Why dividends matter
REITs (real estate investment trusts) such as Post Properties (PPS) must pay at least 90% of taxable income to investors as dividends. For REITs, dividends come primarily from the relatively stable and predictable stream of rent paid by tenants who occupy their properties. Rental rates usually rise during periods of inflation because many lease rates are tied to inflation. As a result, REIT dividends are protected, to a large extent, from the long-term effects of rising prices.
Post Properties’ higher dividends
As we saw in the previous part of this series, Post Properties’ (PPS) FFO decreased to $2.44 per share in 2014, compared to $3.01 per share in 2013. Despite its decline in FFO, the company increased its dividend by a whopping 25.8%, reaching a total of $1.56 per common share in fiscal 2014, compared to $1.24 per share in 2013. This increase represents the highest dividend paid by the company during the past seven years. With the increase in the first three quarters of 2015 dividend to $1.28, Post Properties is on course to pay around $1.72 per share this fiscal year.
FFO payout ratio
A company’s FFO (funds from operations) payout ratio equals its dividend declared per common share divided by its diluted FFO per common share for a given period. So the FFO payout ratio provides investors with relevant and useful information because it measures the portion of FFO being declared as dividends to shareholders.
We should note that Post Properties’ FFO payout ratio, which was 64.5% in 2010, declined to 34% in 2012. However, the company’s FFO improved to 40.9% in 2013. After another sharp dividend rise in 2014, the company’s FFO payout ratio has improved to 63.8% as of the end of fiscal 2014.
Post Properties’ payout ratio is in line with most of its peers in the industry. For example, AvalonBay Properties (AVB) offered an FFO payout ratio of 64%. Meanwhile, Essex Property Trust (ESS) offered an FFO payout ratio of 62.15% while Equity Residential (EQR) offered an FFO payout ratio of 60.7%.
The SPDR DJ Wilshire Global Real Estate ETF (RWO) invests 0.32% of its total portfolio in Post Properties.
Continue to the next part of this series for a discussion of Post Properties’ debt position.