Reaping REIT Rewards In Retirement

Includes: DLR, DOC, MPW, WPC
by: Brad Thomas

REITs are, by their very nature, a safer kind of stock to own than many other types out there.

Their structure forces "most" of them to play much more cautiously with their money and management efforts.

And this trusted analyst is telling you that dividend safety is where it’s at, especially in retirement.

A wise man once said there was a time for every purpose under heaven, and that does seem to be true.

There’s a time to be born and a time to die. There’s a time for feast and there’s a time for famine. There’s a time for unchecked passion and a time for quiet reflection.

You get the point, no doubt. All I’m trying to say is that life is filled with ups and downs, backs and forths, lefts and rights, and every other directional fluctuation you could possibly think of. That’s because almost every facet of life changes over time, sometimes by the century, sometimes by the second.

Like investing.

I’m not even talking about the obvious changes between economic booms and economic depressions. What I mean is your age-to-risk ratio, which factors in how much money you have, how much money you want, and how much time you have to make that money.

Once you’re retired, of course, your work-related income drops to a big, fat zero. You might have a pension to fall back on or social security checks to look forward to. But that paycheck you used to rely on every week or every other week?

It’s officially gone.

That means you have to be a lot more careful with the money you still have, investments and all.

And that’s why dividend safety and steering clear of yield-chasing yahoos is so important, as we’ll discuss further below. Photo Source

Yield Chasing Is NOT Advised in Retirement – or Ever

When you’re younger and you’ve got a steady stream of income flowing in, it’s okay to be a bit more aggressive with what you’ve got.

Traditional wisdom says that, in your younger working years, it’s best to allocate your investable funds more into “riskier” stocks than traditionally safer plays like bonds, which don’t often offer any big gains. The old rule of thumb was always that you start with 100 and subtract your age from it to find out what percentage of your portfolio should go into stocks vs. bonds and other less volatile investing categories.

So if you’re 30, you should have 70% of your investments in stocks. If you’re 50, you should have 50%, and if you’re 70, you should have 30%.

Again, that’s the traditional wisdom. Though CNN Money notes how, “… with Americans living longer and longer, many financial planners are now recommending that the rule should be closer to 110 or 120 minus your age. That’s because, if you need to make your money last longer, you’ll need the extra growth that stocks can provide.”

It’s also important to recognize how there are hundreds, thousands or even millions of interpretations to that traditional wisdom. And, to some degree, that’s a good thing. No two investors are in the same exact situation with the same exact income and the same exact goals.

So it’s okay – even important – to acknowledge that you’re unique. It’s also okay – even important – to build a precise portfolio that reflects that kind of exclusivity.

What is not okay is chasing yield. Not when you’re younger. Not when you’re older. Not when you’re retired.

Especially not when you’re retired. No matter how good it looks, trust me, those apples are not worth biting into.

Photo Source

Learn to Love Dividend Safety Instead

For the record, that no-biting-the-apples rule applies to real estate investment trusts too. REITs are, by their very nature, a safer kind of stock to own than many other types out there.

Their structure – including the fact that they have to pay out 90% of their otherwise taxable income to investors in the form of dividends – forces most of them to play much more cautiously with their money and management efforts.

But there are always ways to mess with even the best of business models. So you can and will find REITs that focus more on being flashy than they do on being sound.

In order to look good on the surface, they resort to raising their payouts disproportionately to their profit base. Moreover, they do it despite how that approach never ever ends well.


By putting more value on a higher yield, REITs (and any other company to try it) have to cut into their capital base. They’re paying out at the expense of their own financial foundation, making for an immediate red flag and a longer-term problem you want nothing to do with.

As I cautioned last month, you need to “Check the REIT’s balance sheet, payout ratio, dividend record, management alignment and, most importantly, listen to trusted analysts who will tell it like it is.”

And this trusted analyst is telling you that dividend safety is where it’s at, especially in retirement. Remembering that you don’t have extra income hitting your bank account every month…

Learn to love dividend safety.

Learn to prioritize dividend safety.

Learn to never seek anything but dividend safety in a REIT.

That’s the best way to make them love you back. And that’s why I love the following REITs to realistically expand your retirement outlook. Photo Source

4 Rewarding REITs To Add To Your Retirement Portfolio

Medical Properties Trust (MPW) is a healthcare REIT founded in 2003 with a vision to provide capital to cash-strapped hospitals and rehab centers. The company focuses exclusively on providing capital to acute care facilities of all kinds through long-term triple-net leases. It provides 100% financing to reduce the hospitals' overall cost of capital by unlocking the value of its real estate assets (via a sale-leaseback). Around 74.4% of the company’s revenue is leased to general acute care hospitals and 22% is leased to inpatient rehab hospitals. The remaining (3.6%) is leased to long-term acute care hospitals.

Medical Properties has high concentration with Steward (36.3%), Median (14.2%), and Prime Healthcare (15.6%), but the most important concentration number is on a property-by-property basis because each facility is underwritten on its own merits.

Also, from a geographical perspective, the company has investments across the U.S. (~82.1%) and in Europe (~17.9%). Medical Properties continues to target approximately 30% to 35% of its investment internationally in countries where there is a deep respect for the rule of law, political and economic stability, and a strong commitment to health care for the country’s populace.

The company’s current blended cost of capital allows it to achieve attractive investment spreads in each country we are operating in. It has an acquisition pipeline close to $5 billion, of which it expects to close one-half in 2019. It continues to improve its long-term dividend payout ratio while increasing annual dividends. The payout ratio is in the low 70% range where it expects it to remain over the foreseeable future. As viewed below, Medical Properties is trading at $18.49 with a dividend yield of 5.4%. We maintain a Buy Recommendation.

Source: F.A.S.T. Graphs

Physicians Realty (DOC) is a healthcare REIT that focuses exclusively on medical office buildings (or MOBs). One of the most important factors in accessing the quality of an MOB is the health system affiliation, credit quality to tenant, age of the building, occupancy, market share as a tenant, average remaining lease term, size of the building, and the client services and mix of services in the facility. Around 85% of DOC’s growth space is on campus and/or affiliated with a healthcare system.

One unique characteristic with regard to DOC is that the company has 115 single-tenant MOBs, which represents over 36% of its portfolio. This means that the company has a longer-duration lease profile with just 3.5% (of leases) expiring through 2022 (peer average is 10.5%).

DOC’s balance sheet is strong, with less than $77 million of debt maturing over the next four years, all of which are existing mortgages with a weighted average interest rate of 4.1%. The company’s net debt to adjusted EBITDAR is 5.6x, and debt to total capitalization is less than 34%, providing lots of flexibility. The company is rated BBB- by S&P (and Moody’s equivalent), and could easily justify a rating of BBB or BBB+.

We forecast DOC to grow FAD by 5% in 2019, based upon +2% NOI (net operating income) growth, $300 million of acquisitions, and re-leasing the vacated El Paso hospital. This REIT has strong internal and external drivers that should put it on track for 4% to 5% growth in 2019 and 2020. Shares now trade at $18.19 with a dividend yield of 5.1%. We maintain a Buy.

Source: F.A.S.T. Graphs

W.P. Carey (WPC) is one of the largest diversified net lease REITs with a history of delivering steady income and growth to investors. The portfolio of high-quality, operationally-critical commercial real estate is leased on a long-term basis to creditworthy tenants primarily in the U.S. and Northern and Western Europe. For more than 45 years, the company has demonstrated a successful track record of investing and operating through multiple economic cycles and is continuing to grow and improve the quality of the diversified portfolio.

The company ended 2018 with 63% of ABR (annual base rent) coming from net leased properties in the U.S. and 35% in Europe. Industrial properties including warehouses represent 44% of ABR at year-end, followed by office properties representing 26%, and retail assets represent 18% of ABR (with the vast majority in Europe).

W.P. Carey is committed to an unsecured debt strategy, with a conservatively managed balance sheet to ensure ample liquidity (just over $1.6 billion). The company ended the year with debt to gross assets at 42.8% and net debt to EBITDA at 5.8x. The debt maturities are well-laddered, with just $74 million of debt maturing in 2019 and limited floating rate debt relative to the size of the overall balance sheet. Shares now trade at $75.55 with a dividend yield of 5.4% and we maintain a Buy recommendation.

Source: F.A.S.T. Graphs

Digital Realty (DLR) is one of the oldest data center REITs in the world, having IPO’d in 2004 and has the most impressive dividend track record in the industry (14 straight years of rising payouts. More impressive than DLR's growth record is the fact that its dividend has grown at 12% over that time, basically in line with its adjusted funds from operations or AFFO/share (REIT equivalent of free cash flow and what funds the payout).

The company owns 198 data centers in 12 countries, in 32 cities, making it second only to Equinix (EQIX) in market share. Those data centers serve over 2,300 corporate clients, including some of the biggest names in finance, technology, and media. The company’s primary business model is focused on hybrid cloud, specifically co-location, meaning its facilities are a mix of private (in-house) and public storage solutions (each facility has numerous small data racks and servers which customers provide themselves).

Digital's primary competitive advantage is scale that allows the company to access low-cost capital to grow quickly through acquisitions. The company’s biggest acquisition was the $7.6 billion merger with DuPont Fabros that actually strengthened the balance sheet and made Digital Realty the second biggest data center REIT in the world. It has made six major acquisitions over eight years totaling $14 billion that give it scale and diversification in both region and customers but also a huge cost advantage as well.

Digital’s long-term guidance is for 7% to 9% AFFO/share growth, which analysts think will come in at 8% - making this REIT one of the fastest growing blue-chip REITs you can buy and makes for an excellent SWAN stock in any dividend portfolio. Shares trade at $113.94 with a dividend yield of 3.8%. We maintain a Buy recommendation.

Source: F.A.S.T. Graphs

Author's note: Brad Thomas is a Wall Street writer, and that means he's not always right with his predictions or recommendations. That also applies to his grammar. Please excuse any typos and be assured that he will do his best to correct any errors if they are overlooked.

Finally, this article is free, and the sole purpose for writing it is to assist with research, while also providing a forum for second-level thinking.

Disclosure: I am/we are long MPW, DLR, WPC, DOC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.