2023-04-20 07:00:00 ET
Summary
- In the current environment, with unprecedented levels of market uncertainty, the importance of cash cannot be overstated.
- So you’re sitting on cash and waiting on the right time to pounce, right?
- Today I’m going to provide a list of 5 SWANs that are reasonable buys or better.
When you hear the term “cash is king” what do you think?
Do you wish you had more cash to invest?
Or maybe you’re swimming in cash and want to own more cash cows?
Maybe both?
In that case, you came to the right place, because I’m going to provide you with a list of three of my favorite real estate investment trusts, or REITs, that exemplify the “cash is king” concept.
In the current environment, with unprecedented levels of market uncertainty, the importance of cash cannot be overstated. And if you’re a buy-and-hold investor like me, finding cash-rich REITs should be at the top of the list.
So you’re sitting on cash and waiting on the right time to pounce, right?
I don’t blame you for waiting on a better margin of safety.
Remember that REIT investors should be focusing on companies that have strong balance sheets that include access to a lot of cash, and that’s why I always look to own these so-called cash cows.
REITs that are “cash cows” create value for their shareholders by investing cash to generate more cash in the future, and the amount of value they create is the difference between cash inflows and the cost of the investments made.
The ultimate sign that a REIT is generating steady and growing cash flows is when it’s able to consistently increase its dividend.
By investing in the strongest REITs that have solid debt metrics, well-diversified tenants, and modest payout ratios, the investor has the best opportunity to capitalize on high levels of cash flow that will in turn, super-charge total returns.
Today I’m going to provide a list of 5 SWANs that are reasonable buys are better.
Prologis, Inc. ( PLD )
PLD is an industrial REIT that specializes in logistics real estate and owns or has an ownership interest in 5,489 properties and development projects located in 19 countries covering approximately 1.2 billion square feet.
PLD leases their logistics facilities to around 6,600 customers and operates primarily across two main segments: business-to-business and retail online fulfillment.
Prologis released first quarter 2023 results on April 18, 2023. Net income per diluted share was $0.50 for the first quarter of 2023 while it was $1.54 for the same quarter last year.
PLD attributes the fall in net income to significant gains on dispositions in 2022, while they had very few in the first quarter of 2023. More importantly, PLD’s core funds from operations (“Core FFO”) per diluted share was $1.22 for the first quarter of 2023, while it was $1.09 for the first quarter of 2022; this represents an 11.92% increase in Core FFO from the same period last year.
In their earnings release, PLD disclosed that they closed on an additional $1.0 billion line of credit in April, which brings their total liquidity to $6.7 billion.
As of March 31, 2023, PLD’s debt as a percentage of total market capitalization was 19.1% and had a weighted average interest rate of 2.6% and a weighted average term to maturity of 9.7 years.
Additionally, PLD announced that it has no significant debt maturities until 2026 . The most recent debt metrics that were released reinforce PLD’s excellent credit profile with a debt to adjusted EBITDA of 4.3x, a fixed charge coverage ratio of 9.9x and debt as a percent of gross real estate assets of 29.6%.
During the first quarter of 2023, PLD had an average occupancy rate of 98.0% and a retention rate of 77.2% and made $6.0 million in acquisitions during the quarter.
Prologis issued 2023 guidance with an upward revision on earnings. Core FFO guidance was revised to $5.42 - $5.50 per share, up from their previous guidance of $5.40 - $5.50 per share for a 0.2% increase at the midpoint.
Prologis is one of the best REITs out there, and I would argue that it’s one of the best companies in the world, whether it be a REIT or regular C-Corp. They are currently trading at a P/FFO of 23.41x, which is just slightly above their normal P/FFO of 22.68x. They pay a 2.83% dividend yield that is secure with an AFFO payout ratio of 81.33%.
They have delivered outstanding FFO growth since 2013, averaging an annual growth rate of 10.87%. Prologis has a fortress balance sheet with a credit rating of A and excellent debt metrics.
They pay an above-average yield (compared to the S&P 500) that is well covered and have excellent growth prospects in the years ahead. At iREIT, we rate Prologis a BUY.
Mid-America Apartment Communities, Inc. ( MAA )
MAA is an internally managed REIT in the multifamily sector. They acquire, develop and own apartment communities in 16 states that are primarily located in the Sunbelt region of the country.
As of December 31, 2022, MAA had ownership interest in 297 multifamily communities containing 101,986 apartment homes. Measured by net operating income (“NOI”), MAA’s largest three markets are Atlanta, GA (12.8%), Dallas, TX (8.9%) and Tampa, FL (7.0%).
MAA is investment-grade rated with a credit rating of A- by S&P. They have excellent debt metrics with a net debt to adjusted EBITDAre of 3.71x and a total debt to adjusted total assets ratio of 28.4%.
Their debt is 99.5% fixed rate with a weighted average interest rate of 3.4% and a weighted average term to maturity of 7.9 years.
As of December 31, 2022, MAA had $1.3 billion of total liquidity consisting of cash and cash equivalents and availability under their revolving credit facility. MAA has an excellent dividend track record and has paid consecutive quarterly dividends since 1994.
They currently pay a 3.73% dividend yield that is very well covered with an AFFO payout ratio of just 60.95%. Plus over the last 10 years they have delivered an average dividend growth rate of 5.92%.
Likewise, MAA has delivered a 6.21% average annual FFO growth rate since 2013. Analysts expect 11% growth in 2023, 4% growth in 2024, and 5% FFO growth in 2025. MAA is currently priced right in line with its normal P/FFO. It is trading at a P/FFO multiple of 17.72x compared to its normal P/FFO of 17.20x.
MAA is arguably one the best apartment REITs out there, pays a nice yield that is very secure, and has historically delivered strong earnings and dividend growth. At iREIT, we rate MAA a BUY.
Simon Property Group, Inc. ( SPG )
SPG is a REIT that owns, develops, and manages Class-A Malls, Premium Outlets, The Mills, and International Properties. As of the end of 2022, SPG owned or held an ownership interest in 196 properties in the U.S. consisting of 94 malls, 69 outlets, 14 Mills, 6 lifestyle centers, and 13 retail properties. SPG also has an 80% noncontrolling interest in The Taubman Realty Group (“TRG”), which has an ownership interest in 24 super-regional malls and outlet centers in the U.S. and Asia.
SPG also has international properties, with ownership interests in 34 Outlet properties primarily located in Asia, Europe and Canada.
Additionally SPG has a 22.4% interest in Klépierre, a company based in Paris, which owns shopping centers in 14 European countries.
Simon Property has an A- credit rating and strong debt metrics with a total debt to total assets ratio of 42% and a fixed charge coverage ratio of 4.8x. SPG has a weighted average interest rate of 3.43% with a weighted average term to maturity 6.7 years and 89.2% of their debt is fixed rate.
Simon Property has $1.3 billion of cash on hand and $6.5 billion available to them under their revolving credit facility for total of $7.8 billion in liquidity. Since 2013 SPG has had an average FFO growth rate of 3.49%. Analysts expect FFO to remain flat in 2023 and increase by 3% in 2024.
Currently SPG pays a 6.47% dividend yield that is very well covered with an AFFO payout ratio of 63.13% and has an average dividend growth rate of 6.95% over the last 10 years.
Simon has consistently grown its FFO over the years. FFO increased each year from 2013 to 2018 but then fell by 1% in 2019. In 2020 FFO fell by 24% due to the pandemic but then rebounded by 31% the following year. While Analysts expect FFO growth to be modest over the next few years currently the stock is priced at a P/FFO multiple of 9.32x which is a significant discount to their normal P/FFO of 15.13x.
Simon is also priced well below its net asset value (“NAV”) with a P/NAV of 0.84x. NAV is the market value of their properties minus all debt so essentially for every 0.84 cents you spend you get $1.00 of real estate.
SPG does not currently have the same growth prospects as the 2 companies mentioned above, but it is trading at a much steeper discount. At iREIT, we rate Simon Property a BUY.
Federal Realty Investment Trust ( FRT )
FRT is a shopping center REIT that owns and manages retail and mixed-use properties. FRT targets markets where they believe demand outweighs supply, with properties located in the Mid-Atlantic and Northeast regions of the country as well as California and South Florida. Federal Realty owns or has an ownership interest in 103 properties covering roughly 26 million square feet that serve 3,300 commercial tenants and contain approximately 3,000 residential units.
FRT has a very diverse income stream with their top tenant, The TJX Companies, Inc. ( TJX ), only contributing 2.8% of their annualized base rent (“ABR”). Additionally, only 7 tenants contribute 1% or more to their ABR.
Federal Realty has paid dividends since their founding in 1962 and have increased the dividend for 55 consecutive years at a compound annual growth rate (“CAGR”) of approximately 7%.
More recently, the dividend growth rate has slowed, with increases under 1% in 2021 and 2022, but nonetheless they have continued their dividend streak and even increased it during the pandemic in 2020.
This performance has given FRT the longest running dividend record in the entire REIT industry. Federal Realty pays a 4.41% dividend yield but the AFFO payout ratio is a little higher than I’d like to see.
In 2022 FRT had an AFFO payout ratio of 91.86%. While this is definitely on the high side, it’s worth noting that their AFFO payout ratio has been improving since 2020 when it stood at 123.46%. In 2021 the payout ratio improved to 97.48% and then improved again in 2022 to its current level of 91.86%.
Analysts expect moderate growth in FFO over the next several years with expected FFO growth of 2% in 2023, 4% in 2024, and 6% in 2025. While the expected FFO growth is moderate, the positive trajectory in earnings growth should enable FRT to get their payout ratio to a more conservative level.
FRT is investment-grade rated with a BBB+ credit rating and has solid debt metrics with an annualized net debt to EBITDA of around 6x and a fixed charge coverage ratio of 4x. Additionally FRT is in a good position to manage the current environment of rising rates as 86% of their debt is fixed rate.
As of December 31, 2022, FRT had $86 million of available cash and complete availability on their $1.25 billion credit facility for approximately $1.3 billion in total liquidity . Federal Realty currently trades at a P/FFO multiple of 15.38x which is well below their normal P/FFO multiple of 22.96x. Plus, they are priced at a discount to their NAV with a P/NAV ratio of 0.87x. At iREIT, we rate Federal Realty a BUY.
Digital Realty Trust, Inc. ( DLR )
DLR is a data center REIT that owns over 300 data centers that serve over 4,000 customers around the globe, with locations in over 25 countries and on 6 continents.
Data centers house servers and require very specialized layouts and systems to manage large amounts of electricity, control humidity and maintain the necessary internal temperatures required.
Data centers are a critical piece to the digital infrastructure that is becoming increasingly important to everyday life as they enable cloud computing, data storage, and e-commerce to run smoothly. Data centers are part of the “e-commerce trifecta” along with cell towers and logistic properties.
At a very basic level, when an order is placed online, the signal is sent to a cell tower which then transmits the information to a data center to process and route to the appropriate logistics center for online fulfillment. I like to think of data centers as the “brain” of the e-commerce trifecta.
Digital Realty is investment grade rated with a S&P Credit Rating of BBB. They have reasonable debt metrics with a net debt to adjusted EBITDA of 6.9x and a fixed charge coverage ratio of 4.9x.
DLR’s debt is 81% fixed rate, 97% unsecured and has a weighted average interest rate of 2.7% and a weighted average maturity of 5.2 years. DLR has no major maturities until 2024 and as of December 31, 2022, they had $141.8 million of cash and cash equivalents, and as of February 21, 2023, DLR had approximately $1.8 billion available to them under their global revolving credit facilities.
Digital Realty has averaged an FFO growth rate of 4.30% over the past decade. Analysts expect FFO to remain flat in 2023, but then increase by 7% in both 2024 and 2025. DLR pays a 5.07% dividend yield that is well covered, with an AFFO payout ratio of 81.33%, and has an average dividend growth rate of 5.29% over the past 10 years.
DLR is trading at a P/FFO multiple of 14.35x, which is below their normal P/FFO multiple of 16.67x. DLR’s stock has been beaten up over the last year, falling approximately 35%, but the digital economy will only continue to grow. DLR is in a strong position to take advantage of this trend.
Given the price decline over the past year, we believe this could present an attractive entry point and rate Digital Realty a STRONG BUY.
Now is not the time to get too cute
As I reflect on my history as a developer before the Great Recession, I began to ponder the fear of owning REITs when the market panicked.
Some of you are too young to remember the agony back then – over 13 years ago – but I have fond memories of the collapse of the financial tsunami that took out Lehman Brothers, Bear Stearns, and a host of other financial institutions.
When I first started writing on Seeking Alpha in 2010, there were very few REIT writers, and I spent the first few years trying to convince investors to get back in the game.
For years, I attended conferences like The MoneyShow and appeared frequently on Fox Business and other media outlets.
To calm fears, many REITs took the necessary steps to reduce leverage and prune portfolios, recognizing that at some point rates would rise and balance sheets had to be stress-tested to ensure that dividends would not be cut (again).
Fortunately, most of the better REITs (aka SWANs, for sleep well at night) were ready, and although they didn’t anticipate a global pandemic, they made it out the other side without too much pain.
Of course, we all know that the pandemic has sped up the rising rate clock, and cost of capital expectations have had to adjust. Nobody could have anticipated the rapid increases in rates, but debt costs are manageable, especially for these blue-chip REITs.
The reason that I selected these five REITs is because they understand that in order to create value the company must invest their cash now to generate more cash in the future. The amount of value that they create is the difference between their cash inflows and the cost of the investments made.
Looking at analyst estimates over the next two years, these REITs are expected to grow by a minimum of 5% per year, which is not super-duper growth, but certainly decent in this new cost of capital paradigm. The average dividend yield for these 5 REITs is 4.5%.
Recognizing, of course, that what makes REITs so attractive compared with other high yield investments is their significant capital appreciation potential and steadily increasing dividends.
Given where we are in this cycle, we believe that investors should begin to think about allocating more capital to the REIT sector, but staying away from high risk REITs.
High quality REITs like these can expect to have good access to capital during most market cycles and we believe that the patient investor will be rewarded with the combination of steady dividends and above average total return prospects.
Thanks for reading and commenting and I look forward to your comments below.
What's Your Optimal REIT Exposure?
For further details see:
Cash Is King