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4 REITs In The Nose-Bleed Seats

Includes: CCI, O, STOR, WPC
by: Brad Thomas
Brad Thomas
Dividend growth investing, REITs, newsletter provider, value

The view isn’t quite the same all the way up there in the nosebleed seats, giant screens or not.

At current cost, they’re not exactly bargains. Let’s just say these picks aren’t trading at student-friendly prices.

The REIT market has gone up more than 17% year to date, and as much as I like these four REITs, it’s just not practical to continue pounding the table: BUY-BUY-BUY.

As the NCAA men's basketball "March Madness" tournament winds down, with only three games remaining - the two semifinal match-ups and the actual championship round - let's ask a very important REIT-related question…

Out of the 64 March Madness games played so far (including the first four play-ins), how many of them have you watched?

That's not a REIT-related question, you say?

Fair enough. I'll give you that.

But bear with me anyway. We're going to get there, with four profitable picks and all. I promise.

The reason why I'm asking about how many basketball games you've watched over the last two and a half weeks has nothing to do with scores, brackets, upsets or anything else about the competition itself. Forget the players and teams who make them possible too.

During this scheduled lull, we've got between the Elite Eight and Final Four contests, all those elements are mere background details for the moment.

That will no doubt change once the games begin again. After all, it's hard to be a basketball enthusiast and ho-hum the action-packed drives, dribbles, passes and shots as they happen in front of you (or onscreen).

However, for now, I'm much more interested in us focusing on the setting those match-ups are played in. They make for a great analogy about our four featured REITs today.

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Some Really Big Venues

The actual arenas big enough to host March Madness events are enormous, to say the least. They have to be in order to hold even a portion of the enthusiastic fans who want to get in.

If you've never really noticed the scales these venues work with, take just 10 seconds during the semifinals to take it in when the camera allows. When you do, you're bound to be impressed.

The sheer size of a basketball-enthusiastic college or pro team's sports stadium is even more apparent, of course, when you're standing in one. Picture yourself dead-center in the middle of a court, free to turn around in a full circle to view everything around you.

I can testify that it's quite the sight to see.

Take the Dean Smith Center, also known as the Dean Dome, at the University of North Carolina, home to the Tar Heels men's basketball team. The fourth-largest college basketball arena in the U.S., it seats 21,572… not including the standing-room-only courtside spot built for students that can hold another 200 or so.

At very great risk of stating the absolute obvious, that's a lot of people right there.

Here's where we start seriously narrowing our analogy down to real estate investment trusts… Because, of course, no two seats are situated alike. Lined up in sections, columns and rows, some are clearly better than others.

There are the courtside seats reserved for very particular people and the people lucky enough to know those people. They've got it made right there, up close and personal… practically part of the game.

It's an appeal people pay good money for, wanting to be as close to the action as possible.

Obviously, the further away you get from that action, the cheaper the seats are going to be. Oh, most fans will still sit in those seats given the chance. To them, it's still worth it to feel the electric charge of being part of such an event. Such a purpose.

But the view isn't quite the same all the way up there in the nosebleed seats, giant screens or not.

More Expensive REITs That Are Worth It

Still nothing about REITs, I know. So, let's get down to them already… after solidifying our March Madness analogy one more time.

There are times when it really is worth it to sit in the nosebleed section just to be part of the game when it's a team you really believe in. You'd prefer to have the courtside seats, naturally. But if you don't have the money, the connections or the pull to score them, then you'll take what you can get.

And, you'll be happy about being part of the action, even if from afar.

Then, there are those opportunities that come along that could get us closer - for a price. Sometimes, you've got to pass on those, I know. Sometimes, it's just not smart to get in at higher valuations, no matter how much you want to.

There are those times, however, when they really are worth it, all things considered. That's how I feel about the four following REITs we hold across our Forbes Real Estate Investor portfolios.

At current cost, they're not exactly bargains. Let's just say these picks aren't trading at student-friendly prices.

However, considering what they hold and how they hold them, we're still happy to be part of their game.

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4 Nose-Bleed REITs (They're Getting Richly-Priced)

Realty Income (O) is known as "the monthly dividend company," and recently became a dividend "aristocrat" - an S&P 500 company with 25+ consecutive years of annual dividend growth. Since its 1994 IPO, Realty Income (founded in 1969) has managed to massively outperform other REITs, the S&P 500, the Dow, and even the tech-heavy, growth-focused Nasdaq. O's scale advantage consists of owning more than 5,700 properties under long-term lease agreements in 49 states and Puerto Rico, with 262 commercial tenants, operating in 48 diverse industries. Realty Income operates under a triple net lease structure: it buys a single tenant property and leases it back to the occupant for 15 years. The contract stipulates the tenant pays property taxes, maintenance, utilities, and insurance.

The company's competitive advantage is helped by its highly disciplined balance sheet. In 2018, the company was upgraded to an "A-" credit rating - one of only nine REITs in America (out of nearly 400) to have an A- or better rating, which lets it borrow monies (87% at fixed-rate), an average of 7.4 years, at just 3.9%. In 2018, Realty Income profitably bought a whopping $1.8 billion in real estate properties and increased its AFFO (adjusted funds from operations) per share by 4.2% to $3.19.

While its core focus is on retail, the company has been diversifying into other industries such as industrial (warehouses), offices, and even farmland; Realty's top tenants are nearly all strong companies in recession-, or e-commerce-resistant industries, such as groceries, pharmacies, convenience stores, and experiential businesses like gyms.

Not even the worst economic downturn since the Great Depression was able to knock Realty Income's occupancy below 96.6%, and the company was one of just 12 U.S. REITs that didn't cut or suspend its dividend during the Great Recession (while 87% of REITs did - due to credit markets freezing up). Last month, Realty Income's board declared the company's 585th consecutive common stock monthly dividend of $0.226 per share, or $2.712 per share annualized. The dividend's increased 101 times throughout O's 50-year history.

Readers know we started trimming (selling some) shares in O at $70 - no doubt the current share price is rich, and I would begin to dip a toe back in at $65, adding more on a pullback.

Year-to-Date Price Performance (vs. VNQ)

Source: Yahoo Finance

W.P. Carey (WPC) is one of the largest net lease REITs, with an enterprise value of approximately $17 billion, via a portfolio of high-quality, operationally-critical commercial real estate, leased long-term to creditworthy tenants in 1,163 properties in the U.S. and Northern and Western Europe, covering approximately 131 million square feet, and well-diversified by tenant, property type, geographic location and tenant industry.

A long sentence for sure - but Carey's earned it. In the U.S., the company has only modest exposure to retail (less subject to downturns). At the end of 2018, 63% of the ABR (annual base rent) came from U.S. properties and 35% from Europe. Industrial properties, including warehouses, represented 44% ABR, office properties 26%, and retail assets 18% (the vast majority in Europe), with a weighted-average lease term of more than 15 years.

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 2018 with debt to gross assets at 42.8%, and net debt to EBITDA at 5.8x. Debt maturities are well-laddered, with just $74 million of debt maturing in 2019, and limited floating rate debt (relative to the overall balance sheet). Acquisitions in 2019 have included approximately $188 million in investments: in Portland, OR, a facility net leased to a private, nonprofit fully-accredited university to relocate its entire campus; in Inwood, WV net leasing to the world's largest independent hardware distributor; and a tractor/trailer hub in Bensenville, IL, net leased to a growing trucking company with more than 600 vehicles.

For more than 45 years (and 21 internationally), the company has demonstrated a successful track record of investing and operating through multiple economic cycles - continuing to grow, and improving the quality of its diversified portfolio. Since going public in 1998, W.P. Carey has delivered yearly dividend increases to investors - just last month increasing the quarterly cash dividend to $1.032 per share, ($4.13 per share annualized). In fact, WPC has increased its dividend every single quarter, for the past 18 years (including during the Great Recession).

Though shares are a bit pricey, so we recently opted to recommend a "pullback" BUY (wait on a better entry price before buying shares).

Year-to-Date Price Performance (vs. VNQ)

Source: Yahoo Finance

STORE Capital Corporation (STOR) is the third of 3 net lease REITs in this collection - another standout for its size and exceptional dividend growth attributes. Uber investor Warren Buffett recognized the company's value proposition, taking a $377 million stake (roughly 9.8%) in June 2017. STOR has a large, well-diversified portfolio of $7.6 billion of investments in over 2,250 properties, substantially all of which are profit centers, in 49 states. STORE's success in growing its earnings (AFFO) and dividend is primarily due to the company's improved cost of capital - rated BBB, BBB and Baa2 by Fitch Ratings, Standard & Poor's, and Moody's, respectively, with about 61% of real estate holdings unencumbered (targeting 65%)- and generating scale: Store has been investing over $100 million per month on average, since 2015.

STOR is well positioned for the year ahead with substantial financing flexibility, conservative leverage, and access to a variety of attractive options to fund their large pipeline of investment opportunities: with more than $450 million on their credit facility - $800 million with the accordion feature. Year-end 2018 long-term debt stood under $3 billion at a weighted average maturity of about 6.2 years, and a weighted average interest rate of 4.4%. STORE's long-term borrowings are all fixed rate, with debt maturities intentionally well laddered - very little debt is coming due the next two years. At year-end, STORE's leverage ratio was 5.5x times net debt to EBITDA on a run rate basis, or around 40% on a net debt to cost basis.

The 2018 annualized base rent and interest generated by the portfolio increased 23% to $615 million, compared to $501 million in 2017. Total 2018 revenues were $541 million, a 19% increase over the prior year. And at year end, only eight properties were vacant - an occupancy rate over 99.6%. Growing demand for the company's real estate financing solutions has continued to translate into strong and consistent revenue growth. Analysts forecast STORE Capital to grow AFFO per share by around 8% this year, in line with historical averages; and with sector-leading rent increases averaging 1.8% annually, dividend growth is targeted at 5% - to continue STOR's yearly dividend increases since the company's 2014 IPO.

Like others on this list, STORE is a bit pricey today, and we're recommending buying during a pullback.

Year-to-Date Price Performance (vs. VNQ)

Source: Yahoo Finance

Crown Castle (CCI) is a cell tower REIT with a comprehensive infrastructure portfolio of approximately 40,000 cell towers and other structures (including rooftops), and 65,000 route miles of fiber, mostly supporting 65,000 small cells (that are on air or under contract). Crown Castle has a presence in every major U.S. market.

As demand for data and information grows, the company's unique combination of assets will allow robust dividend growth in years ahead, supported by high-quality, long-term contractual lease payments (weighted average five-year contract payments totaling $23 billion) on mission-critical shared assets. CCI's largest tenants: AT&T (NYSE:T), T-Mobile (NASDAQ:TMUS), Verizon Wireless (NYSE:VZ), and Sprint (NYSE:S) - provided three-fourths of 2018's site rental revenue - these are recurring revenues subject to long-term contracts (initial terms of 5 to 15 years, multiple renewal periods at tenant option of five to 10 years each, limited tenant termination rights, and contractual rent escalations). All told, site rental was 87% of the company's consolidated net revenue.

Crown Castle's disciplined approach to capital allocation allows long-term stability (an investment grade balance sheet), as data growth expects to drive continued network investment to meet the needs of emerging markets - such as 5G, the "Internet of Things," and smart city technologies - all of which will require infrastructure solutions.

CCI's balance sheet ended 2018 just over 5x debt-to-EBITDA, consistent with its intent to finance itself through five rounds of leverage. The company remains committed to maintaining an investment-grade credit profile, with more than $3 billion in available capacity, and no maturities until 2021. In 2018, Crown Castle increased dividends per share by 10%. That was consistent with its growth in adjusted funds from operations (AFFO), and its commitment to return capital to shareholders. As of late January, the company had an enterprise value of $66.0 billion.

Crown Castle has generated impressive growth since going public in 1998, which has resulted in equally impressive dividend growth. The company invests in assets that attract and generate long-term (even double-digit) returns for shareholders, while paying a high-quality dividend is expected to grow between 7% and 8% annually.

With a share price bordering on "too expensive," we recently opted to recommend a "pullback" BUY (wait on a better entry price before buying shares).

Year-to-Date Price Performance (vs. VNQ)

Source: Yahoo Finance

Some Cheaper Seats?

The REIT market has gone up more than 17% year to date and, as much as I like these four REITs, it's just not practical to continue pounding the table: BUY-BUY-BUY.

Instead, now may be a good time to trim shares and reinvest proceeds into some excellent value stocks (we provided our "Elite 8" yesterday) or sit on the sidelines until prices become more attractive. That being said, there's always a few Cinderella ideas… stay tuned…

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Disclosure: I am/we are long O, STOR, CCI, WPC. 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.

Additional disclosure: Author's note: Brad Thomas is a Wall Street writer, and that means he's not always right with his predictions or recommendations. Since that also applies to his grammar, please excuse any typos you may find. Also, 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.