions with robust trade leaders, who retain property administration, and likewise executes partial acquisitions.

Agency Capital Property Belief can boast of getting a defensive enterprise mannequin due to the excessive credit score profile of its tenants. However, traders ought to be conscious that it is a slow-growth REIT.

Supply: Investor Presentation

Since its inception, in 1988, Agency Capital Property Belief has grown its internet asset worth per unit by solely 57%. In different phrases, the REIT has grown its internet asset worth per unit by 1.3% per 12 months on common since its inception.

You will need to notice that the lackluster efficiency report has resulted partly from the strengthening of the USD vs. CAD. Because the Canadian greenback has depreciated by about 18% over the past decade, it’s evident that Agency Capital Property Belief has confronted a powerful forex headwind in its outcomes over the past decade.

Furthermore, central banks raised rates of interest aggressively within the final two years with a purpose to cool the financial system and restore inflation to their goal vary. Increased rates of interest have elevated the curiosity expense of Agency Capital Property Belief by 50% within the final two years.

As inflation appears to have lastly moderated, central banks are more likely to cut back rates of interest within the upcoming years.

Given the strong enterprise mannequin of Agency Capital Property Belief but additionally its lackluster efficiency report and its forex danger, we anticipate the REIT to develop its FFO per unit by about 2.0% per 12 months on common over the following 5 years.

Dividend & Valuation Evaluation

Agency Capital Property Belief is at the moment providing an above common dividend yield of 8.9%. It’s an attention-grabbing candidate for income-oriented traders, however the latter ought to be conscious that the dividend could fluctuate considerably over time because of the fluctuation of the alternate charge between the Canadian greenback and the USD.

Furthermore, the REIT has an elevated payout ratio of 83%, which enormously reduces the margin of security of the dividend. Moreover, the REIT has an curiosity protection ratio of solely 2.3. This protection ratio is low, significantly given the headwind from excessive rates of interest.

Consequently, traders mustn’t anticipate significant dividend progress going ahead. It is usually essential to notice that the dividend has been frozen over the past three years. Total, the dividend could also be minimize within the occasion of an unexpected downturn, reminiscent of a deep recession.

We additionally notice that Agency Capital Property Belief has a fabric debt load in its steadiness sheet. Its internet debt is at the moment standing at $247 million, which is 160% of the market capitalization of the inventory. The excessive dividend payout ratio, the low curiosity protection ratio, and the fabric debt load of the REIT considerably cut back its resilience to a possible future recession.

In reference to the valuation, Agency Capital Property Belief is at the moment buying and selling for 9.2 occasions its FFO per unit within the final 12 months. Given the excessive debt load of the REIT, we assume a good price-to-FFO ratio of 10.0 for the inventory.

The present FFO a number of is barely decrease than our assumed truthful price-to-FFO ratio. If the inventory trades at its truthful valuation degree in 5 years, it’ll get pleasure from a 1.6% annualized acquire in its returns.

Making an allowance for the two% annual FFO-per-unit progress, the 8.9% dividend and a 1.6% annualized growth of valuation degree, Agency Capital Property Belief may provide a ten.4% common annual whole return over the following 5 years.

That is a pretty anticipated return, although we suggest ready for a greater entry level with a purpose to improve the margin of security in addition to the anticipated return.

Furthermore, the inventory is appropriate just for the traders who’re comfy with the chance that comes from the excessive payout ratio and the fabric debt load of the belief.

Ultimate Ideas

Agency Capital Property Belief has a strong enterprise mannequin due to the competence of its administration and the alignment of pursuits between its administration and its shareholders, as administration invests within the properties of the REIT. This can be a important benefit for the shareholders.

Regardless of its excessive payout ratio of 83%, the inventory is providing an exceptionally excessive dividend yield of 8.9% and therefore it’s a pretty candidate for the portfolios of income-oriented traders.

However, traders ought to concentrate on the dangers associated to the excessive payout ratio and the leveraged steadiness sheet of the belief. If inflation surges once more, then excessive rates of interest will enormously burden the REIT by way of excessive curiosity expense.

Subsequently, solely the traders who’re assured that inflation is not going to recuperate ought to think about buying this inventory.

Furthermore, Agency Capital Property Belief is characterised by extraordinarily low buying and selling quantity. Which means that it’s laborious to ascertain or promote a big place on this inventory.