Published on March 20th, 2023 by Aristofanis Papadatos
Firm Capital Property Trust (FRMUF) has three appealing investment characteristics:
#1: It is a REIT so it has a favorable tax structure and pays out the majority of its earnings as dividends.
Related: List of publicly traded REITs
#2: It is a high-yield stock based on its 8.8% dividend yield.
Related: List of 5%+ yielding stocks
#3: It pays dividends monthly instead of quarterly.
Related: List of monthly dividend stocks
You can download our full Excel spreadsheet of all monthly dividend stocks (along with metrics that matter like dividend yield and payout ratio) by clicking on the link below:
Firm Capital Property Trust’s trifecta of favorable tax status as a REIT, a high dividend yield, and a monthly dividend make it appealing to individual investors.
But there’s more to the company than just these factors. Keep reading this article to learn more about Firm Capital Property Trust.
Business Overview
Firm Capital Property Trust is focused on creating long-term shareholder value through capital preservation and disciplined investing. In partnership with management and industry leaders, the REIT co-owns a diversified property portfolio that includes multi-residential, industrial, net lease convenience retail and core service provider professional space.
Firm Capital Property Trust has a history of 35 years, with presence in the real estate markets of Canada and the U.S. As its management directly invests in some assets of the REIT, its interests are aligned with those of the shareholders.
Source: Investor Presentation
Firm Capital Property Trust currently has 66 commercial properties with a gross leasable area of 4.3 million square feet, interests in 5 apartment complexes, and 2 manufactured housing communities.
Thanks to its solid investing strategy, Firm Capital Property Trust has proved resilient throughout the coronavirus crisis. In sharp contrast to many other REITs, which cut their dividends, Firm Capital Property Trust kept growing its dividend in its local currency (CAD).
Firm Capital Property Trust currently enjoys decent business momentum but it is facing a headwind from rising interest rates. In the third quarter of 2022, the trust grew its same-store net operating income by 1% and its revenue by 12% over the prior year’s quarter. However, its adjusted funds from operations (FFO) per unit dipped 8%, primarily due to higher interest expense.
Growth Prospects
Firm Capital Property Trust aims to grow via strategic accretive acquisitions. It partners with strong industry leaders, who retain property management, and also executes partial acquisitions.
Firm Capital Property Trust can boast of having a defensive business model thanks to the high credit profile of its tenants. On the other hand, investors should be aware that this is a slow-growth REIT.
Source: Investor Presentation
Since its inception, in 1988, Firm Capital Property Trust has grown its net asset value per unit by only 55%. In other words, the REIT has grown its net asset value per unit by 1.3% per year on average since its inception.
It is important to note that the lackluster performance record has resulted partly from the strengthening of the USD vs. CAD. As the Canadian dollar has depreciated by about 30% over the last decade, it is evident that Firm Capital Property Trust has faced a strong currency headwind in its results over the last decade.
Moreover, central banks are raising interest rates aggressively in order to cool the economy and thus restore inflation to their target range. Higher interest rates are likely to significantly increase the interest expense of Firm Capital Property Trust in the upcoming quarters. This is an important headwind to consider going forward.
Given the solid business model of Firm Capital Property Trust but also its lackluster performance record, its currency risk and the headwind from rising interest rates, we expect the REIT to grow its FFO per unit by about 2.0% per year on average over the next five years.
Dividend & Valuation Analysis
Firm Capital Property Trust is currently offering an above average dividend yield of 8.8%. It is thus an interesting candidate for income-oriented investors, but the latter should be aware that the dividend may fluctuate significantly over time due to the fluctuation of the exchange rates between the Canadian dollar and the USD.
Moreover, the REIT has an elevated payout ratio of 91%, which greatly reduces the margin of safety of the dividend. Furthermore, the REIT has an interest coverage ratio of only 2.5. This coverage ratio is too low, particularly given the increasing interest expense amid rising interest rates. As a result, investors should not expect meaningful dividend growth going forward and should be aware that the dividend may be cut in the event of an unforeseen downturn, such as a deep recession.
We also note that Firm Capital Property Trust has a material debt load in its balance sheet. Its net debt is currently standing at $239 million, which is 155% of the market capitalization of the stock. The high dividend payout ratio, the low interest coverage ratio, and the material debt load of the REIT significantly reduce its resilience to a potential future recession.
In reference to the valuation, Firm Capital Property Trust is currently trading for 10.3 times its FFO per unit in the last 12 months. Given the high debt load of the REIT, we assume a fair price-to-FFO ratio of 11.0 for the stock. Therefore, the current FFO multiple is slightly lower than our assumed fair price-to-FFO ratio. If the stock trades at its fair valuation level in five years, it will enjoy a 1.4% annualized gain in its returns.
Taking into account the 2% annual FFO-per-unit growth, the 8.8% dividend and a 1.4% annualized expansion of valuation level, Firm Capital Property Trust could offer a 10.5% average annual total return over the next five years. This is an attractive expected return, though we recommend waiting for a better entry point in order to enhance the margin of safety as well as the expected return. Moreover, the stock is suitable only for the investors who are comfortable with the risk that comes from the high payout ratio and the material debt load of the trust.
Final Thoughts
Firm Capital Property Trust has a solid business model thanks to the competence of its management and the alignment of interests between its management and its shareholders, as management invests in the properties of the REIT. This is a significant advantage for the shareholders.
Despite its high payout ratio of 91%, the stock is offering an exceptionally high dividend yield of 8.8% and hence it is an attractive candidate for the portfolios of income-oriented investors.
On the other hand, investors should be aware of the risks related to the high payout ratio and the leveraged balance sheet of the trust. If high inflation persists for much longer than currently anticipated, then higher interest rates will greatly burden the REIT through high interest expense. Therefore, only the investors who are confident that inflation will soon revert to normal levels should consider purchasing this stock.
Moreover, Firm Capital Property Trust is characterized by extremely low trading volume. This means that it is hard to establish or sell a large position in this stock.
Don’t miss the resources below for more monthly dividend stock investing research.
- The Monthly Dividend Stocks List
- 20 Highest Yielding Monthly Dividend Stocks
- 10 Cheapest Monthly Dividend Stocks
- 10 Safest Monthly Dividend Stocks
- 3 Top ‘Hold Forever’ Monthly Dividend Stocks
And see the resources below for more compelling investment ideas for dividend growth stocks and/or high-yield investment securities.
- Dividend Kings: 50+ years of rising dividends
- Dividend Champions: 25+ years of rising dividends
- Dividend Aristocrats: 25+ years of rising dividends and in the S&P 500
- Dividend Achievers: 10+ years of rising dividends and in the NASDAQ
- High Dividend Stocks: 4%+ dividend yields
- Blue Chip Stock: Kings, Aristocrats, and Achievers
- MLPs: List of MLPs and more
- REITs: List of REITs and more
- BDCs: List of BDCs and more