Why dividend payouts are important for REITs
Real estate investment trusts (or REITs) like General Growth Properties (GGP) are required to pay at least 90% of their taxable income to investors in the form of dividends or share repurchases. This is a prerequisite for them to qualify as equities. REITs fund their dividend payouts from their rental income paid by tenants occupying their properties.
This is a secure and continuously flowing fund for dividends in the form of rental rates and is directly proportional to inflation.
General Growth Properties (GGP) has been paying dividends to its shareholders consistently in every quarter since it raised its dividend 11.1% during 4Q16 to $0.22. The company also raised its dividend 10% in 3Q16. The annualized dividend paid by GGP equals $0.88 per share.
FFO payout ratio
The funds from operations (or FFO) payout ratio can be defined as the portion of its FFO a company pays as a dividend. It gives investors an insight about the shareholder return of a particular stock, and it’s calculated as the ratio between the dividend per share and diluted FFP per share for a given period.
GGP’s FFO payout ratio was 61% in 1Q17. The company had payout ratios of 47%, 54%, 53%, and 50% in 4Q16, 3Q16, 2Q16, and 1Q16, respectively. The chart above shows the estimated dividend payout trend for the next four years.
General Growth Properties (GGP) also returns value to shareholders in the form of share repurchases. During 2015, the company repurchased ~4.3 million shares worth $109.5 million. The company bought back ~1.9 million shares worth $46.2 million during 2016.
If we consider other REITs by comparing FFO payout ratios, we find that the payout ratio of GGP was in line with other REITs. For example, AvalonBay Communities (AVB) offered an FFO payout ratio of 64.2% in 2016. It was followed by UDR’s (UDR) payout ratio of 64.4% and Essex Property Trust’s (ESS) payout ratio of 56.1%.
GGP forms ~1.5% of the Vanguard REIT ETF (VNQ).
In the next article, we’ll find out how the company performs in terms of leveraging its debt level.