All I Want For Christmas Are A Few Good REITs

by: Brad Thomas

Well it’s just eighteen days away from the big day, and my five kids are all getting anxious. I have tried to explain to them that Santa is a risk-averse investor and that his sleigh is equipped with “safe-margin” goodies. In addition, I have explained to them that the North Pole is experiencing a global warming as well as an elf-driven credit crisis and, as a result, Santa’s stocking stuffers will be limited to toys that don’t break and high quality REIT stocks. Santa owns significant property (around the North Pole), and he has built a sound equity portfolio consisting of blue chip stocks and REITs. So this year, the five Thomas kids will become fractional owners (landlords) in a variety of high-quality REITs. Little know that Santa has become an experienced REIT investor and he has decided (this year) to fill up the stockings with personalized REIT stocks customized for each child. Each of the “good” kids will get one share of stock, and Santa will evaluate the picks on an annual basis.

Lauren, my oldest daughter is a junior in high school. She is a straight-A honor student with an interest in dating Justin Bieber (she actually met the heart throb last year). With college in sight, Lauren is looking forward to applying herself academically (UNC is her #1 choice).

This year Santa decided to invest in one share of American Campus Communities (NYSE:ACC) stock (for Lauren). With Lauren’s college prospects in sight, she should soon appreciate owning a (fractional) interest in a portfolio of college dorms. The demand for campus housing is strong, as the college population is expected to grow by 14% (to 22 million students) between 2010 and 2019. And soon Lauren will sleep in a college dorm and possibly in one of the 69,200 beds owned by ACC. The Austin-based REIT owns around 114 properties (campus communities) in 29 states (and 66 collegiate markets). And with a market capitalization of around $3.8 billion, ACC’s balance sheet boasts a moderate debt (around $1.15 billion as of 9-30-11) to market cap ratio of 30% (and debt to asset value of 39.4%). With 2011 FFO of around $1.79 per share, the nation’s largest student housing REIT is projected to grow FFO by around 10% in 2012 (or $1.95 per share). Although student housing is still somewhat of a niche asset class, ACC has reported some impressive results (compared with the REIT universe). This eight year track record (as a public REIT) has resulted in a BBB- (S&P) credit rating and the student housing leader has produced a five year total return of 68.31% - that is 5th in REIT world (behind DLR 108%, RYN 85.6%, NHI 85.23%, and SUI 85.37%). And year to date, ACC is the #3 REIT with a total return of 28.88% (23.99% price + 4.89% dividend). And with Lauren’s college prospects close, she has just a few months to grow her investment portfolio. ACC is paying a current dividend of around 3.6%.

Lexy, the second oldest, is an eighth grader and a cheerleader. She talks a lot (like her dad) and she wants to drive a Lamborghini (she doesn’t have a license yet but we practice in the driveway).

Knowing that Lexy likes to drive fast, she also likes to grow a stock portfolio fast. Consequently, Santa decided to get her a share in Excel Trust (NYSE:EXL). This San Diego-based shopping center REIT owns around 3.4 million square feet in 13 states. The new retail (IPO was April 2010) REIT’s growth model is to locate in hubs that form a lower circle around the United States. By connecting dots in San Diego, SF Bay, Phoenix, Dallas, Atlanta and Washington, D.C., the “smile states” strategy enables Excel to identify well-performing properties that will continue to benefit from long-term demographic trends. Since formation, Excel Trust has done an excellent job with sourcing and acquiring credit-tenant backed shopping centers (overall portfolio roughly 70% anchor space). While visiting many of these Excel owned centers, Lexy will enjoy shopping at many of her favorite shops including Target (NYSE:TGT), Lowe’s (NYSE:LOW), PetSmart (NASDAQ:PETM), Publix, Ross (NASDAQ:ROST) and Kohl’s (NYSE:KSS). Excel’s portfolio is currently 95% leased (as of 9/30/11), and because of the more recent IPO formation, the portfolio has no legacy (tenant) related risks. In addition, most of the shopping centers are anchored by high credit tenants with long leases (total portfolio weighted average lease term of 8.5 years) resulting in more sustainable revenue and dependable dividends.

Of course, shopping will be no more problem, since Lexy will get a 6.0% dividend and that will help her payoff her maxed-out credit card (Excel declared a fourth quarter dividend of $0.16 per share, which equates to an annualized rate of $0.64 per share. That’s almost three times better than Boston Properties’ (BXP) yield of 2.2% and twice that of Federal Realty Investments’ (FRT) 3.4% yield). Another exceptional part about owning stock in Excel is the track record for performance. The California-based REIT is just around a year old; however, the management is highly experienced in that many of the top executives previously at Excel Realty Trust (the new REIT dropped the word ‘Realty’), posted total returns to initial investors of 125.3%–between 1993 to 1998–and during that period, Gary Sabin’s (current chairman and CEO at Excel Trust) company was named the #1 retail REIT for total shareholder return in 1995 and 1997 (by the WSJ) Since Lexy enjoys speed, she will like the 3-month total return (for Excel) of around 10.96% (15.6% + .78%). The recent acquisitions should propel FFO in 2012 as the small cap REIT grew year over year FFO (from 2010 to 2011) by around 416%. Lexy will like that extraordinary growth (and nice 6.0% dividend yield) and one day she should be able to drive to the mall in a red sports car.

Nicholas is the middle child and the only boy. He likes sports, computer games and money (just like his dad). He likes to catch big fish and his record is five fish in one day.

Santa knows that Nick likes catching big fish, so he decided to get Nick a “big box” REIT. STAG Industrial (NYSE:STAG) is a Boston-based industrial REIT with a focused strategy of investing in “big box” industrial facilities. And like Nick, STAG has landed some impressively attractive big fish. As I discussed in a recent Seeking Alpha article, STAG closed on its IPO in April 2011 (just eight months ago) when it generated around $205 million (in gross proceeds). And since the April IPO, STAG Industrial has closed on around $84 million in assets (or around 1.2 million square feet). The current asset base consists of 101 assets in 26 states. With around $580 million assets under management, STAG has grown (in eight months) to an attractively diverse operating model. And STAG’s acquisition model is geared toward secondary Class-B markets where there are “more fish in a smaller pond”. As Nick knows, it’s easier to catch a big fish in a small pond, and buying bait will not be a problem for Nick, as his share of STAG stock is paying a 10.2% dividend, allowing nice income to invest in big worms and crickets.

Riley, the first grader, is the “wild child”. She has yet to understand the purpose of a seat belt and she has not grasped the concept of brakes for her bike. She is a true “risk taker” and fear is not part of her vocabulary.

Riley just lost her first tooth and she has yet to defy gravity - for that reason Santa decided to get her a share of stock in Retail Opportunity Investment Corp. (NASDAQ:ROIC). This San Diego-based REIT is also a “new kid on the block”; however, Stuart Tanz (the CEO and largest individual shareholder) is an “old school” wiz-kid with talents for exploiting value-add retail centers. As I wrote in a recent Seeking Alpha article, ROIC was formed as a special purpose acquisition corporation [SPAC] in 2007, and the shopping center REIT was later converted to a REIT in 2009. With a "blank check" capitalization of around $400 million, the strategically-focused retail REIT has grown its asset base to around $650 million today. With a significant number of acquisitions closed ($140 million in the last quarter), ROIC is flying its (under the radar) strategy in West Coast markets such as Seattle (20%), Portland (21%), Southern California (27%) and Northern California (32%). The REIT’s portfolio is mostly grocery store anchored catering to the basic necessities and providing strong stability in uncertain times. In addition, the risk-managed balance sheet is ONLY 19% leveraged (lowest in the retail sector) which also provides strong growth for the platform. Riley should be able to run with the best as ROIC has provided a total year to date return of 16.66% (12.61% + 4.05%) and FFO growth from 2010 to 2011 was a “gravity free” 469% - second behind Campus Crest FFO of 929%. The current dividend is around 4.3%.

A.J., the youngest girl, is my baby. Just three days away from her 5th birthday. She is an absolute angel and she is looking forward to starting kindergarten next year. She is simply the perfect angel.

A.J. is as perfect as they get. Like her mom, she eats and sleeps like a clock and she is a very dependable kid. Santa had to get A.J. a consistent “great repeatable” REIT and what better one than Realty Income (NYSE:O). Perhaps known to many as “the monthly dividend company®”, Realty Income has over 2,600 single tenant assets in 49 states (all but Hawaii). I have written many articles on the “crown jewel” REIT with a primary differentiation platform of dependable dividends. The risk-aligned net lease REIT has a tremendous track record for dividend performance as the consistent monthly dividends have paid out over $2.1 billion (since 1969). The diverse property base and the almost mortgage-free balance sheet provide a true “margin of safety” to the fixed-income investor. AJ has a few more years before she begins to drive, so she should be able to invest wisely with Realty Income. The total REIT for the past ten years was 324.03% (#16 compared with all equity REITs) and the “crown jewel” has paid out 63 dividend increases and 56 consecutive quarterly dividend increases. Needless to say, this 5.24% dividend is consistently extraordinary – just like AJ. Realty Income has a most user friendly website and you can access the “monthly dividend” REIT here.

My wife manages five bambinos and she is also Chief Domestic Officer. In addition to being a great cook, she puts up with me (and my midnight writing career). She is impressively tidy and her organizational fundamentals are extraordinary. She he has a taste for the finer things and no room for the stuff she accumulates.

Santa knows the author’s wife all too well. He knows that the junk that the author accumulates is excessive. If Santa did not know better, he would call the author a “pack rat”. With around 854 facilities in 34 states (and Washington, DC), Extra Space Storage (NYSE:EXR) is the second largest self-storage REIT in the U.S. and the differentiated space provider continues to build its 34 year old brand (founded in 1977) with strategically aimed customer service and innovative risk management practices. Built on an innovatively systematic product platform as well as exceptional customer service, the differentiated storage REIT has proven that it does not just earn money (for investors) but it also provides strategic value to its diverse customer base. These distinguishable attributes make Extra Space an exceptional risk-aligned investment choice characterized by sustainable income and principal preservation. And because my “better half” is number one, she deserves to align with a best in class operator. With a total (year to date) return of 41.31%, Extra Space is the leading US equity REIT (38.39% + 2.92%) and the Utah-based operator is the 4th best US equity REIT with a 2-Year Total Return on 120.49% (107.77% + 12.72%). And the self-storage operator has delivered sustainable growth and income with an extraordinary 5-Year total return of 68.31% (31.08% + 37.23%). And with an innovatively modeled call center, my wife can dial into any of the 854 Extra Space facilities or click the web site here.

Happy Holidays

Santa Claus is coming to town and he is packing some exceptional REITs on his sleigh. The big round man knows that REITs are important to diversification within a well-rounded portfolio and that all kids should enjoy the dividends produced by the strong operating models. Most importantly, Santa knows that toys will break, but REITs will preserve value and appreciate over time. The kids should enjoy being landlords and being shareholders in some exceptional REIT stocks. Hopefully Santa’s investment strategies will become mechanical-driven behaviors for the kids and perhaps they will be more programmed towards repeatable patterns with accumulative dividend performance. And maybe next year Santa will be in a financial position to pack a few more goodies like Berkshire Hathaway (NYSE:BRK.A) or Procter & Gamble (NYSE:PG). Happy Holidays!

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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