2023-07-11 07:00:00 ET
Summary
- This article was targeted for my mother who is looking to put some dry powder to work so she can take advantage of the opportunities in the REIT sector.
- The article is the first in a two-part series such that my Mom can use this blueprint for her new REIT portfolio.
- The objective is to construct a diversified portfolio of 20 REITs that consists of some of the highest-quality REITs that are trading at a wide margin of safety.
This article was published at iREIT® on Alpha on Friday, July 7, 2023.
I just finished my new book, REITs For Dummies , and now it’s time for a break (perhaps a celebration).
(I began writing the book in December 2022, and after 27 weekends-in-a-row, I’m officially done.)
Book writing is exhausting, and much like investing, it requires patience, discipline, and most importantly, passion.
It’s also habit forming.
This weekend, I went to my office and my wife called me and said, “what are you doing at the office?” I told her that I was working on my book, but then I remembered,
“I’m finished with the book, so what am I doing at the office?”
According to research, it takes an average of 66 days for a habit to become truly automatic, so I suppose that 27 weekends in a row is habit forming.
If you think about it, most of our daily activities are made up of habits, from brushing our teeth to driving to the grocery store to going to the gym.
While some habits are helpful and can improve our lives, others may be harmful and can cause problems. Things like eating too much junk food or drinking too much alcohol.
Habits can be a positive or harmful force in your life, and they can take time to build. And once a habit is formed, some can be very difficult to break (like going to the office every weekend).
(I had to put that one in there for my wife.)
Anyway, today I want to focus on a good investing habit, also all rooted in the same attributes I touched on earlier: patience, discipline, and passion.
There’s a book I read a few years ago, called "Repeatability: Build Enduring Businesses for a World of Constant Change ," by co-authors Chris Zook and James Allen. The duo explains,
“Companies create their repeatable models in a variety of ways, but non-negotiables are nearly always central. They certainly play a major role in one of the most remarkable growth trajectories we have ever seen: a large global company in a mature consumer goods category that
(1) grows and makes money at an astonishing rate;
(2) continues to outstrip and outperform its competitors; and
(3) is now poised to win in one of the world’s most important markets.
And while many outsiders attribute the company’s success to the “hard” capabilities of cost reduction and attention to margins, its transformation was made possible by what the company calls the “desire to dream.”
I suggest you read the book, which happens to be one of my favorites (along with "The Intelligent Investor" and "Security Analysis"), in which Zook and Allen sum up the concept of repeatability:
“The power of a repeatable model’s differentiation lies in its ability to foster sustained growth over time.”
Sustainable growth you say?
That seems like an excellent habit, that also requires patience and discipline, that could lead to spectacular success, if you do your homework.
Well, today I’m going to provide you with my homework , so you don’t have to work as hard. It’s my way of thanking you for being a valued follower and friend on Seeking Alpha.
Also, as the title suggests, this article was targeted for my mother who is looking to put some dry powder to work so she can take advantage of the opportunities in the REIT sector.
This article is the first in a two-part series such that she can use this blueprint for her new REIT portfolio. The objective is to construct a diversified portfolio (20 REITs) that consists of some of the highest quality REITs that are trading at a wide margin of safety.
To be clear, there will be no "sucker yields" or mediocre picks, since my mom taught me the most valuable lesson of all, to live a stress-free life so I can "sleep well at night."
The Office Sector
According to a recent article in Barron’s, “Office REITs are down 50% from pre-Covid highs, while the REIT sector has lost 9.5% in the past year against the S&P 500’s 14.5% gain.” Amid the office meltdown, we see value in several office REITs which is precisely why we’re adding to “Mom’s new SWAN portfolio”.
Boston Properties, Inc. ( BXP )
Boston Properties is a real estate investment trust (“REIT”) that specializes in office properties located in gateway markets. Their properties are concentrated in six gateway markets including Boston, New York, Los Angeles, San Francisco, Seattle, and Washington D.C.
As of the end of 2022, BXP owned or had an ownership interest in 194 commercial properties covering approximately 54.1 million rentable square feet that include 173 office properties, 14 retail properties, 6 residential properties, and 1 hotel. BXP’s In-Service properties are 91.0% leased and have a weighted average lease term of 7.6 years.
BXP is investment grade, with a BBB+ credit rating. It has reasonable debt metrics, including a net debt to EBITDAre of 7.8x, a fixed charge coverage ratio of 2.7x, and a long-term debt to capital ratio of 69.08%.
BXP has delivered positive adjusted funds from operations (“AFFO”) growth in all but 2 years since 2013 and has had an average AFFO growth rate of 3.63% since that time. The company pays a 6.83% dividend yield that is well covered, with an AFFO payout ratio of 83.67%, and has an average dividend growth rate of 5.31% over the past 5 years.
BXP shares have declined by 36.62% over the last year and currently trades at a P/AFFO of 11.94x, which is a significant discount to their normal AFFO multiple of 29.71x.
Additionally they are trading at approximately half of their properties’ net market value, with a price to net asset value (“NAV”) ratio of 0.55x. If shares trade back up to their normal 5-year AFFO multiple, it would result in a total annual rate of return of over 40% by the end of 2024.
At iREIT®, we rate BXP stock a STRONG BUY.
Highwoods Properties, Inc. (HIW)
Highwood Properties is a sunbelt-focused office REIT with properties primarily located in the best business districts (“BBDs”) in Charlotte, Atlanta, Dallas, Orlando, Tampa, Raleigh, Nashville, Richmond, and Raleigh.
Their office properties cover 28.8 million square feet and have an 89.6% occupancy rate and a weighted average lease term of 6.0 years. They are well diversified by tenant, with their top 10 tenants making up 20.7% of their annualized revenue and their top tenant (Bank of America) only contributing 3.8%. HIW has had strong leasing activity with new leasing volume of 1.5 million square feet in 2022, the highest in any year since 2014.
HIW is investment grade, with a BBB credit rating, and has sound debt metrics with an interest coverage ratio of 4.59x, a net debt to EBITDAre of 5.9x, and a long-term debt to capital ratio of 56.98%.
Additionally, they have a weighted average interest rate of 4.3% and no debt maturities until the fourth quarter of 2025. HIW has had an average AFFO growth rate of 2.67% since 2013, but analysts expect AFFO to fall by 2% in 2023 and 4% in 2024. They currently pay an 8.24% dividend yield that is well covered with an AFFO payout ratio of 76.74% and have an average dividend growth rate of 2.60% over the last 5 years.
HIW shares have declined by 29.19% over the last year and currently trades at a P/AFFO of 9.42x, which is a significant discount to their normal AFFO multiple of 21.69x.
Like most REITs in the office sector, HIW is trading well below their NAV, with a P/NAV ratio of 0.61x. If HIW trades up to its normal 5 year AFFO multiple, it would result in a total annual rate of return of 50%+ by the end of 2024.
At iREIT®, we rate Highwood Properties stock a STRONG BUY.
Alexandria Real Estate Equities, Inc. ( ARE )
Alexandria is an office REIT that specializes in life science office properties. ARE has been the pioneer in this space since their formation in 1994 and is longest-tenured developer, operator, and owner of life science properties.
Their properties are concentrated in in AAA innovation cluster locations including Boston, San Francisco, New York City San Diego, Seattle, Maryland, and the Research Triangle. ARE has an asset base of 74.6 million square feet in North America that consists of 41.8 million rentable square feet (“RSF”) of operating properties, 15.5 million RSF of properties in development, and 17.3 million square feet of future development projects. Their operating properties have an occupancy rate of 93.6% and a weighted average lease term of 7.2 years.
ARE has a BBB+ credit rating and excellent debt metrics with a net debt and preferred stock to adjusted EBITDA of 5.3x, a long-term debt to capital ratio of 39.53% and a fixed charge coverage ratio of 5.0x.
ARE’s debt is 96.1% fixed rate, with a weighted average term to maturity of 13.4 years with no debt maturities until 2025 and $5.3 billion of liquidity as of the end of the first quarter.
ARE has had an average AFFO growth rate of 5.43% since 2013 and an average dividend growth rate of 6.47% over the last 5 years. They pay a 4.24% dividend yield that is well covered with an AFFO payout ratio of 72.17%.
Over the past year, ARE’s stock has fallen by 21.80% and now trades at a P/AFFO of 17.38x, which is well below their normal AFFO multiple of 21.21x.
Additionally, they are trading far below their net asset value with a P/NAV ratio of 0.66x. If ARE trades back up to its 5-year normal AFFO multiple, it would result in a total annual rate of return of ~40% by the end of 2024.
At iREIT®, we rate ARE stock a STRONG BUY.
The Retail Sector
I was a retail developer for over twenty years, so I know this sector well. Having developed and invested in properties leased to Wal-Mart, Ahold, PetSmart, and others, I know how important demographics are to the success of a retail property.
Demographics are critical to the retail business model, which is why I insist on owning the highest quality retail REITs that are in A+ locations.
In addition, balance sheets are more important than ever, which is why we’re investing in REITs with “fortress” balance sheets. Here are our top picks in the retail category.
Simon Property Group, Inc. ( SPG )
Simon Property is a REIT that owns and develops shopping, dining and mixed-use properties that primarily consist of malls, Premium Outlets, and The Mills. As of the end of 2022, SPG owned or had an ownership interest in 196 properties in the U.S. that consisted of 94 malls, 69 outlets, 6 lifestyle centers, 14 Mills, and 13 other retail properties across 37 states.
Additionally, SGP owns an 80% interest in the Taubman Realty Group, which has an interest in super-regional malls in the U.S. and Asia, and a 22.4% equity stake in Klépierre (KLPEF), which is a Paris-based real estate company that has an interest in shopping centers that are in 14 countries in Europe.
SPG has an A- credit rating and solid debt metrics, with net debt to EBITDA of 6.39x, a long-term debt to capital ratio of 86.06%, and a fixed charge coverage ratio of 4.6x. Their debt has a weighted average interest rate of 3.56% and a weighted average term to maturity of 7.1 years and they had $9.3 billion in liquidity as of the end of the first quarter.
SPG has had an average AFFO growth rate of 4.17% since 2013 and an average dividend growth rate of 6.95% over the last 10 years. They pay a 6.21% dividend yield that is well covered with an AFFO payout ratio of 63.13%.
Simon Property currently trades at a P/AFFO of 10.95x which is well below their normal AFFO multiple of 16.91x. Additionally they are trading roughly 13% under their net asset value with a P/NAV ratio of 0.87x. SGP could deliver a 24.20% total annual rate of return if it trades back up to its normal 5-year AFFO multiple by the end of 2024 .
At iREIT®, we rate Simon Property Group stock a BUY.
Federal Realty Investment Trust ( FRT )
Federal Realty is a shopping center REIT that specializes in retail and mixed-use properties that are primarily located in the Northeast and Mid-Atlantic regions as well as South Florida and California.
As of the end of 2022, FRT owned or had an ownership interest in 103 shopping centers and mixed-use properties that cover approximately 25.8 million square feet and were 94.5% leased and 92.8% occupied as of December 31, 2022. FRT was founded in 1962 and has continuously paid and increased their quarterly dividend for 55 consecutive years.
Federal Realty has a BBB+ credit rating and solid debt metrics with a net debt to EBITDA of 6x, a long-term debt to capital ratio of 57.06%, and a fixed charge coverage ratio of 3.6x. Since 2013, FRT has had an average AFFO growth rate of 3.82% and an average dividend growth rate of 4.41%. They currently pay a 4.45% dividend yield that is covered with an AFFO payout ratio of 91.86%.
FRT currently trades at a P/AFFO 20.23x, which is well below their normal AFFO multiple of 28.36x. Additionally they trade almost 20% below their net asset value with a P/NAV ratio of 0.82x. Shares have the potential to deliver a total annual rate of return of 27.83% if they trade up to their normal AFFO multiple by the end of 2024.
At iREIT®, we rate Federal Realty stock a BUY.
Regency Centers Corporation ( REG )
Regency Centers is a shopping center REIT that specializes in open-air, grocery-anchored shopping centers. REG has properties throughout the U.S. but are largely concentrated in California and Florida with those two states making up 26% and 21% of their annualized base rent (“ABR”) respectively.
REG owns or has an ownership interest in over 400 properties, 80% of which are anchored by a grocery store, covering 51 million square feet of gross leasable area. As of their most recent update, they have over 8,000 tenants and their properties are ~95% leased.
REG has a BBB+ credit rating and strong debt metrics including a pro-rata net debt to operating EBITDAre of 4.9x, a fixed charge coverage ratio of 4.7x, and a long-term debt to capital ratio of 41.15%. Their debt has a weighted average interest rate of 3.9% and a weighted average to maturity of 8.1 years.
Since 2013, REG has had an average AFFO growth rate of 6.0% and an average dividend growth rate of 3.18%. They pay a 4.19% dividend yield that is well covered with an AFFO payout ratio of 75.87%.
Currently REG is trading at a P/AFFO of 18.18x, which is well below their normal AFFO multiple of 22.76x. They are also trading below their net asset value with a P/NAV ratio of 0.87x. If REG trades back to its 5-year normal AFFO multiple it would result in a total annual rate of return of 15.47% by the end of 2024.
At iREIT®, we rate Regency Centers stock a BUY.
The Healthcare Sector
Healthcare REIT property types include senior living facilities, hospitals, medical office buildings and skilled nursing facilities. While there are some very tempting picks in the sector, we prefer the landlords with the best balance sheets.
As you may recall, we downgraded Medical Properties Trust, Inc. ( MPW ) to a Spec Buy in early 2023, which is why we did not include this one in “Mom’s shopping basket.”
MPW article (February 2023) Seeking Alpha
Alternatively, here are two healthcare picks that are considered more conservative:
Healthpeak Properties, Inc. ( PEAK )
Healthpeak Properties is a REIT that develops, acquires, and manages healthcare properties across the U.S. Their portfolio contains 3 core asset classes which include life science, medical office, and continuing care retirement community properties (“CCRC”).
As of the end of 2022, PEAK owned or had ownership interest in over 400 properties consisting of 149 life science properties, 297 medical office buildings, and 15 CCRCs. Life science properties made up the largest percentage of their net operating income (“NOI”) with 50% of their NOI coming from this segment. Medical offices contributed 39% to their NOI, while CCRCs made up 9%.
PEAK is investment grade rated with a BBB+ credit rating and has strong debt metrics with a net debt to adjusted EBITDAre of 5.4x, an interest coverage ratio of 6.08x, and a long-term to capital of 50.74%. Additionally, they have $2.9 billion in available liquidity and no significant debt maturities until 2025.
PEAK has had an average AFFO growth rate of negative -2.35% since 2013. In 2022, PEAK’s AFFO increased by 8% and analysts expect 2% AFFO growth in 2023, and then 5% growth in both 2024 and 2025. PEAK pays a 5.79% dividend yield that is well covered with an AFFO payout ratio of 82.76%.
PEAK currently trades at a P/AFFO of 14.14 which compares favorably to their normal AFFO multiple of 17.07x. They are also trading approximately 25% under their net asset value with a P/NAV ratio of 0.75x. If PEAK returns to its normal 5-year AFFO multiple it would result in total annual rate of return of 34.45%.
At iREIT®, we rate PEAK stock a STRONG BUY.
LTC Properties, Inc. ( LTC )
LTC Properties is a healthcare REIT that specializes in skilled nursing and senior housing. LTC is somewhat of a hybrid between an equity and mortgage REIT in that they own healthcare properties through sale-leasebacks, but also derive approximately 30% of their revenue through interest income from mortgage loans, bridge loans, preferred equity, and mezzanine loans.
Their portfolio of owned properties consists of 50 skilled nursing facilities, 98 assisted living communities, and 1 behavioral health center, which together make up almost 68% of their annual revenue.
LTC does not have a credit rating from S&P Global or Moody’s, but they are investment grade rated through the National Insurance Company rating agency. They have strong debt metrics including a fixed charge coverage ratio of 3.6x and a debt to adjusted EBITDAre of 5.8x.
Since 2013 LTC has had an average AFFO growth rate of 2.22% and an average dividend growth rate of 2.49%. They pay an annual dividend yield of 6.93% that is paid out monthly and is secure with an AFFO payout ratio of 85.10%.
LTC trades at a P/AFFO of 12.14x, which is a discount to their normal AFFO multiple of 15.40x. However, they are trading at a premium to their net asset value with a P/NAV ratio of 1.10x. If LTC trades back to its normal 5-year AFFO multiple it would result in a total annual rate of return of 22.79% by the end of 2024.
At iREIT®, we rate LTC Properties stock a BUY.
The Technology Sector
As I explain in my new "REITs For Dummies" book, technology is playing a bigger role in the REIT sector, which is why we’re increasing exposure in the so-called “technology trifecta.”
We’re adding shares to all three legs of the trifecta stool: cell towers, data centers, and warehouses. Here’s our top picks:
American Tower Corporation ( AMT )
American Tower is a cell tower REIT that specializes in wireless communications real estate. Their portfolio has a global reach with over 181,000 international cell towers and approximately 43,000 cell towers located in the United States and Canada. In total they have approximately 226,000 communication sites that are located in 26 countries and across 6 continents.
In addition to cell towers, AMT has a portfolio of more than 1,700 distributed antenna system networks and 28 data centers. In addition to the communication sites they lease, AMT also provides services that include structural analysis, zoning and permitting, and construction management.
AMT has a BBB- credit rating and solid debt metrics with an interest coverage ratio of 7.13x and a net leverage ratio of 5.2x. Their debt has a weighted average term to maturity of 5.8 years, and approximately 80% of their debt is fixed rate.
Over the last 10 years, AMT has delivered an average AFFO growth rate of 11.09% and an average dividend growth rate of 20.70%. They pay a 3.14% dividend yield that is well covered, with an AFFO payout ratio of 60.04%.
AMT trades at a P/AFFO of 20.15x, which compares favorably to their normal AFFO multiple of 23.19x. They currently are trading in line with their net asset value with a P/NAV ratio of 0.97x. If AMT trades back to its normal 5-year AFFO multiple it would result in a total annual rate of return of 24.68% by the end of 2024.
At iREIT®, we rate American Tower stock a BUY.
Digital Realty Trust, Inc. ( DLR )
Digital Realty is a data center REIT. In fact, it is one of the largest owners of data centers, with more than 310 data centers that have over 214,000 cross connects and serve approximately 5,000 customers worldwide. They have a global presence with data centers located in the U.S., Latin America, Canada, Europe, Australia, Asia, and Africa.
In total, their data centers are located in 25 countries and span across 6 continents. DLR’s data centers have a wide range of capabilities including co-location interconnection, enterprise hybrid solutions, and dedicated data halls to serve hyperscale customers. DLR’s customers include business enterprises, network service, IT and cloud providers.
DLR is investment grade with a BBB credit rating, and has sound debt metrics including a net debt to adjusted EBITDA of 7.1x, a long-term debt to capital ratio of 52.57%, and a fixed charge coverage ratio of 4.4x. They have had an average AFFO growth rate of 5.37% and an average dividend growth rate of 5.29% over the last 10 years and currently pay a 4.26% dividend yield that is covered with an AFFO payout ratio of 81.33%.
DLR currently trades at a P/AFFO of 18.81x which is a slight discount to their normal AFFO multiple of 19.15x. They are priced right in line with their net asset value with a P/NAV ratio of 0.99x. If DLR trades back to its normal 5-year AFFO multiple it would result in total annual rate of return of 16.51% by the end of 2024.
At iREIT®, we rate Digital Realty stock a BUY.
Prologis, Inc. ( PLD )
Prologis is the largest industrial REIT with a market capitalization of approximately $112 billion. Their portfolio of logistics facilities consists of 5,495 properties located in 19 countries that span 4 continents and cover approximately 1.2 billion square feet. PLD serves roughly 6,600 tenants and has a weighted average remaining lease term of around 4 years and an occupancy rate of 97.5%.
PLD’s properties are critical to global trade as 2.8% of global GDP passes through their industrial properties. In addition to their operating properties, PLD has $38 billion invested in land banks for future development and expansion.
Prologis is investment grade, with an A credit rating from S&P Global. They have excellent debt metrics including a debt to adjusted EBITDA of 4.3x, a fixed charge coverage ratio of 9.9x, and a long-term debt to capital of 32.77%.
Over the last 10 years PLD has delivered an average AFFO growth rate of 12.14% and an average dividend growth rate of 11.13%. Additionally, they pay a 2.83% dividend yield that is secure with an AFFO payout ratio of 68.27%.
Prologis is currently trading at a P/AFFO of 26.75x, which is a slight discount to their normal AFFO multiple of 27.95x. Similarly, they are trading in line with their net asset value with a P/NAV ratio of 0.98x. If PLD trades up to its 5-year normal AFFO multiple it would result in a total annual rate of return of 15%.
At iREIT®, we rate Prologis stock a BUY.
Let’s Recap
Here’s a recap of the picks for this first article:
iREIT®
In the next article we will cover the following sectors:
- Residential (apartments, manufactured housing, SFR)
- Net Lease (traditional and casino)
- Other (specialty).
When finished, Mom’s portfolio will consist of 20 REITs with a targeted annual total return forecast of 20% with an average dividend yield of 5.5%.
I hope you enjoy this article and I look forward to your comments below.
As always, thank you for the opportunity to be of service.
Happy SWAN (sleep well at night) Investing!
For further details see:
Mom's All-Weather REIT Portfolio (Part 1)