2023-07-15 07:00:00 ET
Summary
- A few years ago, mom retired from real estate and she’s now itching to get back in the game.
- Recently she told me that she was ready to load up on REITs, recognizing that shares for many high-quality companies are on sale.
- My mother has no interest in speculative stocks, she’s the poster child for sleeping well at night.
My mother has been in real estate for as long as I can remember.
She worked for several national and regional homebuilders and has seen her fair share of recessions.
She was solely responsible for raising two boys (me and my brother) and sometimes worked multiple jobs to make ends meet.
A few years ago, she retired from real estate and she’s now itching to get back in the game.
Recently she told me that she was ready to load up on real estate investment trusts, or REITs, recognizing that shares for many high-quality companies are on sale.
My mother has no interest in speculative stocks, she’s the poster child for sleeping well at night ("SWAN").
A few days ago, I wrote an article titled "Mom’s All-Weather REIT Portfolio (Part 1)." In it, I provided a list of 11 REITs to seed the new portfolio. You can read that article here and the list (of 11) can be viewed below:
As you can see, we selected these REITs that are focused on office, retail, healthcare, and technology (data centers, cell towers, warehouses). Now, I’ll finish up Mom’s REIT portfolio with 9 more REITs spread across the Net Lease and Residential (apartments, manufactured housing, single family rentals, and self-storage) sectors.
As I told my mom, we’re only selecting the highest quality REITs which we have carefully screened based on fundamentals and valuation. At the end of the article I will provide a summary of the entire portfolio for mom.
The Net Lease Sector
This is one of my favorite property sectors, and I think mom will like it given the higher yield and predictable rental income. I selected four REITs for this sector which should provide mom with yield enhancement and stability.
Realty Income Corporation ( O )
Realty Income is a triple-net lease real estate investment trust that invests in free-standing, single tenant properties. They have both domestic and international properties, with real estate located in all 50 U.S. states, the United Kingdom, Italy, and Spain.
In total, they own or have an ownership interest in 12,237 properties that has an occupancy rate of 99% and covers approximately 236.8 million square feet. Realty Income leases their properties to 1,259 tenants and targets businesses and industries that are largely resistant to e-commerce. Based on annualized rent, grocery stores is their largest industry, followed by convenience and dollar stores.
Realty Income has an A- credit rating and strong debt metrics including a net debt to pro forma adjusted EBITDA of 5.4x, a fixed charge coverage ratio of 4.6x, and a long-term debt to capital ratio of 41.21%.
Additionally, their debt is 95% unsecured and 90% fixed rate with a weighted term to maturity of 5.9 years. Realty Income’s earnings have been extremely consistent and reliable over the years, with positive adjusted funds from operations (“AFFO”) growth in 26 out of the last 27 years and an average AFFO growth rate of 6.16% since 2013.
O pays a 5.15% dividend yield that is well covered, with an AFFO payout ratio of 75.69%. It has an average dividend growth rate of 5.76% over the last 10 years.
Realty Income’s stock is currently trading at a P/AFFO of 15.04x, which is well below their normal AFFO multiple of 18.86x. They are currently priced in line with their net asset value (“NAV”) with a P/NAV ratio of 1.02x.
Investors could potentially receive a total annual rate of return of 26.76% if the stock trades back to its normal 5-year AFFO multiple by the end of 2024.
At iREIT® we rate Realty Income a BUY.
(See our latest deep dive HERE .)
NNN REIT, Inc. ( NNN )
NNN is a net-lease REIT that specializes in single tenant, freestanding properties that are primarily leased to retail tenants on a long-term basis. NNN’s portfolio consists of 3,411 properties that are located in 48 states and cover approximately 35.0 million square feet.
They have over 400 tenants operating across more than 30 lines of trade, including convenience stores, automotive services, restaurants, and family entertainment centers. They have a weighted average lease term of 10.4 years, and roughly 99% of their properties were leased as of the end of 2022.
NNN is investment grade with a BBB+ credit rating and has solid debt metrics including a debt to EBITDA of 5.4x, a long-term debt to capital ratio of 48.88%, and a fixed charge coverage ratio of 4.7x. Their debt has a weighted average term to maturity of 13.7 years and a weighted average effective interest rate of 3.7%.
Since 2013, NNN has had positive AFFO growth in every year except one and has had an average AFFO growth rate of 4.97% since that time. They pay a 5.20% dividend yield that has had an average growth rate of 3.31% over the last 10 years, and the dividend is well covered with an AFFO payout ratio of 67.29%.
NNN is currently trading for a P/AFFO of 13.09x, which is well below their normal AFFO multiple of 17.09x. Additionally, they are trading approximately 8% under their net asset value, with a P/NAV ratio of 0.92x. If NNN trades back to its 5-year normal AFFO multiple, it would result in a total annual rate of return of 26.42% by the end of 2024.
At iREIT® we rate NNN a BUY.
(See our latest deep dive HERE .)
W. P. Carey Inc. ( WPC )
WP Carey is a net-lease REIT with a diversified portfolio of net-lease properties that includes warehouse / industrial, retail, and office properties.
By property type, warehouse & industrial properties combined make up 51% of their annualized base rent (“ABR”). Retail and office properties each contributes 17% to their ABR, while net-lease self-storage properties and other miscellaneous properties including student housing and a hotel makes up the remainder of their annual rent for their net lease properties.
In total their net-lease portfolio consists of 1,446 properties that covers approximately 176 million square feet and are located in the U.S. and Europe. In addition to their net-lease portfolio, WPC also has a portfolio of self-storage real estate that consists of 84 properties that contain 52,105 storage units. WPC’s net-lease portfolio has an occupancy rate of 99.2% and their portfolio of self-storage properties has an occupancy of rate of 91.5%.
WPC has a BBB+ credit rating and strong debt metrics with a fixed charge coverage ratio of 5.4x, a pro rata net debt to adjusted EBITDA of 5.8x, and a long-term debt to capital ratio of 45.68%.
WPC has delivered positive AFFO growth in 8 out of the last 10 years and has had an average AFFO growth rate of 3.08% since 2013. They pay a 6.32% dividend yield that is well covered with an AFFO payout ratio of 80.19% and have increased their dividend each year since going public in 1998. Additionally, over the past 10 years WPC has had an average dividend growth rate of 6.29%.
WPC is trading at a P/AFFO of 12.71x which is a slight discount to their normal AFFO multiple of 13.96x and the stock is currently trading in line with their net asset value with a P/NAV ratio of 1.02x. If, by the end of 2024, WPC’s stock trades back to its 5-year normal AFFO multiple, it would result in a total annual rate of return of 20.12%.
(See our latest deep dive here .)
At iREIT® we rate WPC a BUY.
Agree Realty Corporation ( ADC )
Agree Realty is a REIT that specializes in free-standing retail properties that are leased to tenants on a long-term, net-lease basis. They own or have an ownership interest in 1,908 retail properties located in 48 states that cover approximately 40 million square feet.
ADC has high quality tenants with 67.8% of their ABR coming from tenants with investment grade credit ratings.
Some of their top tenants include well-known names like Walmart, Lowes, Home Depot, and CVS. Their tenants primarily operate in retail sectors that are e-commerce resistant, with convenience stores, home improvement, and grocery stores making up some of their top industries.
ADC’s properties are 99.7% leased and have a weighted average remaining lease term of approximately 8.8 years as of December 31, 2022.
ADC is investment grade with a BBB credit rating and has sound debt metrics including a long-term debt to capital of 30.33%, a fixed charge coverage ratio of 5.1x, and a net debt to EBITDA of 3.7x.
They have delivered positive AFFO growth in each year since 2013 and have had an average AFFO growth rate of 5.75% and an average dividend growth rate of 5.79% over the last 10 years. Plus, ADC pays a 4.48% dividend yield that is well covered, with an AFFO payout ratio of 73.24%.
Agree Realty currently trades at a P/AFFO of 16.75x, which is a slight discount to their normal AFFO multiple of 17.76x. The stock is trading at a slight premium to its net asset value with a P/NAV ratio of 1.04x.
If ADC’s stock trades back up to its 5-year normal AFFO multiple, it would result in a total annual rate of return of 22.22% by the end of 2024.
(See our latest deep dive HERE .)
At iREIT® we rate Agree Realty a BUY.
Residential Sector
Mom has decades of experience in the residential sector, so I know she will like my picks. As you will see below, I decided to include two apartment REITs, one manufactured housing REIT, one single family rental REIT, and one self-storage REIT.
Mid-America Apartment Communities, Inc. ( MAA )
MidAmerica is an apartment REIT with a strong focus on multifamily communities located in the sunbelt region of the U.S. Some of MAA’s top markets are in Dallas, Houston, Atlanta, Tampa, Charlotte, and Orlando.
MAA’s portfolio of multifamily properties contains approximately 102,000 apartment homes and are located across 16 U.S. states and Washington D.C.. They had an occupancy rate of 95.7% as of the end of 2022.
MAA’s apartments are well diversified by asset class and type. 40% of their properties are rated class A+ or A, 52% of their properties are rated class A- or B+, and 8% of their properties are rated class B or B-. By asset type, 63% of their apartments are garden style, 33% are mid-rise, while 4% are high rise apartments.
MAA is investment grade, with an A- credit rating, and has excellent debt metrics with a total debt to adjusted total asset ratio of 27.8%, a net debt to adjusted EBITDAre of 3.5x, and an interest coverage ratio of 7.92x.
Their debt is 100% fixed rate, has a weighted average interest rate of 3.4%, and a weighted average maturity of 7.7 years.
Over the last 10 years, MAA has had an average AFFO growth rate of 6.42% and an average dividend growth rate of 5.92%. They currently pay a 3.66% dividend yield that is secure, with an AFFO payout ratio of 60.95%, plus they have never cut or suspended their dividend since 1994.
MAA currently trades for a P/AFFO of 19.19x, which is in line with their normal AFFO multiple of 19.18x. The stock is trading at approximately a 10% discount to its net asset value with a P/NAV ratio of 0.89x. If MAA’s stock trades up to its 5-year normal AFFO multiple, it would result in a total annual rate of return of 15% by the end of 2024.
(We recently interviewed the CEO at iREIT® .)
At iREIT® we rate MAA a BUY.
Camden Property Trust ( CPT )
Camden Property Trust is an Apartment REIT that invests in multifamily properties, with a strong focus on the sunbelt region. The Washington D.C. metro area is their largest market with this market contributing 12.6% of their net operating income (“NOI”), followed by Houston at 10.8%, Dallas at 8.2%, and Atlanta at 8.2%.
As of their most recent update, CPT’s portfolio consisted of 171 multifamily properties that contains 58,564 apartment homes with an occupancy rate of 96.9% and an average age of 15 years.
By asset class, CPT’s portfolio consists of 37% class A and 63% class B rated properties, and by building type, 60% of their properties are low-rise, 28% are mid-rise, 9% are high-rise, while 3% are mixed.
CPT is investment grade, with an A- credit rating, and has strong debt metrics including a net debt to adjusted EBITDAre of 4.3x, a long-term debt to capital ratio of 40.32%, and an interest coverage ratio of 7.19x.
Their debt has a weighted average term to maturity of 6.0 years, a weighted average interest rate of 4.1%, and 82.4% of their debt is fixed rate. CPT has had positive AFFO growth in 7 out of the last 10 years and has had an average AFFO growth rate of 4.99% over that period. They pay a 3.68% dividend yield that has had a compound growth rate of 5.32% over the last 10 years, and the dividend is well covered with an AFFO payout ratio of 65.28%.
Camden Property Trust currently trades at a P/AFFO of 18.48x, which is a discount compared to their normal AFFO multiple of 21.71x. Additionally they are trading approximately 20% under their net asset value with a P/NAV ratio of 0.80x. CPT could potentially deliver a total annual rate of return of 27.47% if it trades up to its normal AFFO multiple by the end of 2024.
At iREIT® we rate Camden Property a BUY.
Sun Communities, Inc. ( SUI )
Sun Communities is a REIT in the manufactured housing sector that owns manufactured housing (“MH”) and recreational vehicle (“RV”) communities, as well as marinas. They lease parcels of land that have utility access for both their MH and RV customers and wet slips and dry storage spaces for their marina customers.
SUI has been investing in MH and RV communities since 1975 and recently started investing in marinas in 2020. As of the end of 2022, SUI’s portfolio consisted of 669 properties located in the United States, Canada, and the United Kingdom which include 353 MH communities, 134 marinas, and 182 RV communities.
SUI is investment grade with a BBB credit rating and has solid debt metrics with an interest coverage ratio of 4.52x, a long-term debt to capital ratio of 49.75%, and a net debt to EBITDA ratio of 6.1x.
SUI has delivered positive AFFO growth in 9 out of the last 10 years and has had an average AFFO growth rate of 7.90% and an average dividend growth rate of 3.43% over the last decade. They currently pay a 2.82% dividend yield that is well covered, with an AFFO payout ratio of 55.00% as of the end of 2022.
Sun Communities currently trades at a P/AFFO of 20.29x, which is a discount to their normal AFFO multiple of 24.12x. The stock is also trading at a discount to its net asset value with a P/NAV ratio of 0.85x.
If SUI’s stock trades back up to its 5-year normal AFFO multiple, it would result in a total annual rate of return of 37.57% by the end of 2024.
(See our deep dive HERE .)
At iREIT® we rate Sun Communities a BUY.
Invitation Homes Inc. ( INVH )
Invitation Homes is a REIT that specializes in single family homes that they lease to residents across the United States. Their portfolio consists of more than 80,000 homes that are leased in 16 markets, primarily in Florida, and the Southeast and Western regions of the U.S. On average, INVH’s homes are roughly 1,870 square feet and have 3 bedrooms and 2 bathrooms.
In addition to their rental income, INVH has been growing its ancillary services to increase its overall revenue stream. They recently expanded their Base Smart Home package which includes features such as video doorbells, smart locks, and smart thermostats. Additionally, they implemented a HVAC filter program where HVAC filters are shipped to INVH’s homes on a quarterly basis.
Invitation Homes is investment grade with a BBB credit rating and has solid debt metrics, including a net debt to EBITDA of 5.62x, an interest coverage ratio of 4.26x, and a long-term debt to capital ratio of 43.23%.
INVH has delivered positive AFFO growth in each year since 2018, and has delivered an average AFFO growth rate of 8.17% and an average dividend growth rate of 19.08% over the last 4 years. Additionally, they pay a 2.99% dividend yield that is well covered, with an AFFO payout ratio of 62.41%.
Currently INVH is trading at a P/AFFO of 23.77x, which compares favorably to their normal AFFO multiple of 25.91x. The stock is also trading at a slight discount to its net asset value with a P/NAV ratio of 0.94x. If INVH trades up to its normal AFFO multiple, it would result in a total annual rate of return of 16.91% by the end of 2024.
(See our deep dive HERE .)
At iREIT® we rate Invitation Homes a BUY.
Extra Space Storage Inc. ( EXR )
Extra Space is a self-storage REIT that operates and owns self-storage properties. As of their most recent update, EXR owned or operated 2,388 stores covering over 180.0 million square feet that contained roughly 1.7 million storage units with locations in 41 states.
EXR generates income through rental fees on the stores they own, management fees for the stores they operate, and ancillary income through their reinsurance program.
In April of this year, EXR announced that it will combine with Life Storage ( LSI ) through a merger agreement where EXR will acquire LSI in an all-stock transaction. The merger is expected to increase the size of EXR portfolio’s store count by more than 50% and will add over 88 million square feet to their portfolio.
EXR is investment grade, with a BBB credit rating. It has solid debt metrics, including a net debt to EBITDA of 4.9x, a long-term debt to capital ratio of 66.66%, and a fixed charge coverage ratio of 4.4x.
EXR has had positive AFFO growth in each year since 2013 and has delivered an average AFFO growth rate of 13.87% over the last decade. They pay a 4.3% dividend yield that has had a compound growth rate of 21.58% over the last 10 years, and the dividend is well covered with an AFFO payout ratio of 73.98%.
EXR is currently trading at a P/AFFO of 18.26x, which is well below their normal AFFO multiple of 22.46x. Additionally, the stock is trading at approximately 14% under its net asset value with a P/NAV ratio of 0.86x. If the stock returns to its 5 year normal AFFO multiple it will result in a total annual rate of return of 21.89% by the end of 2024.
(See our latest deep dive HERE .)
At iREIT® we rate Extra Space Storage a BUY.
In Closing
As you can see below, the nine REITs we just discussed yield an average of 4.3%, with an average payout ratio of 68%. The average iREIT® quality score is 89, and the forecasted annual total return is 19%.
When adding the 11 REITs (in Part 1) and the 9 REITs (in Part 2), the combined portfolio yield is 4.9% with a targeted (forecasted) total return of 21%. The average iREIT® quality score in an impressive 88 with a relatively safe payout ratio of just 72%.
iREIT® on Alpha
If you thought that we’re finished, hold on just a minute…
Mom always likes to add salsa to her meals, so I decided to conclude the series with a third article with some spice for the REIT portfolio.
So, I will be adding 5 more picks that will be a combination of mortgage REITs aka mREITs (just one), 2 preferreds, and a 2 high-yielding equity REITs.
Stay tuned for Part 3 and I look forward to your comments below.
For further details see:
Mom's All-Weather REIT Portfolio (Part 2)