In 2006, the MDC added 378 new properties, 100% leased, with an average lease length of 16.7 years and an average lease yield of 8.6%.
The company uses a $300 million revolving credit facility to purchase properties. Once the properties are secure, it issues new stock or bonds to finance the investment over the long term. As a REIT, it can't retain earnings, so it has to finance new properties this way. In 2006, it issued five common stock, preferred stock, and unsecured-bond offerings.
The MDC has an excellent credit rating... as you'd expect from a company with a 37-year history of raising dividends with minimal debt on its balance sheet. This allows it to borrow money at virtually the same rates available to banks, local governments, and the largest American corporations.
Here's another way of thinking about the MDC's business: The sale-leaseback is a loan. The MDC borrows money at investment-grade rates near 6% and lends it at 9% junk rates to its middle-market retailers.
As an aside, the MDC never uses mortgages to finance its property investments. It never has. Nor does it use secured debt. In other words, it uses its excellent credit rating to borrow money, not its property portfolio. This means no one else has a claim on its property. And it frees up more rental revenue to pay monthly dividends. It also allows the MDC to keep a super-conservative, unleveraged balance sheet.
15% Returns with Less Risk than a Bank Account
I said this investment was safer than a bank account or a CD. That's a big claim.
But first consider, your principal is safe. The MDC has a $2.4 billion market cap.
And your money is invested in debt-free property. The company doesn't hold Miami condos or Manhattan lofts... we're buying properties that provide basic human needs. Through wars, inflation, recessions, and weak property markets, your principal stays intact.
Inflation is the reason this investment is much safer than bank accounts, CDs, and Treasury bonds. With these fixed-income investments, your return does not adjust, so over time, inflation undermines your annual receipts.
On the other hand, dividend payouts from the MDC rise about 4.5% a year.
Besides, a bank account may pay interest once a year. A bond pays out twice a year. But the MDC mails you a check every month... a check that got bigger four times in 2007.
Over the last 14 years, shareholders have made almost 30% a year in this stock. I think it's fair to expect total returns around 15% a year going forward.
For one thing, inflation makes property prices rise. That's good for 2% a year.
Second, consumers of basic products, such as cheeseburgers and cigarettes, are not price-sensitive... They don't care if prices rise by a nickel here and a dime there. In other words, the MDC's tenants have pricing power. So, the MDC can bump its rents 1%-2% every year.
Finally, the company's gradual expansion – buying properties that yield 9% with money that costs 6% – should be good for 11% a year.
Property Inflation
2%
Rent Increases
2%
Reinvesting Earnings
2%
Property Acquisitions
9%
Annual Returns
15%
The MDC produces dividends. So we have only one sensible way to value this company: its dividend yield. The dividend yield is a barometer that tells you if a company is expensive or cheap. When the dividend yield is low, you're paying more money per dollar of dividend. When the yield is high, you get more dividend for your money.
The MDC is a transparent company and it never changes its strategy, so frankly, its valuation remains pretty constant. You could have bought the MDC with a 9% yield in 2000, but since 2003, its yield has traded in a narrow band between 4.5% and 6%. Right now, it's about 6.7%. That's cheap.
Action to take: Buy Realty Income Trust (NYSE: O) as long as you can earn a 4.5% yield or higher.
Good investing,
The company uses a $300 million revolving credit facility to purchase properties. Once the properties are secure, it issues new stock or bonds to finance the investment over the long term. As a REIT, it can't retain earnings, so it has to finance new properties this way. In 2006, it issued five common stock, preferred stock, and unsecured-bond offerings.
The MDC has an excellent credit rating... as you'd expect from a company with a 37-year history of raising dividends with minimal debt on its balance sheet. This allows it to borrow money at virtually the same rates available to banks, local governments, and the largest American corporations.
Here's another way of thinking about the MDC's business: The sale-leaseback is a loan. The MDC borrows money at investment-grade rates near 6% and lends it at 9% junk rates to its middle-market retailers.
As an aside, the MDC never uses mortgages to finance its property investments. It never has. Nor does it use secured debt. In other words, it uses its excellent credit rating to borrow money, not its property portfolio. This means no one else has a claim on its property. And it frees up more rental revenue to pay monthly dividends. It also allows the MDC to keep a super-conservative, unleveraged balance sheet.
15% Returns with Less Risk than a Bank Account
I said this investment was safer than a bank account or a CD. That's a big claim.
But first consider, your principal is safe. The MDC has a $2.4 billion market cap.
And your money is invested in debt-free property. The company doesn't hold Miami condos or Manhattan lofts... we're buying properties that provide basic human needs. Through wars, inflation, recessions, and weak property markets, your principal stays intact.
Inflation is the reason this investment is much safer than bank accounts, CDs, and Treasury bonds. With these fixed-income investments, your return does not adjust, so over time, inflation undermines your annual receipts.
On the other hand, dividend payouts from the MDC rise about 4.5% a year.
Besides, a bank account may pay interest once a year. A bond pays out twice a year. But the MDC mails you a check every month... a check that got bigger four times in 2007.
Over the last 14 years, shareholders have made almost 30% a year in this stock. I think it's fair to expect total returns around 15% a year going forward.
For one thing, inflation makes property prices rise. That's good for 2% a year.
Second, consumers of basic products, such as cheeseburgers and cigarettes, are not price-sensitive... They don't care if prices rise by a nickel here and a dime there. In other words, the MDC's tenants have pricing power. So, the MDC can bump its rents 1%-2% every year.
Finally, the company's gradual expansion – buying properties that yield 9% with money that costs 6% – should be good for 11% a year.
Property Inflation
2%
Rent Increases
2%
Reinvesting Earnings
2%
Property Acquisitions
9%
Annual Returns
15%
The MDC produces dividends. So we have only one sensible way to value this company: its dividend yield. The dividend yield is a barometer that tells you if a company is expensive or cheap. When the dividend yield is low, you're paying more money per dollar of dividend. When the yield is high, you get more dividend for your money.
The MDC is a transparent company and it never changes its strategy, so frankly, its valuation remains pretty constant. You could have bought the MDC with a 9% yield in 2000, but since 2003, its yield has traded in a narrow band between 4.5% and 6%. Right now, it's about 6.7%. That's cheap.
Action to take: Buy Realty Income Trust (NYSE: O) as long as you can earn a 4.5% yield or higher.
Good investing,
Tom Dyson
P.S. For the past six months, I've been researching a unique way to collect more income in retirement. You probably won't hear about 801(k) plans anywhere else, but they can generate twice as much as typical IRAs, and you can get started with as little as $25. Click here to read my report.
P.S. For the past six months, I've been researching a unique way to collect more income in retirement. You probably won't hear about 801(k) plans anywhere else, but they can generate twice as much as typical IRAs, and you can get started with as little as $25. Click here to read my report.
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