2023-06-26 07:00:00 ET
Summary
- Investing is not a get rich quick game.
- It’s a game of endurance and the endgame is as important (if not more so) as the way you start.
- In this article, I will provide two examples of REITs to avoid (drive for show) and two REITs that can "putt for dough".
I used to play a lot of golf when I was younger, and when my family was much smaller. I was never a scratch golfer (average score for a round of golf is par or better) but I’ve always enjoyed chasing the small white ball around and hoping to occasionally break 80 or below.
My former business partner developed a golf course in South Carolina (River Falls Plantation) and that means that I was able to practice regularly. I remember one day I was walking down the fairway with one of my friends and he said,
“Brad, you have to learn how to drive for show, and putt for dough”.
I told him,
“What in the world are talking about?”
He explained that you must finish strong, and he knew that I could crank out long distance drives, buy I wasn’t a great putter. He told me,
“You can have the longest drive from the tee box, but it doesn’t matter if you can’t putt the ball.”
For example, Will Gordon’s distance off the tee was around 315 yards (good enough for 5 th place on the PGA tour), however he earned $488.8k in prize money, which was outside the Top 150 on the PGA tour.
Another PGA golfer, Abraham Ancer, earned $5.8M in prize money, good for 10 th place on the Tour. However, his distance off the tee was only 290.4 yards on average, which was outside the Top 150 on the PGA tour.
He’s a great example of someone who did not really drive it for show, but he earned much more of the dough.
Over the years, I’ll never forget what my friend told me, and these words have been a big part of my investment philosophy today.
Investing is not a get rich quick game , instead it’s a game of endurance and the endgame is as important (if not more so) as the way you start.
More specifically, the dough I’m referring to (in my REIT wheelhouse) are dividends. There are plenty of companies that can hit good tee shots (high yields), but the real winners are the ones that can generate consistent earnings (dough) and dividends over time.
In this article I will provide two examples of REITs to avoid (drive for show) and two REITs that will make you some dough …
Beware of this Sucker Yield
Global Net Lease ( GNL ) is a net lease REIT that we’re avoiding.
I’ve argued for years that the externally-managed REIT is a value destroyer whose primary purpose is to pad the pockets of the (external) manager.
Recently GNL agreed to acquire Necessity Retail REIT ( RTL ) to create a combined REUT valued at around $9.6 billion. However, activist Blackwells strongly opposes the deal,
“The proposed merger is another deceptive effort by AR Global, in complicity with GNL and RTL, to skirt ongoing proxy fights against them, and the ultimate accountability that will face them.
Shareholders should be on high alert that the compromised boards of GNL and RTL approved a deal that would arrogate a $375 million ransom payment ($325M in GNL stock and $50M of cash to AR Global) to AR Global, Michael Weil and Nick Schorsch in return for all the value they’ve destroyed. Blackwells strongly opposes the cockamamie merger, and expects most other shareholders to do the same.
Blackwells has since called off its proxy fight with GNL and agreed to vote in favor of share issuances for the merger when GNL agreed to issue 495,000 shares of its common stock to Blackwells as a settlement fee. Blackwells is set to receive 2.1 million GNL shares valued at $23 million.
Orange Capital said it plans to vote against the transaction , calling it "value destructive insisting that “Blackwells is now complicit in this value-destroying event as well."
Orange Capital said the merger will cut GNL's dividend and result in the company's credit ratings being put on negative watch by Fitch. Orange Capital wrote in a letter:
"And while further enriching AR Global, a reasonable internalization fee would still unlock tremendous value for GNL shareholders. Everyone can win from here."
With a current dividend yield of 16.8% , we’re recommending that you avoid this sucker yield at all costs.
Hopefully you listened in our previous articles ( here , here , here , and here ) as GNL has been an absolute value destroyer. Lesson Learned: Avoid external management at all costs.
Too Good To Be True
My next “drive for show” REIT to avoid is Gladstone Commercial ( GOOD ), another net lease REIT (like GNL) that is also externally managed. You may recall that I’ve been fairly prolific with my recommendation of avoiding this company ( here , here , here , and here ).
There’s really no need to get to deep into the weeds on this one, as the historical earnings and dividend history provide much of the details surrounding our sell rating.
As you can see, GOOD has not grown its dividend for 15 years in a row and the company recently cut the dividend in January by 20%. And even after the dividend cut, the company still enjoys a sucker yield (98% payout ratio) of 10.1%.
Once again, driving for show can be dangerous and the Lesson Learned: Avoid external management and focus on the underlying cost of capital.
Steady Eddie Coming Up
Now let’s focus on two of our favorite REIT recommendations…
Realty Income ( O ) has never had to use a mulligan, the bellwether pick has paid and increased dividends for over 29 years in a row.
The key is consistency, not just showing off the flashy dividend yield.
And in order to deliver on the predictable profits, the company has been able to utilize its two biggest competitive advantages: scale and cost of capital.
Realty Income is the largest net lease REIT and also a member of the S&P 500. The company has over 12,400 properties that include 1,259 clients that operate in 84 different industries. The portfolio is also geographically diverse with properties in all 50 states, Puerto Rico, Italy, Spain, and the U.K.
Realty Income is A-rated (A3.A-) and in April closed on a $1 billion bond offering, which was comprised of $400 million of 4.7% senior unsecured notes due in 2028 and $600 million of 4.9% senior unsecured notes due in 2033.
As viewed below, Realty Income has generated stable and predictable growth of around 4.5% annually.
Even with rising debt costs (and elevated cost of capital) analysts are forecasting the company to grow by 4% in 2024 and 2025.
As seen below, shares are trading at a wide margin of safety: share price of $58.76 with a P/AFFO of 14.9x and dividend yield of 5.2% . The iREIT “dive for show and putt for dough” target projects ticker “O” to return 25% annually.
A Tower of Dividend Power
Our next pick American Tower ( AMT ), a cell phone landlord that also packs a powerful punch.
Like Realty Income, American Tower has also demonstrated a very predictable and reliable earnings history highlighted by 12.4% CAGR growth in AFFO per share since 2012 (and 20% dividend per share growth during the same period).
Once again, scale and cost of capital drive the ball…
American Tower owns over 226,000 sites in 26 Counties. This means the company has unmatched scale. In addition, the cell tower powerhouse also owns 25 data centers, thanks in large part to the acquisition of CoreSite for $10.1 billion that establishes AMT as a leader across multiple classes of communications real estate (5G and wireless/wireline convergence accelerate globally).
American Tower also has a solid balance sheet highlighted by $7.7 billion of liquidity and net leverage of 5.2x. (80% fixed / 20% floating). Q1-23 financing activities reduced floating rate debt exposure, while extending maturities.
American Tower’s AFFO is forecasted to moderate (-1%) in 2023 and analysts are forecasting normal growth of 8% in 2024 and 9% in 2025.
Share are cheap too, trading at $186.03 with a P/AFFO of 19.2x (normal is 23.1x) and safe (68% payout ratio) dividend yield of 3.3% . As shown below, iREIT forecasts shares to return ~25% per year.
In Closing
A few years ago I met the legendary golfer Gary Player who is known as one of the most consistent golfers of all-time.
During his career, he won nine major championships on the regular tour and nine major championships on the Champions Tour.
He has won over 150 professional tournaments on six continents over seven decades and was inducted into the World Golf Hall of Fame in 1974. I remember walking 18 holes with Mr. Player when my former business partner was developing a Gary Player golf course in my hometown. I’ll never forget this Player quote,
“Greatness isn’t just talent. Its talent applied consistently.”
I hope you enjoyed this golf-themed article which is also applicable to your investing strategy. Think twice before you put all of your hard-earned money on a big swinger, and instead focus on the predictable and reliable stocks that will help you sleep well at night.
Note: Realty Income and American Tower are constituents in the iREIT-MarketVector ™ Quality REIT Index that provides exposure to high-quality, US-listed common and preferred equity securities of REITs while ensuring sector diversification.
ireit-marketvector-quality-reit
Happy SWAN Investing!
Author's note: Brad Thomas is a Wall Street writer, which means he's not always right with his predictions or recommendations. Since that also applies to his grammar, please excuse any typos you may find. Also, this article is free: Written and distributed only to assist in research while providing a forum for second-level thinking.
For further details see:
Drive For Show And Putt For Dough