2023-10-05 07:00:00 ET
Summary
- We recommend three real estate investment trusts as "Everlasting Gobstoppers" that provide long-term satisfaction and returns.
- The recommended REITs are Digital Realty Trust, Rexford Industrial Realty, and AvalonBay Communities.
- These REITs have strong portfolios, solid financials, and the ability to weather market fluctuations and provide consistent dividends.
Welcome to my final installment of 10 real estate investment trusts (REITs).
As I've pointed out to readers, I'm only focused on buying the highest quality REITs like now - there's simply no reason to chase yield!
There are many bargains today in REIT-dom, but it's critical to be selective given the new paradigm in which rates could be higher for longer. Howard Marks describes it this way:
“Where in my 53 years in the investment world, I’ve seen a number of economic cycles, pendulum swings, manias and panics, bubbles and crashes, but I remember only two real sea changes. I think we may be in the midst of a third one today.”
Thus far I’ve already recommended:
- American Tower ( AMT )
- VICI Properties ( VICI )
- Extra Space Storage ( EXR )
- Alexandria Real Estate Equities ( ARE )
- Mid-America Apartment ( MAA )
- Realty Income ( O )
- Prologis ( PLD ).
So there are three more to go.
Three more top-notch REITs that have proven strong through previous problems and are well-placed to handle whatever more may come.
Or, as I put in my last article in this series, candy that isn’t going to make you sick. Which brings me to the title of this final installment.
My long-term subscribers and regular readers will recognize “Everlasting Gobstoppers” from past articles. It’s a concept I love to work with since it fits the REITs I tend to recommend so well.
These aren’t short-term treats with tastes that fade fast. The right REITs keep you satisfied for years and even decades on end.
But I’m getting ahead of myself. First to explain what everlasting gobstoppers are.
My loyal followers, of course, aren’t the only ones who know about them. Anyone who’s watched or read Charlie and the Chocolate Factory or the remakes might get it too.
It’s the candy creation that never loses its flavor. And therefore can be enjoyed over and over and over again.
Everyone Should Own REIT Treats
To quote Wikipedia (which I’m fine quoting in cases like this – just not on anything that actually depends on precise facts and figures):
“The Everlasting Gobstopper candy is a gobstopper candy from Roald Dahl’s 1964 children’s novel Charlie and the Chocolate Factory. According to its creator Willy Wonka, it was intended ‘for children with very little pocket money.’ It not only changes colours and flavours when sucked on, but also never gets any smaller or disappears. In 1976, the name of the fictional candy was used for a product similar to a normal gobstopper, or jawbreaker.”
(I assume that a Brit wrote that entry.)
That storyline features a whole range of confectionary treats, from Wonka Bars to Lickable Wallpaper to special gums and Fizzy Lifting Drinks. Almost all of them sound good (with hair toffee being a definite exception)…
But it always was the Everlasting Gobstoppers that stood out to me. Maybe because I grew up in a single-parent household, where my Mom always was working extra hard to provide for us? Who knows.
I do know though that I’ve found the adult version today. The analogy works pretty darn well from start to finish.
Consider the whole reason that Congress passed REIT legislation in 1960: It was for the Average Joe and Jane – people who couldn’t afford to buy up entire properties on their own.
Before then, commercial real estate ('CRE') was a rich man’s game. Only the wealthy could grow wealthier off of buying up land and buildings and renting them out to others.
While there were, of course, risks involved, it could be a pretty sweet setup. It had been for a very long time.
REITs, however, allow anyone and everyone to purchase portions of those properties… and then reaping the rewards they bring.
These Everlasting Rewards Will Leave You Gobsmacked
Better yet, those rewards come with a whole lot less hassle than direct ownership.
With (the admittedly fictional) Everlasting Gobstoppers that had unbeatable flavor for an amazing amount of time, kids didn’t have to worry about having to create them. They were already-created products.
Likewise, REIT shareholders don’t have to deal with the hassle of finding tenants, retaining tenants – and all that entails – or collecting money from those tenants. The REITs themselves handle it all.
And then they pay out dividend after dividend after dividend from there.
This isn’t to say you can be completely hands-off with these holdings, of course. As I described in the last installment – “ Like a Smart Kid in a REIT Candy Store ” – you don’t want to make yourself sick off of REITs.
“For all those I’ve convinced with my previous ‘REITs are great!’ messages, let’s now commit to another reality: That we don’t want to overindulge in a good thing.
“There’s no reason to ever grab everything off the stock-market shelf. You always want to evaluate each potential company on its own accord, not just based on larger market conditions or the sectors they run in.
“Focus on quality.”
With that said, “All the data I’m seeing points to 10 tasty treats that won’t give me a stomachache after I’ve eaten them.” Just “keep your own appetites, preferences, and allergies in mind as you” look over the list.
Now that we’ve recovered all of that, let’s get to the goodies!
Digital Realty Trust ( DLR )
Digital Realty is a data center REIT that offers a full range of colocation, data center, and interconnection solutions as well as dedicated server halls for hyperscale users. Data centers are very specialized and are required to have the physical and connectivity infrastructure that supports the operations of these specialized properties.
Most of DLR’s data centers have:
- Fully redundant electrical supply systems
- Multiple power sources
- Sophisticated cooling systems
- Raised floor areas
- High-level security (both inside and outside the data center)
- In-building communications cabling
DLR’s data centers are used by more than 5,000 customers that operate across multiple industries including cloud computing and information technology services, social networking, financial services, healthcare, energy, and consumer products.
Digital Realty’s portfolio includes more than 300 data centers located in over 50 metros located in 27 countries and on six continents.
During the second quarter earnings release, DLR highlighted Core FFO per share in 2Q-23 of $1.68 compared to $1.72 in 2Q-22 and Same-Capital cash net operating income (“NOI”) growth of 5.6%.
Additionally, DLR signed total bookings during the quarter that are projected to generate approximately $114.0 million in annual GAAP rental revenue. 32% of total bookings in 2Q-23 were in the 0-1 MW category, 11% of total bookings were in interconnection, while 54% of total bookings came from the >1 MW category.
In addition to signed bookings during the second quarter, DLR also signed renewal leases which are expected to contribute $211.0 million of annual GAAP rental revenue. For renewal leases, rental rates rolled up 6.9% on a cash basis and increased 14.6% on a GAAP basis.
Digital Realty is investment grade with a BBB credit rating from S&P Global. The debt is 97% unsecured, 83% fixed rate, and has a weighted average coupon of 2.7% and a weighted average term to maturity of 4.9 years.
DLR has a moderate amount of leverage with a net debt to pro forma adjusted EBITDA of 6.3x and can easily handle its debt obligations with an adjusted fixed charge coverage ratio of 4.6x and pro forma liquidity of approximately $4 billion.
DLR has increased its dividend for 17 consecutive years with the dividend totaling $1.00 per share in 2005, compared to $4.88 per share in 2022.
Over the last 10 years, DLR has averaged a dividend growth rate of 5.29% and currently pays a 4.17% dividend yield that's covered with a 2022 year-end AFFO payout ratio of 81.33%.
Currently, DLR is trading right at its average AFFO multiple with a P/AFFO of 19.40x vs. its 10-year average AFFO multiple of 19.15x. Analysts expect AFFO growth of 2% in 2023, and then 6% and 10% in the years 2024 and 2025, respectively.
Based on analysts’ consensus growth projections along with DLR’s current price and five-year average AFFO multiple, we have modeled DLR to return approximately 15% annually.
We rate Digital Realty Trust a Buy.
Rexford Industrial Realty ( REXR )
Rexford is an industrial REIT that has an exclusive focus on industrial properties throughout infill Southern California (“SoCal”).
Normally I’d be hesitant to invest in a company with such geographic concentration, but SoCal is the fourth-largest industrial market in the world and has the lowest supply and highest demand of any major market in the United States.
Natural barriers such as oceans and mountains limit the supply of developable land in SoCal and restrictive zoning regulations constrain supply further. While there's a scarcity of developable land, SoCal is the largest U.S. market and has a diverse economy with more than 600,000 businesses and approximately 21 million residents.
The ongoing supply-demand imbalance in SoCal positions REXR well for continued outperformance in the industrial sector as well as continued future rent growth.
The company’s portfolio includes 371 industrial properties covering approximately 45.0 million rentable square feet (“RSF”) with the same property portfolio occupancy of 98.0% as of the end of Q2 23.
During the second quarter earnings release, Co-CEOs Michael Frankel and Howard Schwimmer stated:
"The Rexford Industrial team produced another quarter of excellent results, demonstrating the strength of our value creation focused business model within infill Southern California, the nation's largest industrial market, benefiting from the lowest threat of disruption from new supply of any major market due to an extreme scarcity of developable land coupled with favorable long-term tenant demand fundamentals."
Other highlights from the second quarter earnings release include Core FFO during the quarter of $108.4 million, or $0.54 per share, which represents a 10.2% increase on a per share basis when compared to the same period in 2022.
Additionally, comparable rental rates on approximately 2.1 million RSF of renewal and new leases grew by 96.8% on a GAAP basis and 74.8% on a cash basis when compared to prior rents.
REXR - IR
Rexford has an investment-grade balance sheet with a BBB+ credit rating and excellent debt metrics including a net debt to adjusted EBITDA of 3.7x, a long-term debt to capital ratio of 24.75%, and an EBITDA to interest expense ratio of 7.54x.
Additionally, REXR’s debt is 100% fixed rate with a weighted average interest rate of 3.6% and a weighted average term to maturity of 5.1 years.
As seen below, REXR has several large maturities in 2024 which consist of a $400 million unsecured term loan and a $60 million secured term loan, but both loans have extension options that REXR can elect which range from two to three one-year extensions.
Including all 2024 extension options, REXR has no significant debt maturities until 2026 and has $1.5 billion of total liquidity as of its most recent update.
Rexford recently announced that they will release third quarter earnings results after the market closes on Oct. 18. Since 2014 REXR has delivered an average AFFO growth rate of 12.67%.
Analysts expect AFFO per share to increase by 14% in 2023, and then increase by 18% and 10% in the years 2024 and 2025, respectively.
Since the IPO in mid-2013, Rexford has increased the dividend each year and has an average dividend growth rate of 19% over the last five years (from 2018 to 2Q 2023).
The company pays a 3.12% dividend yield that's covered with a 2022 year-end AFFO payout ratio of 80.25% and analysts expect the dividend to increase from $1.26 per share in 2022 to $1.52 per share in 2023, representing an expected annual dividend increase of 20.63%.
Currently, this blue-chip REIT is trading at a large discount, with a current P/AFFO of 28.06x, compared to the nine-year average AFFO multiple of 35.54x and a five-year average AFFO multiple of 42.25x.
Based on the consensus growth projections, REXR's five-year average AFFO multiple, and REXR’s current price, we have modeled REXR to return approximately 66% annually by the end of 2024.
We rate Rexford Industrial Realty a Strong Buy.
AvalonBay Communities ( AVB )
AvalonBay is an apartment REIT that specializes in developing, acquiring, and managing multifamily communities that are primarily located in the Mid-Atlantic, the Pacific Northwest, New England, the metro areas of New York / New Jersey, and Northern and Southern California.
AVB attempts to deliver superior risk-adjusted returns by targeting multifamily communities in regions that have growing employment, a diverse and high quality life, and regions that have lower housing affordability.
AVB is well diversified in established regions with the New York / New Jersey metro area making up 22% of their revenue, followed by Southern California, which makes up 20%, Northern California, which makes up 16%, the Mid-Atlantic region which makes up 15%, New England which makes up 14%, and the Pacific Northwest which makes up 7% of their total revenue.
In addition to the established regions, AVB is expanding into Southeast Florida, Denver, Raleigh-Durham, Charlotte, Dallas-Fort Worth, and Austin.
As of the end of the second quarter, AVB owned or had an ownership interest in 294 multifamily communities that contain 88,659 apartment homes with properties located across 12 states and The District of Columbia.
During their second quarter earnings release, AVB reported Core FFO per share of $2.66 compared to $2.43 per share in Q2 2022, representing a year-over-year increase of 9.5%.
AVB raised its guidance on several metrics including Core FFO per share growth, rental revenue growth, and net operating income growth. 2023 guidance for Core FFO per share growth increased from 5.3% to 7.9%, guidance for rental revenue growth increased from 5.0% to 6.0%, and guidance for NOI growth was increased from 4.25% to 6.0%.
AvalonBay has an investment-grade balance sheet with an A- credit rating from S&P.
The company has excellent debt metrics including a net debt to core EBITDAre of 4.6x, a long-term debt to capital ratio of 39.27%, and an interest coverage ratio of 6.9x (as of Q1-23).
AVB has a strong dividend track record and is only one of three multifamily REITs that has never reduced its dividend. They increased the dividend each year from 2012 through 2020, growing the dividend from $3.88 to $6.36 per share.
They maintained a dividend of $6.36 per share from 2020 to 2022 but increased the quarterly dividend from $1.59 per share in the fourth quarter of 2022 to $1.65 per share in the first quarter of 2023.
In total, AVB has delivered 4.8% annualized dividend growth since its IPO in 1993.
AVB recently announced that it will release its third quarter earnings results on Oct. 25, after market hours. Since 2013 the company has had an average AFFO growth rate of 5.84%.
Analysts expect AFFO to increase by 8% in 2023 and then by 5% and 4% in the years 2024 and 2025, respectively.
Currently, the stock pays a 3.93% dividend yield that's well covered with a 2022 year-end AFFO payout ratio of 70.95% and trades at a P/AFFO of 17.72x, compared to their 10-year average AFFO multiple of 23.38x.
Based on consensus growth projections and AVB’s current price, we have modeled AVB to return approximately 28% annually by the end of 2024.
We rate AvalonBay Communities a Buy.
The Golden Ticket
My next article is titled "I'm Not A Market Timer" which simply means that I don't have a crystal ball, so I have absolutely no clue when rates will pause permanently.
Odds are - based on the Fed's dot plot - that there will be at least one more rate hike this year, matching projections from June.
The median projection for next year’s rates increased to 5.1% (from 4.6%), providing evidence that inflation will remain stickier than initially anticipated.
Within the commercial real estate sector, a majority believe that real estate prices will bottom in the first or second half of 2024 (66%).
@rbradthomas
This is why I'm laser-focused on the highest quality REITs that will not only survive the next six months but thrive. Had you purchased these nine REITs during the GFC your portfolio would have generated annual returns of 21%.
iREIT® (AMT and REXR were since listed, and VICI was excluded)
Of course, back in 2008 and 2009, I did not have the REIT knowledge that I do today or the capital. So now you can see why I'm truly like the kid in a candy store, eager to capitalize on some of the best opportunities in a lifetime.
I witnessed some of my closest friends get rich in 2008 -2009 and I'm planning on doing the same in this cycle.
One more thing. I have a large following here on Seeking Alpha (more than 112,000) and I also have five kids and a grandson. This means that I must build a legacy in which future generations can look back and remember the "REIT guy" on Seeking Alpha who knew a fat pitch when he saw it coming.
Benjamin Graham once said,
“Adversity is bitter, but its uses may be sweet. Our loss was great, but in the end, we could count great compensations."
It's been a tough few quarters in the REIT sector, but by owning these 10 REITs I believe I will one day count great compensations .
Thanks for reading and I look forward to your comments below.
For further details see:
Get Your Everlasting REIT Gobstoppers Right Here