Written by: Brad Thomas
Let’s start it up…
ONE Risk tolerance is an important component in your investing process – being realistic about your ability and readiness to stomach big swings in the value of your investments. It’s actually simple: Assess the returns you expect, and the time horizon you have to invest. Then, protect your principal at ALL costs. Best way? Research every single pick, top to bottom. Focus first on fundamentals, then management, then big picture, then valuation.
TWO Investments don’t pay 8% and higher in this environment unless there’s risk. I don’t care how smart the investor – it’s critical when you’re more aggressive … to double-down on knowledge about the prospective company. Look into financial statements and question if the dividend can be maintained – and look at management’s track record paying dividends.
THREE As loyal followers and subscribers know, I’m a conservative investor, and have experienced my share of losses. I’ve bet big on leverage and higher-yielding investments, but those instant gratification days exist only in my rear-view mirror. Let high rollers play the dangerous tables. I shall sit back with my balanced approach and intermediate-term time horizons of five to 10 years.
FOUR Valuations are meaningless without a strategy. Determine the intent of your investments, and choose wisely (even when it’s not your money). No strategy – sorry, no valuation. Pick and choose the best categories, the best property sectors, the best REITs of the bunch. (Consider from over 140 choices using the Lab section of my Forbes Real Estate Investor.)
FIVE At the beginning of 2018, REITs sold off around 9%-10% in direct response to the 10-year Treasury rate and conservative earnings guidance from most REITs. However, REITs have since snapped back in the second quarter, delivering around 10% returns. In my August newsletter, I interviewed Evan Serton, portfolio manager at Cohen & Steers, who explained, “We’ve been talking about the divergence of performance between the equity market and REITs and we believe this is one of the most favorable levels we’ve seen.”
Here are 5 of the best blue-chips to buy, from the stress-free REIT category I call SWANs – which stands for “sleep well at night.”
The Big WHY: Simon has the scale advantage and the cost of capital advantage. Interesting enough, all of the 5 blue-chip BUYs enjoy similar attributes. Simon’s moat is well-defined and the management team has maintained strict discipline to drive shareholder returns.
Feathers In Its Cap: Simon does an excellent job releasing space to new tenants, and it possesses some pricing power given its high-quality properties. The company has reasonable debt levels with a balanced debt maturity schedule, and a solid fixed charge coverage ratio. Simon’s debt ratings are among the best unsecured debt ratings in the REIT industry, and this underscores the balance sheet strength.
Downsides: Retail store closures continue to create an overhang as well as the uncertainty of Sears demise.
Performance YTD: +5.3%
Alpha Insider Management Update: Simon announced its dividend this quarter of $2.00 per share, an increase of 11.1% year over year. The company will pay at least $7.90 per share in dividends, an increase of more than 10% compared to the $7.15 paid last year.
Bottom Line: Simon shares trade at $176.21 with a P/FFO multiple of 15.0x. Simon is A-rated with a dividend yield of 4.5%. The company is expected to grow FFO per share by 8% in 2018. I maintain a STRONG BUY.
The Big WHY: Ventas is the healthiest REIT in the healthcare REIT sector. Similar to Simon, Ventas utilizes its powerful scale and cost of capital to drive earnings and dividend growth. Ventas also has a vetted management team with deep experience in the REIT sector.
Feathers In Its Cap: Ventas is a landlord to best-in-class operators. The pivot out of skilled nursing into Life Science was well-timed and proves the management team understands how to drive value. The balance sheet is in the best shape ever and I expect the company to capitalize on its massive liquidity without chasing high-yielding operators (like MPW).
Downsides: Ventas is recycling capital and that generates muted growth. That’s okay. I would rather have brand new Air Force One’s than beaten-down Pumas. Ventas has as much potential as MJ’s vertical jam once had (can you tell I’m ready for some b-ball? Go Heels!)
Performance YTD: -3.0%
Alpha Insider Management Update: Ventas extended its maturity profile, reaching mutually beneficial deal with long-standing tenant Brookdale (nation’s largest senior living operator), to combine all assets into single guaranteed master lease – an example of successful, innovative risk management practices. Also, team has demonstrated the ability to withstand various economic conditions & cycles.
Bottom Line: HCP trades at 13.6x and WELL trades at 15.1x, both higher multiples than VTR that trades at 13.5x. Why does VTR trade 4% below the 4-year average, while direct peers trade at same or higher multiples (vs. 4-year average)? Ventas’ dividend yield is 5.6% with a BBB+ rating (should be A- in my opinion). I am maintaining a BUY.
The Big WHY: Tanger’s Q2-18 results were in line with expectations as the “pure play” outlet REIT remains focused on driving traffic to centers and filling vacancies caused by multiple tenant bankruptcies over the past 2 years with new high-quality in-demand tenants.
Feathers In Its Cap: Tanger’s balance sheet is in the best shape ever. At Q2-18, approximately 94% of square footage in consolidated portfolio was not encumbered by mortgages. Tanger maintained a substantial interest coverage ratio during first quarter of 4.4x and net debt-to-EBITDA approximately 6.0x at quarter-end.
Downsides: Retail closures. However, Tanger maintained guidance for 2018 and expects FFO per share for the year between $2.40 and $2.46, and same-center NOI -1.5% to -2.5%.
Performance YTD: -7.0%
Alpha Insider Management Update: Relative to other retail channels, outlets have not been overbuilt, so the need to right-size and competition among landlords is minimized. Also, I was happy to see Tanger include a new board member, Susan Skerritt, who has an extensive and distinguished career in banking and finance.
Bottom Line: Tanger shares remain cheap – on all metrics – the P/FFO multiple is 10.4 and the dividend yield is 5.9%. I am maintaining a STRONG BUY.
The Big WHY: Similar to other blue-chip REITs, Realty Income has increased its moat capacity utilizing the same levers: cost of capital and scale. Over the years, I’ve witnessed evolution of this REIT that really functions more like an investment bank for corporate tenants that generate very sustainable revenue. Top drivers include Walgreens, CVS, 7-Eleven, Home Depot, among others.
Feathers In Its Cap: In Q2-18, Realty Income boosted 2018 adjusted FFO per share guidance to $3.16-$3.21 from previous range of $3.14-$3.20. Also increased 2018 acquisitions guidance to about $1.75B from previous range of $1.0B-$1.5B. Q2-18 adjusted FFO per share of 80 cents exceeded consensus by a penny and compares with 76 cents a year ago.
Downsides: None (Sorry, but true. If I must name one: the global economy, but remember O is a “flight to quality” trade).
Performance YTD: +.50%
Alpha Insider Management Update: In June, Realty Income announced 83rd consecutive quarterly dividend increase, the 97th increase in amount of dividend since company’s listing on New York Stock Exchange (NYSE) in 1994.
Bottom Line: Realty Income shares trade at $55.77 with a P/FFO multiple of 18.4x. The dividend yield is 4.7% and well-covered by AFFO. This is the ultimate SWAN, buy it and forget about it. I maintain a BUY
The Big WHY: Kimco has evolved substantially since company cut the dividend in 2009. Sold off all international assets and non-core assets. Halfway through the year, confident it will meet its full-year disposition range of $700-$900 million. In Q2-18, Kimco sold 17 shopping centers for $320 million well ahead of goal. Beefed up balance sheet. Over $300 million in cash, zero outstanding on $2.25 billion revolving credit facility and no debt maturing the balance of the year. Executing on plan for well-defined scale and cost of capital strategy which leads to shareholder value.
Feathers In Its Cap: Kimco’s leasing volume continues to near all-time highs. During Q2, Kimco executed 369 leases, totaling 2 million square feet and average rent per square foot just over $18.
Downsides: Retail closures. However, Kimco is focusing on gateway markets with very favorable demographics.
Performance YTD: -4.4%
Alpha Insider Management Update: Based on company’s first half performance and expectations for balance of the year, Kimco is raising the bottom end of its NAREIT FFO per share and FFO as adjusted per share guidance range, now $1.43 to $1.46.
Bottom Line: Kimco shares trade at $16.69 with a P/FFO multiple of 11.3x. The dividend yield is 6.7% and well-covered. Much less uncertainty over recycling, and development pipeline is strong. I am maintaining a STRONG BUY.
Happy SWAN (sleep well at night) investing!
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