Written By: Brad Thomas As I prepared for Thanksgiving this year, I didn’t hunt wild turkey on the plains, but rather sought a handful of Blue Chip REITs, to serve up for your portfolio.
Here are my notes - with straight-talking REIT investing principles, realities - and some bromides:
1. Well-capitalized balance sheets reduce a REIT’s exposure to interest rate movements.2. Limited use of debt to finance acquisitions in recent years, combined with the low level of market interest rates, has pushed interest expense as a share of net operating income to the lowest on record, and has given companies a sound financial position to take advantage of investment opportunities that may arise in the years ahead - while also providing a solid cushion against rising interest rates or any unexpected future market developments. That’s a long sentence, worth re-reading.3. Investors who diversify their portfolios have historically had a better chance of ending up with higher returns as
diversification reduces portfolio volatilityand mitigates losses from any one security or asset class.4. REITs, as part of a diversified portfolio, offer a distinct asset class that demonstrates low-to-moderate correlation with other sectors of the stock market, as well as to bonds and other assets. In other words, REIT returns have tended to zig while returns of other assets have zagged, smoothing a diversified portfolio’s overall volatility.5. REITs are great diversifiers because you can mitigate concentration risk geographically and by property sector because each property sector has its own economic headwinds and tailwinds (catalysts).6. As a dedicated REIT analyst, my goal is to
help you navigate these cycles to optimize performance, while always protecting principal at all costs.7. The upcoming picks were selected, in part, due to their dividend safety, balance sheet strength, earnings growth, diversification and management - all important attributes.8. These are blue-chip picks, from my slightly wider collection of “SWANs” – REITs that allow you to “Sleep Well At Night.” These come, one each, from the Mall, Healthcare, and Data Sectors; and two Triple Net Lease REITs.9. Timeless wisdom should not be discounted, but rather, mined for gold. As a value investor, I agree with Benjamin Graham who summarized his philosophy by stating intelligent investing consists of analyzing potential purchases according to sound business principles. This includes an understanding of what you are doing, making your own decisions, ensuring that you are not risking a substantial portion of your original investment, and sticking to your own judgments without regard to market opinion.10. As Mr. Graham wrote, “You are neither right nor wrong because the crowd disagrees with you. You are right because the data and reasoning are right.”11. Five Blue Chip REITs to feast on:Mall REIT
Simon Property Group ( (
SPG[NYE] -
$181.73 Trade )) has scale advantage and cost of capital advantage. Moat well-defined, and management team has maintained strict discipline to drive shareholder returns. Does excellent job re-leasing space to new tenants, and possesses pricing power with high-quality properties. Reasonable debt levels, balanced debt maturity schedule, solid fixed charge coverage ratio. Among best unsecured debt ratings in REIT industry, underscores balance sheet strength. Well-capitalized to re-develop Sears fleet. No concerns related to dividend safety, 10% increase over last year; current yield is 4.23%.
Ventas ( (
VTR[NYE] -
$62.00 Trade )) owns approximately 1,200 healthcare assets, focuses on high-quality real estate well-located in attractive markets in U.S., Canada, United Kingdom, with high entry barriers. Partners with top operators in each asset class - leaders in their sectors and well-positioned for growth. Primary competitive advantages: scale and cost of capital advantage. Balance sheet in the best shape ever. Expect company to capitalize on liquidity, possibly acquiring a large portfolio or REIT in near future. While senior housing muted growth, seems cycle is turning around, and well-positioned to benefit from aging population demographics driving the industry. Dividend yield is 5.11% well-covered by FFO.Triple Net Lease REIT
Realty Income ( (
O[NYE] -
$63.68 Trade )) has increased its moat capacity using same levers: cost of capital and scale. Functions more like investment bank for corporate tenants that generate very sustainable revenue (Walgreens, CVS, 7-Eleven, Home Depot). Credit upgraded to “A,” by two rating agencies a big plus. Navigated store-closing risks by investing in necessity-based retailers including dollar stores, drugstores. 49-year operating history. 579 consecutive common stock monthly dividends, increased 98 times since 1994’s public listing. Dividend yield is 4.14% well-covered by AFFO.Related:
Consumer Non-Cyclicals Sector 4Q18: Best and WorstData Sector REIT
Digital Realty Trust ( (
DLR[NYE] -
$111.56 Trade )) also has structural advantages that protect it from competitors. Has ambitious growth targets for next several years, expected to achieve from a global connected sustainable framework. Footprint of 203 properties in more than 30 global markets (4 continents, 11 countries). Supports data center, colocation and interconnection strategies of more than 2,300 firms across its secure, network-rich portfolio of data centers throughout North America, Europe, Asia, Australia. Third quarter: announced entry into Latin America acquiring Ascenty for $1.8 billion for leading data center platform in rapidly growing market. Dividend yield is 3.61%.Triple Net
W.P. Carey’s ( (
WPC[NYE] -
$67.44 Trade )) year-over-year AFFO growth was driven primarily by higher real estate revenues from new acquisitions and solid same-store growth keeping very high percentage of annualized base rent (ABR) generated from leases with either fixed rent bumps or increases to high inflation. Positions company well for further inflation, in U.S. the last year and Europe the last few months. Completed merger with CPA:17, increasing size of company to benefit from economies of scale. Also helps wind down investment management business & effectively remove most of complexity risk to become a 100% pure-play net lease REIT. Dividend yield is 5.98%.To follow the REIT industry every month, as I review over 150 choices, separating SWAN & victors, from, the, um, turkeys, across more than 17 sectors… subscribe to my newsletter,
Forbes Real Estate Investor, please click here. Makes a great holiday gift!
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