2023-10-02 07:00:00 ET
Summary
- REITs are currently trading at low prices, presenting a great buying opportunity for investors.
- The article advises investors to focus on quality and proper diversification when buying REIT stocks.
- I recommend three specific REITs: MidAmerica Apartment Communities, Realty Income, and Prologis.
Picture this…
A seven-year-old kid is let loose in a candy shop for a full 15 minutes. He’s told he can fill up a whole shopping cart with whatever he wants. No dollar limit whatsoever.
Can you imagine how much he’s going to get?
I can just see him sweeping his hands across shelves as he races down each aisle, grabbing everything in sight. Or maybe he’ll dash over to his favorites, filling his cart with what’s available of four or five brands.
Kit-Kats?
Check.
Chocolate-covered Oreos?
Check.
Sour gummies?
Check.
M&Ms?
Check.
Butterfingers?
Check.
What a happy kid he would be afterward, chowing down on all that loot. Right up until the stomachache sets in, of course. Then it’s quite a different scene, which – don’t worry – I won’t go into detail about.
You get that picture too, I’m sure.
It’s easy to shake our heads over the foolishness of youth. But the truth is that we adults aren’t much better when faced with our own “candy shops.”
Take the real estate investment trust, or REIT, situation right now. We’re looking at very low prices almost across the board. It very much looks like the adult version of what I described above, at least to me.
Fortunately for my future, I’ve been there, done that, and lived to tell the tale already of unrestrained spending. That’s why this kid in the REIT shop aims to have his cake and eat it too.
REITs Really Are in a Great Place, But…
Mixed metaphors aside, I know I published two recent articles pounding the table in favor of REITs. “They’re great buys!” I said in so many words. “Don’t let the naysayers tell you otherwise!”
The first piece was “ This REIT Myth Must Be Debunked ,” which looked at the rapid rise of interest rates. Contrary to popular belief, this hasn’t destroyed real estate investment trusts’ ability to operate.
It was in response to a reader’s challenge to prove as much. And judging by the comments, I think I did pretty well. Though one person did then push me to prove that REITs weren’t overleveraged.
So I did that too, this time in “ Debunking the ‘REITs Have High Leverage’ Myth ,” writing how:
“I do understand where the naysayers are coming from. And if they’d just change their comments from REITs specifically to the larger commercial real estate ((CRE)) category, I could grant them a whole lot more credit.”
You see, it’s true that the larger CRE category is showing some unattractive facts and figures – including a whopping $1.5 trillion in debt coming due between 2023 and 2025.
Summed up, “Too many of the companies holding those loans are already struggling. [And] too many are going to struggle further.”
But REITs have overall strong balance sheets that give them continued access to capital. Plus, they’ve been overall wise about the loans they do have, making sure to space them out under fixed rates.
In short, they’re just not suffering the way they’re accused of.
I’m not backing down on any of that. But I also want to make sure you know I’m still the same Brad Thomas as always, cautioning all you kiddos not to get too cute.
Buy Your REITs the Mature Way
This brings me back to that kid in the candy shop and whether we have more maturity.
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.
Likewise, we don’t want to buy up so much of a single stock – REIT or otherwise – that we put our collective holdings at risk of suffering unbalanced attacks.
Focus on proper diversification.
As for valuation, the final leg of a sturdy portfolio stool, it’s clear most REIT shares are far from loved. So price isn’t a problem. We’re not getting them for free, but boy are they discounted!
Combine all those together, and I’ve got 10 REITs I’m personally doubling down on. I already own all of them, but I’m adding to those positions in reasonable amounts.
I already recommended four (below). And I’m going to recommend another three soon enough. For this article though, I’ve got three you’re more than welcome to evaluate for yourselves.
All the data I’m seeing points to 10 tasty treats that won’t give me a stomachache after I’ve eaten them. But keep your own appetites, preferences, and “allergies” in mind as you see for yourself.
With those “don’t be too cute” cautions taken care of, here’s the next shopping-spree REIT set for you to consider.
Mid-America Apartment ( MAA )
MAA is an apartment REIT that owns 276 properties (over 95,000 units) in Sunbelt markets like Atlanta, Dallas, Tampa, Orlando, Charlotte, Austin, Raleigh-Durham, Nashville, Houston, and Charleston.
MAA has benefitted from strong migration trends - 48% of move-ins from non-MAA states like CA, NY, IL, NJ, MA, and WA.
MAA’s diverse portfolio of high-quality properties appeals to the largest segment of the rental market, the REIT benefits from thousands of jobs coming to markets with well over $100 billion of expected investment activity.
Supply pressure in MAA markets is nothing new. I recently spoke with the CEO, Eric Bolton, and he explained
“we’ve seen this before. We have a lot of diversity in the market, and we can weather the pressure. This time next year should be much better.”
MAA markets faced higher levels of supply compared to national levels before and during the pandemic. In fact, some of the markets with the strongest rent growth captured by MAA over the past few years have been in markets with the highest new supply deliveries.
MAA IR
The CEO told me that he has been at MAA for over 30 years, and “this time I get truly energized”. He added,
“this is the time where value is created”.
He told me that the REIT will become opportunistic as it uses its fortress (A- rated) balance sheet (1 of 8 Public REITs to be A- Rated or above) to seek out new development and/or acquisition opportunities.
MAA IR
MAA expects to start several new projects over the next 12 to 18 months, expanding its development pipeline to around $1 billion. The company ended A2-23 with $1.4 billion in combined cash and borrowing capacity.
Leverage remains historically low with a debt to EBITDA ratio of 3.4x and debt is 100% fixed for an average of 7.5 years at a record low of 3.4%. MAA has a low payout ratio of just 68% with a strong track record of dividend increases (as seen below):
MAA is attractively priced – shares are trading at $128.65 with a P/AFFO of 15.9x (average is 19.2x) with a dividend yield of 4.4%. As seen below, MAA is trading in the iREIT® Buy Zone :
Analysts forecast MAA to grow by 8% in 2023, 2% in 2024, and 7% in 2025. Based on this consensus growth and current valuation, iREIT® has modeled MAA to return around 22% annually :
Realty Income ( O )
O is a net lease REIT that owns over 13,000 free-standing properties in all 50 states as well as Europe. The S&P 500 constituent has an enterprise value of around $62 billion and generates over $3.8 billion per year in rent (~40% from investment grade clients).
One of O’s primary competitive advantages is scale, and as seen below, the company has grown from around $4 billion in 2019 to over $47 billion today (based on real estate book value at year-end).
The higher interest rate environment benefits O’s acquisition pipeline as the company is well-positioned to take advantage of large-scale sale-leaseback transactions. Here’s what the CEO, Sumit Roy, had to say about that on the latest (Q2-23) earnings call,
“Because of this cost of capital convergence and because of the many benefits sale-leaseback financing provides, including the elimination of maturity risk, we believe there is a more compelling case to be made than ever for corporates to look to sale-leaseback financing to replace maturing debt.
As the attractiveness of sale-leaseback financing accelerates for corporates with looming debt maturities and elevated debt costs, we believe our growth opportunities will continue to expand on a sustainable basis.”
We also believe that O is capable of pursuing M&A activity as it did during COVID-19 with VEREIT (formerly VER). We believe these public REITs could be prime targets for O:
- Spirit Realty ( SRC )
- Alpine Income Property Trust ( PINE )
- Four Corners ( FCPT )
- Broadstone Net Lease ( BNL )
In addition, O is likely to extend its recent entry into the casino sector after recently announcing and acquiring:
- Encore Boston Harbor (operated by Wynn) resort for $1.7 billion
- The Bellagio Las Vegas investment of $950 million
The other advantage for O is its fortress balance sheet, A-rated (A3 by Moody’s and A- by S&P).
O ended the latest (Q2-23) quarter with healthy leverage as measured by net debt to annualized pro forma adjusted EBITDA of 5.3x and fixed charge coverage of 4.6x.
O also added another capital source to its inventory, raising €1.1 billion through a debut public offering of euro-denominated unsecured bonds. This dual tranche offering resulted in a weighted average tenure of 9 years and a weighted average annual yield to maturity of 5.08%.
Combined with $254 million of cash on hand and $650 million of forward equity, O is well capitalized to meet its objectives of acquiring $7 billion in 2023.
O is an S&P dividend aristocrat with a rock-solid track record of increasing dividends (as seen below). The payout ratio (based on AFFO/sh) is 76%.
Realty Income IR
O is a bargain these days – shares trade at $49.94 with a P/AFFO of just 12.9x (normal is 18.9x) with a dividend yield of 6.2%.
As seen below, O is trading in the iREIT® Strong Buy Zone :
Analysts forecast O to grow by 2% in 2023, 4% in 2024, and 4% in 2025. Based on this consensus growth and current valuation, iREIT® has modeled O to return around 25% annually :
Prologis, Inc. ( PLD )
PLD is a large industrial REIT that has a global portfolio of over $1.2 billion square feet in addition to a land bank of $38 billion.
The highly diversified portfolio has over 6,700 customers with 19% of Net Effective Rent from its top 20 customers (as seen below):
PLD has a proven development track record generating significant value creation over 20+ years with a land bank that supports $38 billion of investment.
In the latest quarter (Q2-23), development started to pick up with commencements of 12 projects around the globe and guidance was maintained at $2.5 billion to $3 billion.
Like the other two REITs I previously referenced, PLD is also A rated (A3/A rated by Moody’s/S&P) and maintains an impeccable balance sheet, with liquidity of approximately $6.4 billion and debt-to-EBITDA of 4.2x.
In Q2-23 the company raised approximately $7 billion in debt financing across 4 currencies at an interest rate of 4.9% and an average term of 8 years.
PLD has a solid dividend growth record as seen below (with a payout ratio of 74% based on AFFO per share):
PLD is also an attractive buy these days – shares trade at $112.21 with a P/AFFO of just 24.0x (normal is 28.0x) with a dividend yield of 3.1%. As seen below, PLD is trading in the iREIT® Buy Zone :
Analysts forecast PLD to grow by 1% in 2023, 1% in 2024, and 18% in 2025. Based on this consensus growth and current valuation, iREIT® has modeled PLD to return around 25% annually :
Everlasting Gobstoppers
Remember Willy Wonka and the everlasting gobstoppers?
The candy that changes colors and flavors when you suck on them, and they never get smaller or disappear.
That’s exactly what these three REITs are to me – everlasting gobstoppers.
Here’s the list of all 7 that I have discussed up until now:
Stay tuned for my last article in the series in which I will complete the list of 10 REITs that I’m focusing on for my personal portfolio .
There are some terrific opportunities and I want all of my readers to be like the Smart Kid in a REIT Candy Store .
Good luck!
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:
Like A Smart Kid In A REIT Candy Store