2023-07-17 07:00:00 ET
Summary
- I know I said in the original article that there would be 20 REITs altogether in the series.
- That’s why I covered 11 in the first one and nine in the second.
- But the five I’m detailing in this one don’t really fit into the same category.
- They’re more of the SALSA variety (as opposed to SWANs).
I have a confession to make…
I made a mistake. I wrote something recently that turned out to be wrong. For which I sincerely apologize.
Some of you may already know what I mean based on the title of this article. But for those of you who don’t, let me be clear.
Here’s what I wrote in the original article (i.e., Part 1):
“This article is the first in a two-part series such that [my mom] can us this blueprint for her new REIT [real estate investment trust] portfolio.”
But this “Mom’s All-Weather REIT Portfolio” concept clearly isn’t a two-parter. It’s a trilogy. And who knows, it might end up being more than that before I’m done.
So I apologize about the inaccurate information. With that said, the objective of these articles remains the same:
“… 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.”
And this bit stays true too:
“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.’”
In fact, I can’t think of anything else in the previous two write-ups that I need to recant. In which case, hopefully you’ve accepted my admission of guilt and we can move on to bigger, better things…
Like more strong REITs trading at very nice prices.
SWANs vs. SALSA - Adding Some REIT Spice for Mom
One more moment of clarification - this one for all my extremely smart readers who think they’ve caught me in another “gotcha.”
I know I said in the original article that there would be 20 REITs altogether in the series. That’s why I covered 11 in the first one and nine in the second .
But the five I’m detailing in this one don't really fit into the same category. They belong in the same series, mind you, since they’re still for my Mom and should be capable of weathering whatever “weather” comes their way.
Mostly.
I admittedly wouldn’t call these stocks sleep-well-at-night ('SWAN') assets. They’re more of the SALSA ( safe and lasting seeking alpha ) variety. Fortunately, as I wrote at the end of Part 2, after I realized I wasn’t ready to be done with the series:
“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.
“… I will be adding 5 more picks that will be a combination of mREITs (just one), 2 preferreds, and… 2 high-yielding equity REITs.”
For those of you who aren’t familiar with the SALSA term, it’s one I created to indicate the next rung down on the REIT hierarchy. It’s a category that still encompasses strong companies, mind you. But they’re not as strong as they absolutely could be.
That’s why they tend to offer higher dividend yields than SWANs. Which, let’s face it, can be a very nice thing for any portfolio.
I’m certainly not going to object to that combination: strong (though not strongest) with elevated (though not dangerous) payouts compared to their stock prices.
A Note About Mortgage REITs
Before we get to the five picks, I do want to acknowledge the mortgage REIT in the room.
My regular readers know I’m not usually the biggest mREIT fan. REITs that deal in lending money to other real estate entities instead of owning them tend to be a lot more volatile. Industry stalwart Nareit notes that there are four primary risks involved when investing in these assets:
- Interest rate risk
- Credit risk
- Prepayment
- Rollover.
You can read the entire analysis here , but I usually stick with the first issue when warning people about mREITs. To quote Nareit:
“Managing the effects of changes in short- and long-term interest rates is an essential element of mREITs’ business operations. Changes in interest rates can affect the net interest margin, which is mREITs’ fundamental source of earnings, but also may affect the value of their mortgage assets, which affects corporate net worth.
“mREITs typically manage and mitigate risk associated with their short-term borrowings through conventional, widely used hedging strategies, including interest rate swaps, swaptions, interest rate collars, caps or floors and other financial futures contracts. mREITs also manage risk in other ways, such as adjusting the average maturities on their assets as well as their borrowings and selling assets during periods of interest rate volatility to raise cash or reduce borrowings.”
Those measures are all well and good. And there are mREIT management teams that are absolute experts at what they do. Which shows.
But the added risks remain nonetheless. And the interest rate risk is even bigger when we’re dealing with residential mREITs. The commercial kind tends to be more stable.
That’s why I was very careful before assigning the SALSA status to an mREIT, as you’ll hopefully see below.
Medical Properties Trust ( MPW )
Medical Properties is a real estate investment trust (“REIT”) that primarily invests in hospitals but also owns other healthcare properties such as behavioral health centers, inpatient rehabilitation facilities, long-term acute care hospitals, and freestanding ER / urgent care facilities.
MPW derives the majority of its revenue from general acute care hospitals with 72.3% of Q1 revenues coming from this property type. Behavioral health facilities were their 2 nd largest property type as it made up 15.3% of their Q1 revenues.
MPW’s portfolio includes 444 healthcare properties with approximately 45,000 licensed beds and have a global footprint with properties spanning across 10 countries and 31 states within the U.S.
One of the largest risks associated with MPW’s business is their tenant concentration, in particular their largest tenant Steward Health Care which makes up 24.4% of their total assets and contributed 29.6% to their Q1 revenues.
Over the last several years MPW has made progress towards further diversifying their operator concentration. As an example, in 2019 Steward made up 37.9% of their annual revenue compared to 24.4% in the latest quarter.
Additionally, the company recently announced that CommonSpirit Health will acquire Steward’s Utah operations and continue to lease the properties from MPW. In a February press release, MPW stated that its investment in its Utah real estate represents 6% of their total gross assets and Steward’s concentration will decline by this amount.
MPW has a BB credit rating (junk rated) from S&P Global. I would like to see them reduce the amount of leverage they currently employ as their debt metrics are on the high side with an adjusted net debt to EBITDAre of 7.2x and an adjusted interest coverage ratio of 3.5x.
MPW has made positive strides on this front with their agreement to sell their Australian properties for cash proceeds of approximately $1.2 billion AUD which will be used to fully repay their term loan maturing in 2024.
MPW currently pays an 11.84% dividend yield that is covered with an AFFO payout ratio of 81.69% as of the end of 2022. In 2023, analysts expect AFFO to fall by 13%, from $1.42 to $1.24 per share, which would put the 2023 AFFO payout ratio at approximately 93.5%, assuming the dividend is maintained at its current rate.
Currently MPW trades at a P/AFFO of 7.40x which is a significant discount to their normal AFFO multiple of 13.57x.
At iREIT® we rate MPW stock a Spec Buy.
Blackstone Mortgage Trust ( BXMT )
Blackstone Mortgage Trust is externally managed mortgage REIT that primarily originates senior floating rate mortgage loans that are collateralized by commercial real estate located in the U.S., Europe, and Australia.
BXMT’s $26.7 billion senior loan portfolio is comprised of 199 loans that are conservatively financed with a weighted average origination loan-to-value of 64%.
BXMT’s loan exposure is well diversified across location and property type. 66% of their loan exposure comes from multiple regions in the U.S, 14% comes from the U.K., 14% comes from Western Europe, and 6% of their loan exposure comes from Australia.
By property type the majority of their loan exposure comes from office, multifamily, hospitality, and industrial properties. U.S. and international office properties makes up 34% of their loan exposure, multifamily makes up 27%, hospitality makes up 19%, and industrial properties makes up 9% of their loan exposure.
BXMT’s distributable earnings per share ('EPS') came in at $0.79 per share in Q1 23 which represents a 27% year-over-year increase when compared to the first quarter in 2022. Similarly, their dividend coverage improved from 100% in Q1 22 to 127% in Q1 23 when based on distributable EPS.
During the first quarter BXMT’s portfolio had excellent credit performance with no defaults and 100% interest collection. They upgraded 10 loans and downgraded 7 loans and loans on cost recovery only represented 3% of their portfolio during the first quarter.
Blackstone Mortgage Trust has paid a $0.62 quarterly dividend for 31 consecutive quarters which totals to $2.48 per share on an annual basis. They currently pay a 11.34% dividend yield that is covered by their distributable earnings and trade at a P/E of 7.87x compared to their normal P/E ratio of 11.51x.
Note: iREIT® on Alpha just published a deep dive on BXMT.
At iREIT® we rate BXMT stock a Buy with a tier 1 rating.
Ladder Capital Corp ( LADR )
Ladder is an internally managed mortgage REIT that originates and invests in a portfolio of commercial real estate (“CRE”), with a primary focus on originating fixed and floating-rate senior first mortgage loans that are secured by commercial real estate.
Additionally, they own and operate net leased commercial properties and invest in investment grade securities that are secured by first mortgage loans. LADR is middle-market focused with an average loan size of $25 million and offers a variety of financing solutions including senior mortgage, mezzanine, joint-venture and net lease equity investments.
LADR has a $3.8 billion senior secured first mortgage loan portfolio and has $5.9 billion in total assets which consists of their CRE loans, equity interests, and investments in securities. Senior secured first mortgage loans make up 99% of their CRE loan portfolio and have a weighted average loan-to-value of 68%.
Additionally, only 16% of their total assets are made up of office loans and 76% of their office loans originated after the covid pandemic.
Since 2016 LADR has an average operating earnings growth rate of -4.26% with earnings falling by 21%, 63%, and 18% in the years 2019, 2020, and 2021 respectively. However, earnings rebounded sharply in 2022 with an increase of 137% and analysts expect a 13% increase in earnings in 2023.
During the first quarter, LADR generated $47.2 million in distributable earnings, or $0.38 distributable earnings per share, and paid a $0.23 quarterly dividend for dividend coverage of approximately 1.65x. However, it should be noted that they cut their dividend for 3 years in a row (2019 – 2021) and are expected to pay an annual dividend of 0.92 per share in 2023 compared to $1.53 per share in 2018.
LADR pays a 8.42% dividend yield and is currently trading at a P/E of 8.82x which compares favorably to their normal P/E ratio of 10.33x.
At iREIT we rate Ladder Capital stock a Buy with a tier 1 rating.
Now 2 Preferreds for Mom
RLJ Lodging Trust (RLJ.PA) operates as a self-advised REIT that owns premium-branded hotel real estate. As of December 31, 2022, RLJ owned 97 hotel properties with 14% of EBITDA generated by resort locations and the remainder from its urban portfolio.
While occupancy in urban markets has lagged resorts, the Sunbelt, which represents 51% of RLJ’s portfolio, has been the quickest market to recover occupancy.
RLJ’s occupancy has recovered from a 2020 covid low of 34% to more than 72% occupied today, only a few percent less than pre-covid. Additionally, average daily rates on rooms are more than 5% higher than 2019 levels.
Digital Bridge Group Inc ( DBRG.PJ ) is a global digital infrastructure investment manager, deploying and managing capital across digital assets, including data centers, cell towers, fiber networks, small cells, and edge infrastructure.
Notably, over the past few years DBRG has effectively transitioned out of its senior housing and wellness portfolios to become primarily a digital infrastructure company.
DBRG operates through two segments, Investment Management, and its operating interests in two data center companies, DataBank and Vantage.
DBRG’s strategy is to ultimately transition away from being an operator to become a pureplay asset manager earning fee income. DBRG has successfully been able to grow assets under management from approximately $30b in 2020 to more than $50b today.
The Sum of the Parts
Now that I’ve officially finished mom’s portfolio (Part 1, 2, and 3) let’s recap the picks below:
iREIT®
As you can see, the average dividend yield for all 25 picks is 5.9% with an average payout ratio of 68%.
iREIT® has forecasted the portfolio to return approximately 20% annually.
As most of my followers know (thank you for following me), I’m very close to launching my very own REIT ETF that’s similar to our Index known as the iREIT®-MarketVector ™ Quality REIT Index .
Our team has spent over three years refining the blueprint to ensure that it’s suited for not only my mom, but all moms (and dads) around the globe.
The REIT ETF Index provides exposure to high quality US listed common and preferred equity securities of REITs while ensuring sector diversification. Here’s a snapshot of some of the constituents of the Index:
The ETF also includes 10% preferred stock exposure with a tilt toward quality, just as per the Equity REIT composition.
I can’t wait for the ETF to go live, as our team designed the Index for my mom…
Meanwhile, I hope you have enjoyed the Mom’s REIT portfolio series and as always, thank you for the opportunity to be of service.
Happy SWAN Investing!
For further details see:
Now I'm Adding Salsa To Mom's All-Weather REIT Portfolio (Part 3)