Berkshire Hathaway Doubles Down On Net Lease REIT, STORE Capital


While COVID-19 continues to spread its tentacles across most of the commercial real estate sector, the net lease sector has become the new “gold standard” for income-oriented investors.

This week, two net lease REITs are entering the publicly- traded universe in separate IPOs: NetStreit Corporation, trading under the ticker “NTST” raised raised $225 million at $18.00 per share (below the range of $19 to $21) and Broadstone Net Lease filed recently to raise up to $100 million in an IPO (this is likely a placeholder for a deal that could raise up to $500 million).

The Net Lease sector – consisting of free-standing buildings – has become an increasingly dominant investment category, thanks in part to the long-term lease contracts that generate durable sources of rental income.

A decade ago, this REIT sector had a combined market capitalization of less than $5 billion and today it has mushroomed almost 10x, to a market capitalization of over $44 billion (according to Nareit).

Today Berkshire Hathaway’s 13F revealed that the company owns another 5.8 million shares of STORE Capital (STOR), on top of the 18.6 million shares that were purchased back in June 2017, bringing the total to 24.4 million shares. In a Forbes article (June 2017) I explained,

“Store Capital simultaneously issued 18.6 million shares of company stock in a private placement to a wholly owned subsidiary of Berkshire Hathaway

BRK.B
at a price of $20.25 per share.”

In what’s commonly referred to as “dollar cost averaging”, Berkshire Hathaway took advantage of the mispricing of STORE shares, to lower the cost basis to essentially “true up” the original allocation ($20.25 back in 2017).

Like most REITs, STORE has been hammered with the COVID-19 lockdown, and the company has been hit especially hard due to its exposure with restaurants (8.5 percent of the portfolio), movie theaters (4 percent of the portfolio), and health clubs (5.3 percent of the portfolio).

STORE has returned roughly -30 percent year-to-date, compared with the rest of the U.S. REIT sector that’s returned -12 percent (based on the Vanguard Real Estate ETF).

However, rent collection has continued to improve as STORE collected 70 percent of rent in April, 67 percent in May, 76 percent in June, and 85 percent in July (average 73 percent in Q2-20).

This announcement also corresponded with the company maintaining its dividend at $0.35/share amidst the COVID-19 concerns.

In a recent COVID-19 update conference call, STORE’s CEO, Chris Volk said that his company’s recent performance leads management (and the board of directors) to believe that the company will have the wherewithal to pay the dividend from operating cash flows rather than being forced to offer equity to shareholders and/or increase the debt load to support the dividend payment.

Berkshire Hathaway’s confidence in the company is evidenced by the 31 percent growth (based on number of new shares) – up 1.15 percent after hours. Berkshire Hathaway’s total STORE investment now stands at approximately 9.6 percent.

STORE has been trading at around $22.00 per share over the last 90 days, so we estimate that Warren Buffet’s prized vehicle has added another $125 million in capital, putting the total investment sum at roughly $500 million.

I’m glad to see Berkshire Hathaway casting a wider net in REIT-dom as this signals trust in the asset class that has become an all-important category for big and small investors, known as Real Estate Investment Trusts.  

I own shares in STOR.



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The Ultimate Winners Are The Secondary Markets


I’ll state right away that I still see promise in certain big-city real estate investment trusts (REITs). So this is not a hit against that entire focus.

You may have seen the recent news that Facebook (Nasdaq: FB) signed a massive lease with Vornado Realty Trust (VNO). And that’s in New York City, of all places – the place in the U.S. most affected by the pandemic.

Yet it still seems like the place to be for big business, according to CEO Mark Zuckerberg. And say what you want about Zuckerberg… he’s far from a stupid man considering his groundbreaking elevation of social media and shrewd expansion of his empire since.

As Yahoo! Finance reported on August 4, Facebook has leased the entire planned office space at the Farley Building:

“The social media giant is looking to use its space at Farley to create a ‘dedicated hub’ for its tech and engineering teams, according to its VP of real estate and facilities, Robert Cookson.

“Facebook also leases office space at Vornado’s 770 Broadway and at the [close-by] Hudson Yards.”

It might sound strange for a tech company to be thinking about office space when it has every seeming incentive to cut that expense. Yet there it is anyway, just as “it’s there” with:

·       JP Morgan, which is constructing new 2.5 headquarters there at 277 Park Ave.

·       Mastercard

MA
, which recently leased all of 150 5th Ave.

·       Disney, which is constructing new headquarters at 4 Hudson Square

·       Pfizer

PFE
, which leased 800,000 square feet at 66 Hudson Boulevard

·       Netflix

NFLX
, which leased 140,000 square feet at 888 Broadway.

You’d better believe they’re not building offices they don’t expect people to use.

Which means employees will need to be within commuting distance.

But Don’t Discount the Suburbs

So yes, I’m investing in select New York City stocks. And I’m confident certain other big-city focused REITs will survive the pandemic and even go on to thrive again.

But that doesn’t mean I don’t recognize the very real potential in select secondary markets.

Right now, cities don’t have quite the same popular perception that they once did. For proof of that, consider articles like this one from CNBC: “‘We’re Running Out of Homes for Sale,’ Lake Tahoe Brokers Say as Tech Workers Flee Bay Area.”

The piece’s “Key Points” are as follows:

·       Lake Tahoe real estate is getting snapped up at a record pace, as San Francisco tech workers flee the city in search of more space and a healthier lifestyle.

·       Brokers say the inventory of homes for sale has shrunk to about one-fifth to one-tenth of the usual levels.

·       “People are writing all-cash offers for houses, sight unseen,” said Sabrina Belleci, a Lake Tahoe broker with RE/Max.

That last one seems extremely intense. And perhaps more than a little ill-advised. But that’s the situation nonetheless. With so many employees still working remotely – complete with promises that they can continue doing so for quite a while – they’re looking to book it out of big-city life by buying up properties elsewhere…

Including in secondary markets.

As for those who can’t afford new homes, they’ll still take more space if they can, how they can.

Winning All Around

Not quite three months ago, Inmar, a data analytics company that serves Fortune 500 companies, published these thoughts:

“The Covid-19 pandemic has thrown the United States into a recession. Not a ‘downturn.’ Not a ‘correction.’ A recession. This unprecedented phenomenon – marked by retail-killing stay at home orders – is already impacting the very fabric of American business and virtually every sector of the U.S. economy has been negatively affected. But there are a few exceptions. Most notable of these is the secondary market. This is one business segment that actually grows during a recession, and it’s going to grow this year even as the rest of the economy suffers.”

By that Inmar meant “the industry that (re)sells retailers’ overstocks, excess inventory, used goods, and products returned by customers.” And they’ve been proven right in so many ways so far.

But there’s another kind of secondary market I’d like to point out today that is proving to have its own heyday. And, in many cases, the markets still haven’t caught on…

2 Secondary Market Picks

I live in a secondary city, known as Greenville-Spartanburg, and while I miss going to big gateway cities, I recognize that there’s plenty of business in towns like the one I live in.

STAG Industrial (STAG) is an Industrial REIT that owns buildings in my hometown, as well as around 60 other markets in the U.S. While other Industrial REITs scout out the larger towns, STAG has mapped out a strategy of investing in markets that are “off the radar”.

I have been a stakeholder for a number of years, and I have watched the company evolve (IPO was 2010) into a highly diversified REIT with tenants like Amazon

AMZN
, XPO Logistics

XPO
, Solo Cup, ad Ford Motor Company

F
.

The dividend appears safe, as reflected in the payout ratio (of 78 percent) and investment grade balance sheet. Shares hit an all-time high last week, so I suggest waiting for a better entry price.

Another secondary market REIT I like is City Office (CIO), a REIT that owns 65 office properties located in markets like Phoenix, Denver, Tampa, Orlando, San Diego, Dallas, Portland, and Seattle.

Investments range from $25 million to $100 million, and the company likes these markets because it has less competition from larger institutional investors (like STAG). The top tenant list includes names like State of Colorado Dept of Health, Seattle Genetics

SGEN
, United Healthcare, Ally Financial

ALLY
, and Kaplan.

City Office cut its dividend due to the pandemic, yet shares look tempting now, as evidenced by the $9.20 price and P/FFO multiple of 81.x (normal is 12.0x). The dividend yield is 6.5 percent and analyst growth estimates are strong (+11 percent in 2021). We have a Spec Strong Buy rating on shares now.

I own shares in STAG and CIO.



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Why QTS Realty Is Trading At All-Time Highs


In a nutshell, QTS Realty kicked off data center REIT earnings last week hitting on all cylinders and raising FY 2020 Guidance across the board, including revenue, adjusted EBITDA, operating FFO per share, and boosting capex to record levels.

In a Covid-19 world, many REIT asset classes have suffered and withdrawn guidance and/or cut dividends as tenants across non-essential industries have struggled to pay rent. On the other hand, secular trends such as ecommerce, work from home, and remote learning, have created opportunities in fiber infrastructure, cell towers, and data centers.

In fact, the Covid-19 pandemic has also accelerated the digital transformation by traditional Enterprise and SMB firms away from isolated on-premises data centers to distributed multi-cloud and hybrid IT architectures to deploy applications closer to customers, vendors, and employees.  

QTS Q2 2020 Highlights

·        Reported Operating FFO (OFFO) per fully diluted share of $0.70 for the quarter, an increase of 8.5% compared to OFFO per fully diluted share of $0.65 in the same period of 2019.

·        Signed new and modified renewal leases during the second quarter of 2020 aggregating to $21.0 million of incremental annualized rent, net of downgrades.

·        Reported a Company record high annualized booked-not-billed monthly recurring revenue (MRR) balance of $111.2 million as of June 30, 2020 compared to $100.9 million as of March 31, 2020.

·        Adjusted EBIDA margins increased 310 basis points year-over-year to a record 55.3%.

·        Interconnection revenue for cross-connects increased by 30% year-over-year.

·        Churn was just 1.1% YTD, and FY 2020 Guidance was reduced to 3% to 5%, with the lower range likely in play.

QTS Boosts FY 2020 Guidance

The strong bookings during the past three quarters, along with visibility into the sales funnel and deal pipeline has resulted in an acceleration of development Capex. (QTS has increased the amount of capacity expected to be delivered and in-service in 2020 by more than 100,000 square feet of raised floor, relative to expectations at the beginning of 2020).

Notably, the 60MW of expansion space to be delivered by year-end 2020 is greater than the number of megawatts delivered during 2017, 2018 and 2019, combined!

Over 75% of this growth Capex is pre-leased, and development pipeline is fully funded through mid-2021 with $591 million of forward equity offerings. Additionally, this capital allocation as directly tied to QTS’ goal of achieving consistent growth in OFFO per share of between 5% – 9% annually to support growing the dividend in a 6%-7% range.

QTS Realty’s Digital “Secret Sauce”

QTS Realty has invested for over four years in its SDP (software defined data center) initiative. Prior to Covid-19, QTS management credited the company’s Service Delivery Platform with driving strong business momentum and efficiencies last year.

Back in February — prior to the Covid-19 nightmare becoming a daily reality – QTS CFO Jeff Berson shared in an interview with Data Center Knowledge: “We are seeing tremendous value stemming from SDP in a number of areas, including supporting a successful [customer] win-rate that is increasing our market share at strong and sustainable pricing levels.”

SDP is a game changer because it allows customers to monitor all IT deployments remotely from a mobile device and drill down to the server level in a rack to monitor every data point a technician would normally access in person.

Customers can also self-provision many new deployments without the need of a sales engineer, or alternatively work with a sales engineer “on the same page” remotely. In a similar fashion, the QTS sales team can give virtual tours to potential customers located anywhere across the globe – a huge advantage during a pandemic.

CEO Chad Williams confirmed on the Q2 earnings call that SDP differentiates every conversation for the sales team and clearly has increased the win rate when competing for Enterprise multi-cloud and hybrid IT colocation deals.

Making a Federal Case

Success in the Federal government leasing vertical appears to have finally become “a thing” for QTS Realty, (an overnight success after eight-years of pursuing this elusive market segment).

While the federal government is notoriously slow in decision making, there are a limited number of landlords and facilities that can make the short-list due to the cost and time required to run the gauntlet to become certified as an approved vendor.

There is an alphabet soup of critical designations including FedRAMP and FISMA required to provide physical data center space for federal agencies such as the Department of Homeland Security, and Department of Defense.

One reward for this effort is government contractor and Federal agency deployments can yield higher margins compared with competing on price for hyperscale deployments. QTS announced a contribution of 5MW-plus of signed government leases (across multiple locations) included in the $21 million bookings achieved during the quarter. Notably, this is an expansion of a similar 5MW-plus deal reported by QTS Realty in Q2 2019.

Investor Edge

QTS Realty continues to under-promise and over-deliver when it comes to quarterly bookings, but most of this good news is already baked into the shares.

Notably, QTS shares are trading at all-time highs, having already been bid up 35% YTD. (And per FAST Graphs, QTS shares are trading at a lofty 28.8x AFFO per share versus a “normal” multiple of just below 20x AFFO). Potential investors should consider exercising patience here and wait for a more attractive entry point.

Bill Stoller contributed to this article. I own shares in QTS.



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Offense Might Win Games, But Defense Wins Championships


Call it what you will. The Covid-19 pandemic. The Great Lockdown. The Coronavirus Recession. Whatever label you give it, it remains unprecedented. Never in history has more than 60 percent of the global population come under this kind of lock-and-key restrictions all at once.

The effects of the shutdowns range country to country. But in the U.S. alone, the Congressional Budget Office (CBO) expects second-quarter economic growth to come in at -40 percent. The New York and St. Louis Feds, meanwhile, have even worse estimates at -47 percent and -50 percent, respectively.

Now, for the July-September period, there’s supposed to be a 20 percent+ surge back upward, which would mark see the strongest economic growth in history. However, let’s face the facts: that this unprecedented situation has largely upended one of REIT investors’ most cherished and basic assumptions.

It will be dangerous moving forward if we don’t.

A REIT Reversal for the Record

So far, more than 180 companies have announced either dividend cuts or full-out suspensions since the start of the shutdowns. And as was expected (as soon as we gathered our wits enough to expect anything), plenty of economically sensitive REITs are among that unfortunate number.

For instance, it’s no surprise that hotel REIT dividends haven’t done well.

Even in typical recessions, they lack the long-term leases and stable cash flow of other equity industries. That’s why I look for AFFO (adjusted funds from operations) payout ratios of 75 percent or less in this subsector rather than the 90 percent that’s safe for most REITs. Essentially, you need a safety buffer for the bad times that are bound to happen, sending occupancy down.

The same 75 percent applies to industrial REITs, which often have economically sensitive cash flow.

We can see similar problems with low-quality mall and shopping center REITs: the kind that have high leverage, like Whitestone Realty (WSR), Macerich

MAC
(MAC) and Washington Prime Group

WPG
(WPG). All three have cut or suspended their dividends – something I warned income investors about even before the lockdowns.

What’s much more surprising is the shutdown’s effects on triple-net lease REITs and well-placed, well-run shopping centers, such as Realty Income

O
(O) and Federal Realty (FRT). Both tend to be less sensitive since most of their tenants are recession-resistant… with “tend to be” the apparent keywords to note.

The lockdowns seem to have turned the normal defensive vs. cyclical relationship topsy-turvy. Not completely, mind you, but definitely with industrial REITs. Back in April, they managed to collect virtually all their rent. In this environment, of course, it doesn’t hurt that so many of them lease to the likes of FedEx

FDX
and Amazon

AMZN
. Cooped up at home, people are ordering online like never before. Which means that industrial REITs are thriving like never before.

That then puts them in stark contrast with triple net leases. The April Nareit rent survey found that, collectively speaking, half of those stalwarts’ expected rent didn’t come in. And shopping center REIT fared even worse. That kind of news was more than enough to knock so-called “bond alternatives” like Realty Income right off their overvalued pedestals.

Painfully so.

I and so many other REIT or stock experts have long-since been warning against treating dividend stocks like bonds. Even the best don’t match up; they’re still stocks, no matter how defensive they normally might be. We’re seeing the hard truth of that lesson hit home.

But there’s an even more hard truth at play: a risk-management lesson we’d better take to heart now if we haven’t already.

Their Dividends Remain Solid

A colleague of mine recently stress-tested a wide range of retail REITS, medical REITs, and office REITs with a three-month lockdown scenario compared to Nareit’s April rent data. Factoring in that cash-flow hit along with the AFFO cuts already estimated by analysts, he applied the results to both leverage and interest coverage ratios.

Looked at like this, Realty Income resulted in a 94 percent stress-test AFFO payout, while Federal Realty came in at 104 percent. This took both of them down from stellar safety ratings (5/5) to above-average (4/5). Even so, Realty Income and National Retail Properties

NNN
(NNN) came out ahead in their industry, with very low chances of cutting their dividends anytime soon.

That’s partially due to their reasonable payout ratios, but also because of their strong balance sheets and high liquidity. As such, they can borrow more easily to pay out their dividends, even in a worst-case scenario.

Besides, NNN jealously guards its 30-year dividend growth streak, as does Realty with its 25-year run. FRT, meanwhile, has been raising its payouts 52 years in a row – landing it a place on the dividend kings list it won’t give up without an intense fight.

How to Avoid Losses When Things Go Wrong

Back to Realty Income, the defensive core of its portfolio is made up of convenience, drug, dollar, and grocery stores. And since those have been deemed “essential,” most of them never closed. That’s why, it  was able to collect 83 percent of May rent – on May 1.

Gyms, movie theaters, daycare services, and restaurants, of course, weren’t so lucky. So many of them didn’t pay some or even all their leasing obligations. Fortunately, Realty’s business is well-diversified across 20 major industries… only six of which saw any significant amount of lease breaches. Very close to 100 percent of its investment-grade tenants, meanwhile – which account for 50 percent of its cash flow – paid in full and on time.

So what can we take from this? How about a demand that we start paying more attention to fundamentals. That way, whenever bad times hit – and they always hit eventually – we’ll be properly prepared.

During normal economic stints, it’s nice – and even sensible – to focus on companies that can grow their cash flows appropriately. That’s what drives shares and dividends alike higher. But during recessions, it’s all about safe payout ratios and strong balance sheets, which makes top-quality blue-chip companies like Realty Income, National Retail and Federal Realty extremely attractive.

In times like these, we crave stability. And since we never quite know when “times like these” are going to hit, we should seek appropriate amounts of stability for our portfolios no matter what.

I own shares in O and FRT.

Portions of this article appeared in the June edition of The Forbes Real Estate Investor (newsletter).



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The Coronavirus Is Hurting Restaurants. Here’s What That Means For Real Estate


Aside from the airlines and hotel operators, restaurants could be one of the biggest victims of the coronavirus pandemic. 

In only a matter of days, thousands of eateries – from fast-food chains to fine-dining establishments – have shut down across the country. Eating out at restaurants was one the first things that many people cut back on, as they realized COVID-19 could be spread via human-to-human contact. 

And then, one by one, many cities and states across the U.S. began ordering dining establishments to lock their doors, though many are still allowed to offer deliveries and take-out options to customers looking for a quick and easy bite. 

Unfortunately, for many restaurant operators, the coronavirus could be the final blow to their businesses – one that puts them out of business. 

Profit margins in the industry are already razor-thin to begin with. Turnover has always been high. The mechanics, to run a restaurant, are complicated. The supply chains are complex. As a restaurant operator, you are dealing with fresh food, which is difficult to keep in stock as demand fluctuates. 

It will be extremely difficult for many of these restaurant owners to continue to pay staff, when they are not serving customers. Even those still offering deliveries are losing sales. The demand from consumers has dropped off tremendously. 

The National Restaurant Association has estimated that between 5 million and 7 million restaurant jobs will be lost in the U.S. over the next three months. 

Danny Meyer’s Union Square Hospitality Group, which is based in New York, has already laid off about 2,000 workers, or about 80% of its workforce. 

The irony of this all from a real estate perspective is that, for some time now, restaurants have been considered a safer asset to incorporate into a shopping center or mixed-use development. They drive traffic. And then, hopefully, people will visit some of the nearby shops after they grab lunch. 

But for the foreseeable future, all of that logic is out the window. We don’t know what restaurants we’ll be left with when this is all over. Some pizza delivery chains like Papa John’s are looking to hire thousands of workers “immediately” to meet a surge in demand. But there are many companies that have never been prepared to handle orders that way. 

The parent company of Olive Garden and Longhorn Steakhouse – Darden Restaurants – has withdrawn its fiscal 2020 outlook and also suspended its quarterly dividend because of COVID-19. It fully drew down its $750 million credit facility “out of an abundance of caution.” 

We can only expect many more businesses will be following suit. 

But Wait, You Can Buy Their Real Estate At Bargain Prices Now

As a REIT analyst, I cover a variety of companies that lease to restaurants and the net lease REIT sector offers some attractive buying opportunities, if you have the appetite for the higher risk.

We recently upgraded shares of Realty Income (O), a net lease REIT with a portfolio of over 6,400 free-standing properties of which around 21 percent is exposed to restaurants. It gives me comfort in knowing that around 49 percent of the revenue in the portfolio is generated from investment grade rated tenants. 

Realty Income has done an excellent job of maintaining strict discipline by maintaining a fortress balance sheet (rated A- by S&P) and growing its dividend (increased every year since 1994). Shares are now a tasty $43.34 which translates into a dividend yield of 6.5 percent. We recently upgraded to a Strong Buy.

Another terrific strong buy is Four Corners Property Trust (FCPT), a net lease REIT that invests exclusively in restaurant properties. The company was created a few years ago after Darden (DRI) spun its restaurant and today Darden owns 426 Darden properties and 273 others under additional brands.

Four Corners portfolio is 72 percent investment-grade rated (the highest in the net lease REIT sector) and has the second-strongest tenant earnings before interest, taxes, depreciation, amortization, and restructuring (EBITDAR)-to-rent coverage (of 4.8x) in the net lease REIT sector. Shares now trade at $13.78 with a delicious dividend yield of 8.9 percent.

While there’s little doubt that restaurants will be like zombies for a few days, if not weeks, we believe that these two REITs are well-positioned to continue paying dividends. Eventually life in the U.S. (and the world) will normalize and things will get back to normal. 

But for now, we see opportunity in buying shares in some excellent REITs that are trading at a wider margin of safety. Put these two REITs on your menu!

I own shares in O and FCPT.

 



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Don’t Panic: Buy REITs


The coronavirus continues to generate more volatility after yet another wild week for U.S. equity markets. Stocks ended in the green following historic intra-day fluctuations and an emergency rate cut by the Federal Reserve (by 50bp to 1 percent-1.25 percent).

The economic fears regarding the coronavirus and its impacts have put the Fed in a very difficult situation and it remains uncertain as to whether the last move will boost confidence.

Domestic-focused and yield-sensitive equity sectors were the big winners this week, as U.S. REITs surged 4.2 percent, with 14 of the 18 real estate property sectors finishing higher by at least 2.0 percent.

Lost in the volatility, employment data was strong across the board this week, headlined by Friday’s nonfarm payrolls report which surged past expectations with 273k net gains, beating estimates of 175k.

As the editor of the Forbes Real Estate Investor it’s easy for me to recommend REITs, an income-oriented business model designed for retirees, but I feel as though I need to become a more vocal cheerleader in these uncertain times.

According to Hoya Capital Real Estate, “there were far fewer signs of investor “panic” this week” yet the market seemed to lose focus after “fourth-quarter earnings season for the REIT sector was generally better than expected, with roughly 45% of REITs beating prior guidance (above the 35% average beat-rate) while a solid 35% of REITs raised full-year guidance.

The trends that dominated 2019 continued in the fourth quarter with the residential, industrial, and technology REIT sectors continuing to record strong growth while the retail and lodging sector continues to struggle, trends that appear poised to be further amplified by the near-term impacts of the CV-19 outbreak.

The top-performing REIT property sectors of 2019 have continued their strong relative performance through the early stages of 2020 as cell towers, manufactured housing and data center REITs top the charts so far this year, while storage REITs have also performed well this year.

The coronavirus-inspired pullback has created a window of opportunity for income-oriented REIT investors to take advantage of the highly predictable dividend income that REITs generate (REITs must payout at least 90 percent of their taxable income in the form of dividends).

Several of our strongest conviction buys include Simon Property Group (SPG), Tanger Outlets (SKT), Ventas Inc. (VTR), CoreCivic (CXW), Iron Mountain (IRM), Ladder Capital (LADR), and Omega Healthcare Investors (OHI).

Recognizing that the advantage to owning high-quality REITs is that investors can take advantage of the “power of compounding” while also benefitting from the upside of solid share price appreciation. REITs have generated highly consistent total return performance over many decades.

While the coronavirus has sparked a panic within the financial sector, this black swan event has less significance to real estate since the asset class provides core necessity “shelter” attributes. Ultimately the short-term panic will subside, and the underlying real estate should continue to grow in value.

This makes REITs especially appealing, because you are not only betting on the real estate that the company owns, but also on the management team and its ability to grow earnings and dividends.

With the latest pullback, investors should become more familiar with REITs and their purposeful ability to generate solid returns through various cycles, including “black swan” events like the coronavirus.

I own shares in SPG, SKT, VTR, CXW, IRM, LADR, and OHI.



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3 High-Yield REITs To Impress Your Friends


It was two Decembers ago that a very important list was published by a very respectable broadcaster.

By that, of course, I mean “25 Things to Learn That Will Impress Your Friends” from Channel 933 out of San Diego.

You don’t get more reputable or worthwhile than that.

Up top at the beginning of the list is the ability to know “the day of the week for any date.” As the site says:

“This one involves a little memorizing, but master this and you’ll be the hit of your next party. Start by knowing the date of the first Sunday of each month, then, when someone gives you a date, you think of that’s month’s first Sunday date and then do a little math to figure out the day of the week.”

That way, you can automatically know when Valentine’s Day is, Halloween, Thanksgiving, and other such holidays off the cuff. Because, you know, that question comes up in parties all the time. And people don’t have “off the cuff” access to Google.

Some of the other suggestions include learning how to:

  • Open a beer bottle with a lighter
  • Learn the “4-Turn Checkmate (aka the Scholars Mate)” in chess
  • Make a paper crane that can flap its wings
  • Touch-typing (ten-finger typing).

As you might be able to tell by now, I wasn’t being entirely (or at all) serious with my introductory statements. It’s a little less than an impressive list, to say the least.

I honestly wonder why they put it together in the first place.

A James Bond Lifestyle Without the James Bond Pain

I will say that “lockpicking” – entry #5 on the “25 Things to Learn That Will Impress Your Friends” list – might be impressive. It’s not just a practical skill to know in case you lock your keys inside your house. It’s also a James Bond-like skill.

Therefore, yes, it’s kind of cool. A do-it-yourself trick at its most suave and sophisticated.

But even cooler than that is the ability to invest well. Because, when you invest well, you don’t have to worry about breaking into your own home.

Your home won’t have locks on it at all. Nor will your car or any of your other valuables. Everything, no doubt, will be digitized with special codes and passwords that can’t be so easily toggled or pried apart.

Because, guess what? You can afford those kinds of things.

You can also afford to buy James Bond-like apparel, travel accommodations, and cars. And without having to risk your life for those perks. Which – unless you’re an intense adrenaline junkie – should make those perks even more worthwhile.

Now, I know that my normal way of investing isn’t exactly the most dashing, daring mode of operation. There’s no betting on penny stocks that go from $0.72 to $98.45 (or some such thing) overnight. I don’t even promise stocks that go from $76.31 to $98.45 overnight.

That’s just not realistic. A safe stock – even a stellar safe momentum stock – needs, at the very least, a few months to make that kind of headway. Otherwise, it’s not a safe stock, which is what should be the bedrock of any profitable portfolio.

That’s certainly what I invest in overall. And I’m just not going to recommend anything to you that I wouldn’t be comfortable putting my own money into.

A Better Way to Impress

So no, if you follow my advice, you’re never going to have THAT stock story: the rags to immediate riches (or riches to even greater riches) one that makes all your friends ooh and ahh and wish they were you.

That’s overrated in the long-term anyway.

But I can still give you three real estate investment trusts, or REITs, that offer more than their “boring” brethren.

These stocks give you the opportunity to either:

  • Withdraw bigger dividends every quarter to buy impressive “bling” right now
  • Reinvest bigger dividends every quarter to buy impressive “bling” later.

While anyone who knows me recognizes that I’d go with the save today to spend tomorrow mentality (boring, I know)… the choice is yours. And, either way, you can still brag to your friends about how well your investments are doing should you so choose.

When you do, they’ll no doubt want to buy in as well. That way, they’ll bump up your stock price to compliment those dividend gains.

There’s a little James Bond-style stealth for you after all.

3 REITs to Rock

Our first REIT that rocks is Simon Property Group (SPG), a mall REIT that recently announced it was acquiring a close peer, Taubman Centers (TCO) in a $3.6 billion transaction (paying cash for all of TCO’s common stock at $52.50 per share).

The deal will further extend Simon’s moat, that is already sizeable given the company’s sizeable cost of capital advantage (one of just a few A-ratings by S&P) and scale advantages (233 retail real estate properties including Malls, Premium Outlets® and The Mills® comprising 191 million square feet in North America, Europe and Asia).

Simon shares now trade at a 30 percent discount to our Fair Value target and a 54% discount to the normal P/FFO range. The dividend yield is 6.0 percent and analysts forecast FFO per share to grow by 3 percent in 2020.Shares now yield around 6 percent and we consider this REIT one of the highest quality REITs to buy in today’s crowded REIT universe.

Another REIT to brag about is Iron Mountain (IRM), a true outlier in the REIT sector that has a diverse customer base of over 230,000 companies. That includes being trusted by over 95 percent of the Fortune 1000 list.”

Even though the company does own real estate – 27 million square feet of it, though it does lease another 59 million – its operations drive its value. And its investment thesis is really rooted in the thousands of box/storage customers it caters to.

The central tenant to our bullish conviction is Iron Mountains ability to accelerate organic growth to drive significant adjusted EBITDA benefits and enable deleveraging. While leverage is a concern (rated BB- by S&P), the company’s latest initiatives to reduce corporate overhead and expand into data storage should pay dividends.

Shares in Iron Mountain now yield 7.5 percent and we have forecasted earnings (or FFO per share) to grow by 8 percent in 2020. Although a higher risk REIT, Iron Mountain trades at a significant discount, and we believe shares could return over 20 percent in the next year or so.

Our final high yield REIT is CoreCivic (CXW), a company that invests in prisons. Although private prisons have become somewhat political, we view the asset class as “critical mission infrastructure” that has become a popular REIT sector based in large part to the fact that the U.S. has the highest incarceration rate in the developed world.

CoreCivic is the largest player in the private sector with a portfolio that includes 105 facilities totaling more than 17 million square feet. The assets generate a steady reoccurring cash flow stream underwritten by investment-grade government tenants.

The primary value proposition for CoreCivic is based on the high fragmentation that exists within the states across the country. Most states are continuing to struggle with overcrowding and are operating at more than 100% capacity.

Meanwhile CoreCivic shares trade at a wide discount, with a dividend yield of 10.5 percent. The dividend is well-covered (67 percent based on AFFO) and offers strong upside (especially if President Trump is re-elected).

I own shares in SPG, CXW, and IRM.



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