REXR - My Oh My 5 Sweet REIT Buys

2023-10-10 07:05:00 ET

Summary

• Interest rates have risen due to a stronger-than-expected economy and excess savings from pandemic stimulus.
• The jobs report was a blowout, sending interest rates soaring once more.
• REITs have fallen 30%, just like they did from 1972 to 1974. And for the rest of the decade, with interest rates climbing to 16%, REITs soared over 700%.
• Over 51 years, just 2% of REIT returns are explained by interest rates. Now is the time for long-term REIT investors to cash in on the "rates up REITs down" hysteria, which is a historical lie.
• These 5 REITs are the fastest growing blue-chip REIT bargains you can safely buy today. They offer a very secure 3.2% yield, 50% upside potential in the next two years, and 420% return potential in the next decade, 3X more than the S&P 500.

Interest rates have been soaring in recent weeks as the market adapts to an economy far stronger than almost any economist thought possible, given 5.25% worth of rate hikes in 18 months.

Why is that? Most likely, more money than expected in the economy.

Estimates for the excess savings from $9 trillion in Pandemic stimulus have risen by about $750 billion. That's about five extra months of consumer spending.

That's likely why the jobs report came in at a blistering 366K on Friday, twice the 170K economists were expecting.

We had revisions from the two previous months, raising the 3-month average to 266K net jobs per month, equal to the 12-month average.

In other words, in the last year, there isn't a sign that hiring has slowed any from the Fed's rate hikes.

However, all that extra money in the hands of consumers means that the Fed is likely to have to go higher for longer.

The bond market remains 97% convinced that a recession is coming next year and that the Fed is done hiking. The first cuts are expected next June, defying the Fed's bold call for one more rate hike in November and then 12 months without any cuts.

Sweet REIT Bargains Are All Around Us

REITs are the 3rd best-performing asset class since 2008 but the most volatile. Volatility is your best friend if you're a patient long-term income growth investor.

When prices crash ferociously, yields go up, even among the safest dividend blue-chips.

REITs are down 30% off their highs, and that's true for even the bluest of blue-chips, aristocrats like Realty Income (O) and Dividend Kings like Federal Realty (FRT).

This is the worst bond bear market in over 50 years.

And that's why now is the perfect time to start buying the world's best REITs.

In 2020, REITs were the worst-performing asset at -5% returns. In 2021, they delivered 42% returns, the best asset returns on Wall Street.

Be greedy when others are fearful." - Warren Buffett.

15% of the time, when rates go up, REITs fall; 85% of the time, they rise.

That's because a strong economy means rising rents and stock prices are a function of cash flow and dividends, not just interest rates.

Ok, but maybe this time is different. What if this is a stagflation period like the 1970s?

Take a look at the 1970s. When inflation averaged almost 8%, rates hit an all-time high of almost 17%.

Yes, REITs suffered for two years. And then what did they do?

REITs fell about 30%... just like now.

And then, after 10 years of the worst inflation in history, REITs had... almost quadrupled in value.

• 151% inflation-adjusted return.

And that's with buying and holding. REIT investors in 1971 had no idea that inflation was coming. They had no idea that REITs were about to fall 30%. And it didn't matter one bit.

But who knew that REITs were set to soar? The smart income investor in 1974 who had just seen REITs fall 30%!

Buy when there's blood in the streets, even if the blood is your own. Baron Rothschild

After REITs had fallen 30% by 1974, they soared 718% by 1984.

• 341% after inflation = 16% annualized inflation-adjusted returns.

In other words, the last time REITs fell this much due to rising rates, they more than quadrupled in the coming decade, adjusted for inflation.

In the last 51 years, interest rates have explained... 2% of REIT returns. And the correlation is ever so slightly positive.

"Rates up REITs down" is statistically a long-term lie. Don't buy the hype unless you want to lose money.

Investment Spread Matters, Interest Rates Are Irrelevant

(Source: NAREIT.)

Imagine you could only see the return column, not the interest rate column. Could you tell which decade had the highest interest rates?

How about the decade that was bookended by two 50+ market crashes?

How is this possible? How can REITs do best when rates are averaging almost 11% and do so much worse when they are 80% lower? Because interest rates don't matter to blue-chip REITs.

• investment spread drives growth, not rates
• cash flow yield on new properties - weighted average cost of capital.

If rates go up 5% and cash flow yields on new properties go up 5% too, because property prices fall due to higher rates, then guess what? The profitability for REITs stays the same.

Their growth outlook doesn't change. That is what Wall Street is missing right now. It's fixated on one side of the profit equation, while blue-chip REITs report similar or even improving investment spreads.

Here is just one example from Realty Income about how investment spreads are stable over time. That's why it's table-pounding time for REITs. Wall Street is freaking out for now, and when these REITs prove themselves in the coming months, they are likely to spring back to long-term historical market-determined fair value (about 25% higher for the sector).

My point is that if you have ever wanted to buy the world's best REITs, including the growth darlings of the sector, now is the time.

And I just proved it statistically, with facts. Not opinion, no speculation, but pure math and facts. That's how the nerds like me roll, and to paraphrase Jesus, "The geeks shall inherit the earth."

My Favorite Fast-Growing REIT Bargains

Here is how I used the Dividend Kings Zen Research Terminal to find the best growth REIT bargains right now.

From 504 stocks in the Dividend Kings Master list to four 5+% yielding non-speculative investment grade, non-speculative REITs.

All in one minute, thanks to the DK Zen Research Terminal. This is how I find all my investment ideas.

We have top-quality non-speculative REITS with very safe dividends and the best long-term total return potential.

5 Sweet REIT Bargains For A Rich Retirement

This is a reminder that this is a screen for the highest total return potential REITs.

• Sweetest REIT bargains for very safe yield
• Sweetest REIT bargains for deepest value .

Yield, value, and finally, growth and total returns. So here they are: the top 5 REIT bargains for the rich retirement, maximizing long-term income and returns.

I sorted these by long-term total return potential and linked them to further research reading.

1. American Tower (AMT)
2. Equinix (EQIX)
3. Digital Realty Trust (DLR)
4. Rexford Industrial Realty (REXR)
5. Prologis (PLD).

Fundamentals Summary

• yield: 3.3%
• dividend safety: 93% very safe (1.35% dividend cut risk)
• overall quality: 93% medium-risk 13/13 Ultra SWAN
• credit rating: BBB stable (7.5% 30-year bankruptcy risk)
• long-term growth consensus: 11.8% vs 6% REIT sector
• long-term total return potential: 15.2% vs 10.2% S&P 500
• discount to fair value: 23% discount (strong buy) vs 5% overvaluation on S&P
• 10-year valuation boost: 2.7% annually
• 10-year consensus total return potential: 3.3% yield + 11.8% growth + 2.7% valuation boost = 17.9%
• 10-year consensus total return potential: = 419% vs 130% S&P 500.

In 10 years, analysts think these 5 REITs could turn $1 into $5.19, about 3X better than the S&P 500.

Historical Returns Since 2004

17% annual income growth since 2005, sector-leading dividend growth.

Future consensus dividend growth is 13% to 17%.

Consensus Total Return Potential Through 2025

• if and only if each company grows as analysts expect
• and returns to historical market-determined fair value
• this is what you will make.

American Tower

Equinix Digital Realty

Digital Realty

Rexford Realty

Prologis

S&P 500

S&P consensus total return potential: 20% through 2025 or 9% annually.

These fast-growing REIT bargains: 49% or 19% annually.

2.5X the S&P's consensus return potential and almost twice the yield with 50% better long-term growth prospects.

Bottom Line: If You're A REIT Investor Not Buying REITs Now, You're Doing It Wrong

I don't make short-term forecasts because it's impossible to do consistently well.

In the Short-Term Fundamentals Don't Matter, In The Long Term They Are The Only Thing That Matters

(Source: JPMorgan, Fidelity, Bank of America, Princeton, RIA.)

Are rates likely to start falling soon? The bond market thinks it's a 96% probability.

And if the bond market is right, the same REITs that have been the most hated sector will suddenly become coiled springs.

But I don't care about helping you make 50% in the next two years. I want to help you make the 420% returns these REITs can achieve over the next ten years.

AMT, EQIX, DLR, REXR, and PLD are the growth champs of the REIT sector. They have strong balance sheets, excellent management, and wide moat access to low-cost capital.

That is why they should thrive in this rate environment, just as they did during previous periods of higher rates.

For further details see:

My Oh My, 5 Sweet REIT Buys