2023-05-23 07:00:00 ET
Summary
- Diversified REITs offer an extraordinary mix of well-diversified rents from tenants in varied geographies.
- The Real Estate sector (XLRE) has been the worst-performing over the last year. Now may be the time to capitalize on beaten-down REITs with strong fundamentals to demonstrate resilience amid macro headwinds.
- REITs offer higher dividend income than common equities and can offer favorable tax structures.
- We have three Strong Buy-rated REITs with yields between 4%-8% based on Seeking Alpha’s Quant Rating system.
Investing in Real Estate Investment Trusts (REITs)
Anyone who has invested likely heard the saying “diversify your portfolio.” Exposure to more than one type of investment can be essential to combat inflation, generate income, and balance risk and reward – especially in a challenging economy.
But another element is to invest in high-quality, preferably undervalued companies with solid AFFO and FFO growth to deliver greater upside. And while real estate has been hit hard this last year, diversified REITs that offer a mix of residential and commercial assets in various industries have proven to be safe havens in the Real Estate market and have also outperformed on the right mix of value, growth, plus characteristics like momentum, profitability, and EPS revisions. Why purchase individual properties that require maintenance and can create headaches when you can own a specific theme of properties? Broad exposure to companies with +90% occupancy rates and stocks with solid yields and strong dividend safety – two investment characteristics that matter in an environment that eats away at portfolios. Whether or not you’re an income-oriented investor, I have three top diversified REITs that provide above-average yields and should be considered by investors seeking to invest in REITs.
3 Top Diversified REITs to Buy
Income-generating REITs are a great opportunity to build long-term capital appreciation similar to value stocks while diversifying a portfolio. Although there is uncertainty around whether the Fed will continue to raise interest rates, diversified REITs’ unique portfolio of properties can be an excellent way to gain exposure in varied sectors and industries rather than focusing on one specific type of asset. Here’s a look at my top three REITs to invest in for the second half of 2023.
1. Essential Properties Realty Trust, Inc. ( EPRT )
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Market Capitalization: $3.65B
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Dividend Safety Grade: A-
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Dividend Yield ((FWD)): 4.50%
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P/FFO ((FWD)): 14.56
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Quant Rating: Strong Buy
Offering income and growth, Essential Properties Realty Trust is the REIT you have supported without knowing, and maybe you even love some of their tenant’s products. Offering a diversified portfolio that includes tenants like Taco Bell, McDonald’s, Marriott, and Circle K, to name a few, EPRT’s long-standing tenant relationships, strong balance sheet, and earnings highlight the company’s strength and stability, as evidenced by the quant Strong Buy rating. Not only has Essential Properties' rent covered remained at nearly 4x for the first quarter, but its solid network resulted in 94% of its new sale-leaseback transaction from existing relationship referrals. Because the real estate market performs differently during various economic times, to help mitigate risks from a diversified perspective, EPRT’s management has been proactive in looking for the right industries to capitalize on, selectively taking advantage of favorable pricing and adjusting for any risks. As highlighted by EPRT President and CEO Pete Mavoides ,
“From a diversity perspective, our largest tenant represents just 3% of ABR at quarter end, and our top 10 tenants account for only 17.1% of ABR, both strong indicators of the growing diversity in our portfolio and tenant base. Diversity is an important risk mitigation tool and differentiator for us and is a direct benefit of our focus on noncredit-rated tenants and middle market operators, which offers an expansive opportunity set and, in our view, superior risk-adjusted returns.”
EPRT delivered strong first-quarter results, highlighted by excellent growth grades .
EPRT Growth & Profitability
Essential Properties delivered a strong first quarter showing, with a Q1 2023 AFFO of $0.40 in line with expectations and revenue of $83.69M, beating by $4.63M for 19.4% year-over-year growth. A forward dividend yield of 4.50% gives investors something to look forward to, resulting in EPRT ranking as one of Seeking Alpha’s Top 10 Dividend Stocks . Although 4.50% is moderate in the current environment, the company has a solid reputation for cash yields above 7% and possesses very strong dividend grades.
EPRT Stock Dividend Scorecard
Strong dividend grades are supported by 5-6% FFO growth and a solid 4.5% dividend yield that has consistently grown. And while past performance does not guarantee future results, EPRT’s dividend growth has increased by approximately 4% yearly.
Following $207M invested in 24 separate transactions for the first quarter, EPRT’s weighted average cash yield was 7.6%. With a substantial investment pipeline, EPRT has increased the 2023 AFFO per share guidance to $1.60 to $1.64, an anticipated 6% growth. With over 1,688 properties spanning 48 states and nearly 100% leased, this cash cow is sitting pretty as it focuses on car washes and early childhood education, its two largest industries. With bullish momentum pushing the stock to trade near 52-week highs, consider this still discounted stock for a portfolio.
EPRT Valuation & Momentum
Year-to-date, EPRT is up more than 7%, and over the last year is +11%. While it’s trading near its 52-week high of $26.43, EPRT possesses a ‘C’ valuation grade, highlighted by P/AFFO ((FWD)) of 15x compared to the sector 13.81x and solid Total Debt/Capital of nearly 30% discount to the sector. With strong liquidity, AFFO of $58.3M for Q1, an increase of $9.3M for the same period in 2022, and solid growth prospects, EPRT is focused on continuing to perform well and adding value in a challenging capital market environment, as is my next pick - that can literally add some fun to your portfolio.
2. EPR Properties ( EPR )
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Market Capitalization: $3.16B
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Dividend Safety: B-
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Dividend Yield ((FWD)): 7.86%
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P/FFO ((FWD)): 8.57
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Quant Rating: Strong Buy
Where Essential Properties’ diversified portfolio focuses on tenants in businesses that include restaurants, car washes, and service sectors, EPR Properties add an element of fun to portfolios. A leading experiential net lease REIT, EPR allows investors to invest in the out-of-home entertainment experiences people crave. Commercial gaming, Top Golf, Margaritaville, and leading ski resort destinations are just a few offerings. The company’s strong liquidity has allowed them to deploy capital for expansion, which it plans to explore in a “disciplined manner across a variety of experiential properties, including having a committed pipeline that we will fund in the coming quarters,” said Greg Silvers , Chairman & CEO. “With a durable income stream and ongoing recovery and additional growth from our investment pipeline, we are encouraged by our outlook for the year.”
In addition to tremendous fundamentals supported by a nearly 8% forward dividend, EPR’s consecutive earnings beats, including profits that surpassed expectations , help solidify why this REIT is great for the income-focused value investor.
EPR Growth & Profitability
Continuing to rebound from the pandemic’s destruction, EPR’s financials are healthy, and profitability is strong despite the uncertainty surrounding Regal Cinemas' parent company, Cineworld, filing for bankruptcy. However, as noted in the first quarter earnings call, Regas, which makes up approximately $82M of a $110M deferred rent, has paid total rent and deferral payments in April. Although the stock is down more than 17% over the last year, its recovery is strong, +14% YTD.
Not only did EPR Properties’ FFO of $1.26 beat by $0.07, but revenue of $171.4M beat by $20.78M with a Y/Y increase of ~9%. Net income per diluted common share grew ~44%, and $6.5M of deferred rent from cash was collected. Additionally, ~$127M rent and interest deferred from the pandemic was recovered. With the recovery of theaters post-pandemic comprising 41% of its portfolio making a strong box office recovery as pent-up demand is aiding the stock’s momentum, EPR is on solid footing, with A+ analyst revisions that include four upward revisions in the last 90 days.
EPR Properties Dividend Scorecard
With post-pandemic momentum gaining, EPR is a REIT continuing to perform by capitalizing on industries performing well as EPR focuses on positive trends and growth to capture more revenue while still trading at a discount. In addition to its unique exposure to varying real estate types and strong liquidity position, EPR has substantial cash to support an attractive 7.86% dividend yield ((TTM)). Although its dividend consistency grade is an ‘F,’ the company’s ability to continue paying a dividend is well-covered by an AFFO payout ratio of 63% for Q1.
EPR Valuation & Momentum
According to Atlas Equity Research , "EPR Properties Seems Like A REIT Bargain". Atlas Equity Research highlights that EPR’s debt looks manageable with no significant maturities up to 2026, and the company is trading at a considerable discount to other experiential REITs. With an A- valuation grade, EPR is undervalued, trading at less than $45 per share and below its mid-52-week range. With a P/AFFO ((FWD)) of 8.41x versus the sector's 13.81x, EPR is nearly a 40% difference to the sector.
Despite the stock’s decline over the last year and most of the REITs market, EPR has rebounded nicely and is on an uptrend, +14% YTD. Quarterly outperforming its peers, in addition to a strong valuation, EPR continues to outrank the REITs in its sector and industry.
3. Broadstone Net Lease, Inc. ( BNL )
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Market Capitalization: $3.12B
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Dividend Safety: B
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Dividend Yield ((FWD)): 7.05%
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P/FFO ((FWD)): 10.26
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Quant Rating: Strong Buy
Broadstone Net Lease, Inc. is a REIT offering commercial net lease properties diversified by location, tenant, industry, and brand. With a proven strategy for defensive growth, BNL offers single-tenant and commercial properties throughout the U.S., focusing on credit analysis and real estate underwriting. With a longstanding track record of delivering attractive risk-adjusted returns, Broadstone trades substantially lower than its peers while maintaining strong momentum.
BNL Stock Valuation
As mentioned above, the real estate sector and many REITs, in general, have been crushed over the last year, and BNL is no exception. Down nearly 20% over the last year, BNL has felt the impacts while maintaining strong fundamentals and its quant strong buy rating on the heels of consecutive top-and-bottom-line earnings beats. Gen Alpha from Hoya Capital has written an article titled Broadstone Net Lease: Bag This Generous 7% Yield Before It Recovers. Trading at a forward P/AFFO of 11.27x, BNL is a -18.42% difference from its peers and has a 37.43% Total Debt/Capital, which is a -23.69% difference.
BNL Stock Has A Strong Valuation Framework
With little debt and a fortified balance sheet, BNL is focused on a selective growth strategy to drive accretive earnings long-term.
BNL Stock Growth & Profitability
BNL continues to capitalize on organic growth, highlighted by solid dividend grades. With first-quarter FFO of $0.38 in-line with expectations and revenue of $118.99M that beat by $6.29M with 27% Y/Y growth, BNL expected AFFO of between $1.40 and $1.42 per diluted share.
BNL Stock Dividend Scorecard
Highlighted by a 'B' Dividend Safety rating and a 7.05% forward dividend yield, many of the stocks that posted some of the highest dividends , including BNL, were REITs.
Representing five semiannual dividend increases since its IPO, Broadstone Net Lease approved a $0.28 dividend per common share in OP unit, a 1.8% increase from Q4 2022. Supported by an AFFO payout ratio of +70%, the yield is handsome compared to its peers. With continued growth and strong financial performance that includes $389.5M in annualized base rent of more than 801 highly diversified properties, it's no surprise the company has maintained a strong dividend payout and guidance. Broadstone’s CFO, Kevin Fennell , stated,
“We are maintaining our 2023 per share guidance today, with an AFFO range of $1.40 to $1.42 per share, so we are increasing our disposition volume given the success we have experienced year-to-date. We will continue to evaluate guidance revisions as we progress further into the year and gain more clarity into both the pace of asset repricing and conditions in the capital markets.
Our guidance range reflects the following key assumptions: investment volume between $300 million and $500 million, which includes amounts to be funded this year under the aforementioned build-to-suit transaction; disposition volume between $150 million and $200 million, which has been revised higher; and total cash G&A between $32 million and $34 million which remains unchanged.”
Despite the challenging economic conditions, BNL maintained 99.4% occupancy through Q1 and collected 100% of tenants’ rents for the quarter. The resiliency of each of my top REIT stocks is a testament to the opportunities available by focusing on quality metrics supported with strong buy ratings.
3 Top REITs for Growth, Value, and income generation
Real estate is the worst-performing U.S. sector over the last year, with ( XLRE ) -13.50%. And while historically, many REITs have outperformed during periods of downturn and economic uncertainty, screening for quality and value, even in an industry that’s down, can offer the opportunity for upside. The three strong buy-rated REIT stocks, EPRT, EPR, and BNL, not only offer solid yields and have provided strong consecutive returns amid rising interest rates, their yields with strong dividend safety grades offer income, especially in the current environment.
Each of the picks offers attractive risk-adjusted return potential and trades at discounts. With increases in rental rates and pricing competition serving as a tailwind, bullish momentum is helping push these Top REITs to the top of their sector and industries. Being ahead of the curve by focusing on companies with strong fundamentals that stand to benefit now and as the economy rebounds is a great opportunity to benefit from diversified segments within some of the Top Real Estate Stocks .
For further details see:
Top 3 High Yield Diversified REITs For H2 2023