CPT - Buy These 2 REITs Before 2024 (You'll Be Glad You Did)

2023-12-28 07:00:00 ET

Summary

• Many REITs have experienced a surge in value, but the initial upward momentum may be slowing down.
• Camden Property Trust is a recommended alternative due to its strong fundamentals, historical growth rates, and attractive valuation.
• Agree Realty Corporation is another favorable choice with excellent diversification, tenant quality, and a solid track record.

This article was coproduced with Wolf Report.

These past weeks and months have seen a massive surge upward in many of the real estate investment trusts, or REITs, and investment potentials that we've been beating the drum for some time - almost a year.

Most office REITs are in a position where, while still cheap and with an upside, much of the initial upward momentum might be over, at least in the shorter term.

We're in a place where most of our REIT positions are not just in the green/black, but firmly at a profitable return, even including FX and not including dividends (given that FX for me has normalized in a negative context in the last month).

Overall, we're very happy with the ongoing REIT exposure (Wolf at 14% and Brad at 40%) that we managed to carve out for this year when everything was so cheap.

It's also what has driven an over 20% annual rate of return, despite not investing anything (almost) in tech-based companies, but only in conservative dividend growth and value-based stocks.

From this perspective, we're very pleased.

However, it also begs the question as to what we invest in now as things are getting more expensive.

Do we wait?

Do we look at other sectors?

While we do look at a combined investment coverage in the several hundred companies with price targets and have "BUY" ratings still on over two dozen companies, we also say that there are still REITs that fulfill your investment ambitions, if those investment ambitions include a double-digit growth per year and a solid, competitive yield.

In this article, I'll show you two of our favorites.

Ground rules are important!

As usual, let's set some ground rules to make sure that you don't buy anything in material distress or with issues, or options that don't provide the growth you're looking for or the dividends.

Here are our current rules.

• Fundamental quality (at least BBB or equivalent safety, decent market cap, good management)
• Portfolio diversification in terms of both square footage and ABR.
• Good history in terms of FFO growth and growing their dividend.
• Around 4%, or more than 4% dividend yield.
• A realistic, conservative upside of around double digits or higher

Then you can probably beat inflation while staying safe, and while getting appealing dividend payments from good companies.

1. Camden Property Trust (CPT)

We invest quite a bit in apartment REITs.

Over the last year, we've weighted our investments far more towards the non-West coast options here. This includes Camden - it also includes another that we will show you after presenting you with Camden, but Camden is a very good option for several reasons.

We will show you why.

First , the company has absolutely stellar fundamentals and historical growth rates as well as a beyond-solid track record.

Camden Property Trust is A-rated and has less than 40% long-term debt/Cap. It's also a REIT that, despite everything, still gives you a 4.1%+ dividend yield, which after the recent surge, is really quite good. CPT also has the significant advantage of having A credit from all three credit majors.

More than that, though, it trades at a 14.2x P/FFO compared to a typical valuation of closer to 20-22x P/FFO. Even if you normalize this over 2 decades, the company still trades at over 18x P/FFO.

So, the simple fact is that we can go as conservative as we like here.

We can normalize Camden at 18x P/FFO, and still get 18% market-beating annualized rates of return, based on a very conservative FFO growth rate of 1.79% per year.

And that growth is very likely - because Camden does not miss estimates. It hasn't for over a decade, not with a 10 or 20% margin of error. If anything, the company actually beats estimates 8% of the time.

Camden is surprisingly volatile for this type of REIT. It's coming out of an absolutely incredible bout of overvaluation.

We can find no better example than showing this to confirm to you how "crazy" the market can sometimes be.

It also shows you why we haven't touched Camden until it dropped, and why our position isn't that huge yet - but why we're building it more and more.

We're talking occupancy numbers of over 95.5% from apartments located here.

As you can see, the company's exposure to the West Coast is relatively small - and most of the apartments the company offers are located in what we would consider to be very attractive areas.

The company also has a very attractive average tenant profile - 31 years with a $122k+ annual income and 1.7 average occupants per home.

The company focuses on high-growth markets - both in population and employment growth.

This focus in turn results in the ability to pay a continued attractive dividend that doesn't really put the company's finances in danger, as evidenced by the high credit rating.

The latest results for the company continue to be attractive as well - we can even look at highlights for the YTD.

The company managed to stabilize development communities, commenced leasing at three more, and delivered Q3 2023 same-store rev growth of 4.1%, and NOI of 3.5%. Divestments were also active, and those were in West Coast locations, selling one community in Costa Mesa.

While rent growth rates are definitely going down from their highs in 2021, they're still significantly in the positive here. No matter where you look, the company's worst occupancy doesn't go, as of Q3 2023, below 94% in any market.

The lower number of overall starts is also expected to impact the tightness of the market on a forward basis, and the strong demand for multifamily rental housing here is confirmed, as far as both demographic trends and result trends go.

There's a continued pent-up demand from young adults still living at home, and this is where CPT targets many of its customers, both current and future.

Camden is, we believe, a very good choice for the long term because the company is far from normalization.

Camden dropped from a high of 178 to a low of less than $90/share, marking an almost 50% decline in less than 2.5 years. That was when it was the best opportunity to buy, but even at $96/share, this company still has a significant upside to any logical premium here.

For that, we say that this company fulfills every single criterion we have , and still constitutes a good "BUY" here.

We're both long Camden and we're buying more here.

2. Agree Realty Corporation (ADC)

I can already hear you saying a version of "another ADC recommendation?"

There's a reason for this.

Oftentimes we feel that we're pounding the table and nobody's listening.

This time around, we're going to continually state our stances for these stocks as we see them until we no longer view them as favorably valued - everything to be able to clearly state that, yes, indeed, we have been trying to make this clear.

Why is Agree Realty such a great stock when you have the same portfolio exposure of Realty Income ( O )?

Portfolio and tenant quality is the core of the thesis here.

ADC has even better diversification and tenant quality than Realty Income, and it lacks the "risk" players, such as theaters, that Realty Income has.

The company's CEO, Joey Agree, has made a very clear in several interviews that the company will not compromise on its safety, nor on its strategy to stay away from "specialized" properties, such as auto lubes, theaters, bowling alleys, or anything that can't be easily renovated for a new tenant with a fresh coat of paint and a hammer.

We like this strategy.

It's boring - and we love boring.

When we really "bore down" on ADC, Wolf Report bought the company at less than $55/share. The company is now at $61/share. It might no longer yield 5.4% as it did, but it still yields an impressive 4.79%, paid out in monthly dividends.

The upside for ADC is not just the yield though - that is almost the smallest part, but it still provides you with a solid income.

The argument for investing here is the combined quality and upside , which is something you don't get from a pure debt investment.

As we often state - every type of investment has its purpose and its goals.

We invest in debt, in preferred shares, in common shares. We invest in Tech, we invest in Consumer goods. We invest in different currencies.

Every investment has a purpose, a timeframe, and a realistic upside that we see, and try to get - and statistically, on a 5-10-year basis, we usually get what we want - more or less. Put it like this, out of 398 investments that Wolf Report has made in the last 10 years, he has sold 4 with a loss (Source: Author's Data).

This gives him a decent track record.

This company is one of his highest-conviction buys in the entire REIT space.

It has a superb market cap of over $5B, has returned double digits over the past years, compounding at a rate of 11.3% since IPO over 30 years ago. This is well above where the market has taken the average investment.

It has a history, too - ADC has been around for over 50 years.

And despite what the share price trends might suggest, the company is actually increasing its guidance specifics.

It now owns over 2000+ properties across 49 states, strictly U.S.-based with no international exposure, and over 10% of its income comes in fact from ground leases.

These qualities are reflected in a very attractive 4.5% pre-hedge average interest, and the fact that the company has over 20% of its market cap in additional liquidity, should it choose to use it.

Also, over 10% of the company's income comes only from grocers, with another 8-9% from home improvements. A vast majority of the company's tenants are either countercyclical, e-commerce resistant, or both.

Even if the company has unrated tenants, we would love to hear the argument for why, for instance, the company Aldi is risky.

Ground leases are another big part of the company.

We'd love to hear why this portfolio, as an example, is risky.

The company is expertly managed, and this is not a description we use lightly.

Despite the current ongoing macro, ADC has been continuing to acquire and invest new assets, while also divesting non-core assets. One of the reasons we say that the company's management knows what it is doing is its early divestment of Walgreens (WBA). The company saw the danger in Walgreens even before we did.

But even all of this can, for fundamental investors, pale next to the fundamentals of the debt, which specify no maturity until 2028 or later.

The company has a debt/EV of 25%, with a fixed coverage of 5.1x and a net debt/recurring EBITDA of 4.5x, or 4.1x on the basis of outstanding 2023E equity. There are not many companies with more conservative or fortress-like fundamentals.

This is also why despite the company's limited age, it has managed to score investment-grade BBB from S&P Global. We consider the company realistically worth BBB+ at least, and we have no doubt it will go there eventually.

The one drawback that we see is that future dividend increases are likely to be less than historical ones - but this is a commonality, we would say, among most investments in this sector that aren't relatively fresh.

This is also a company that is heavily traded when it comes to insiders - and those insiders recently did only one sort of trade. They buy.

The CEO/President is a big buyer here, buying shares in the hundreds of thousands of dollars at relatively frequent intervals - but millions are also bought by directors, CFO, Chairmen of the board, CAO, and COO.

In short, anyone who knows anything about the company's inner workings is heavily buying shares. Since the middle of this year, we're talking at least $5M in buys. This is a good sign, as we see it.

Now, unfortunately, you've missed out on the "bottom of bottoms" here.

The company is above 15x P/FFO again, and it requires a premium here to see a good upside. We have no issue assigning the company a premium here.

Here is the premium we assign.

To be clear, this is the price where we would consider what we want to do with our shares of the company - because if you follow our work, you know that we believe every company has a price at which it can, and should, be sold or trimmed.

But that price is far off for Agree Realty.

Aside from all the positives we've mentioned, we want to make it clear, as with Camden, that Agree Realty traditionally does not miss estimates. It hits or beats them.

All of these reasons are why ADC is in our portfolio (at least 2.5% at all times). If it goes below that, we buy more. And if it goes above that, we don't automatically trim.

It's above 3% (for Brad and Wolf Report) at this particular time. While we unfortunately cannot boast a position the size that many of the C-suite or management hold, it's an actual goal of ours to reach a very sizeable position.

Wrapping up

The theses for both of these companies are of positive nature.

We believe that when it comes to both of these REITs, they are likely to outperform over time - that is why we're allocating more capital whenever the possibility arises due to liquidity availability and the like.

Both of these companies clearly fulfill the requirements and demands that we have set out for what REITs we invest in.

Over the past 24 months, we have become even more conservative about the companies where we go in, and we don't foresee that changing.

Why is that?

With inflation surging and rates rising, the last year or so has taught us to focus on quality and value.

It's all about "survival of the fittest" and we want to own stocks that can stand the test of time.

There's no need to chase yield.

There's no need to cut corners.

There's no need to get outside your circle of competence.

There's no need to be too cute!

As always, thank you for reading and commenting.

Happy New Year!

For further details see:

Buy These 2 REITs Before 2024 (You'll Be Glad You Did)