5 Top REIT Picks To Get Your Piece Of The 'Top Five' Life

Includes: DOC, IRM, KIM, LADR, MNR
by: Brad Thomas

They say to go big or go home, and whoever dreamed up this yacht took them at their word.

As we scan the “intelligent REIT lab” for the five best REITs to buy, we remain cognizant of the fact that valuation plays a critical role in the investing process.

We wish you all a safe, happy and prosperous Memorial Day weekend, and stay tuned for my next article: Perseverance.

At the risk of making you jealous, I’m in the Bahamas right now. Nassau, to be specific.

It’s for business. I swear. I flew into paradise with you on my mind to talk to well-connected landowners, to discuss the latest and greatest real estate, and to determine how to best bring it your way.

That’s all true. I promise. However, before you call me out on it, I’ll admit that, yes, business has never looked as good as it does right now.

Nassau is every bit as gorgeous as you would expect. If anything, the travel brochures don’t do it justice.

The view I’m staring at as I write this is one of exquisite blue tiers. Up above me is a cloud-dotted sapphire sky that fades into a hazy, lazy blue at the horizon. There, it meets the even more notable ocean, which gets darker and darker the further you look out. But it’s the most inviting shade of turquoise up close, where it touches the sand- and rock-strewn beach.

If at all possible, you’ve got to come and see it for yourself. Words just can’t do it justice.

There are palm trees. Lagoons. Sunshine galore. And it seems like every walk I take brings me to something beautiful. Like Top Five.

If you want, you can Google this “boat.” Or I can save you the effort and just quote CharterIndex.com. Just wait until you hear this ship’s sweet, sweet details.

A large white boat on the waterDescription automatically generated

Photo Source: Brad Thomas

“Top Five” Is Top Notch

They say to go big or go home, and whoever dreamed up this yacht took them at their word. Here’s what its current operators have to say:

The luxury super yacht TOP FIVE offers accommodation for 12 guests in six cabins consisting of a master stateroom located on the deck with a king size bed and bathroom facilities… [and] a VIP stateroom with a king-sized bed and bathroom facilities… Further guest accommodation[s are] also available in another four cabins.

TOP FIVE also accommodates up to eight crew on-board to ensure you have a relaxed luxurious charter experience and all of your needs are catered for while on board.

Charter Index continues with:

The specifications on board the beautifully built 157 ft/47.9 m Christensen… include air conditioning, stabilizers for a smooth ride… as well as an extensive list of amenities and toys.

Whether you should choose to charter in the Bahamas or North America, the luxury super yacht TOP FIVE and her crew of eight will be sure to satisfy all of your needs and make sure you enjoy your experience.

Looking at the featured images online and the up-close picture I got this morning, let me tell you, people:

This isn’t a boat we’re talking about here. It’s not even a yacht.

It’s a full-out five-star hotel with everything you could possibly expect from such an establishment. Including elevators, exercise equipment, water skis, a windsurfer, and a very wide-screen TV.

When you sail with Top Five, you’re living like a king.

No, not a king. An emperor. A maharaja. We’re talking about unparalleled oceanic extravagance here – an exceptional experience for just $180,000 per week!

Not quite a bargain, I know. But what if you could generate enough wealth to make Top Five an affordable reality nonetheless?

Let’s Discuss a 5-REIT Reality

Since I always want to stay as honest as possible for your sake and my own, let’s face the facts.

In order to make a boat ride like Top Five anything other than a daydream, you’d have to have a portfolio filled with truly exceptional positions.

You’d also have to have either a good bit of money to start out with – hey, it takes money to make money – or an intensely focused financial plan that foregoes the niceties today in favor of seriously splurging tomorrow.

Naturally, I can’t help you out with those last two factors. Those who are born into wealth are born into wealth, and those who aren’t? Well, they aren’t. Nobody put me in charge of decisions like that.

And while the topic of keeping and expanding the money one makes is much more malleable, to each their own. I have to make my decisions in this regard just like you have to make yours.

It’s a day-to-day evaluation of which one you want more: immediate gratification or forward-thinking rewards.

However, I can give you some exceptionally worthwhile real estate investment trusts, or REITs, to look into. If you faithfully invest and reinvest in them over the years, these five picks could help you build something big and bold.

And perhaps even breathtaking, like the views I’m seeing down here.

Our “Top Five” REIT Picks

REITs are up over 18% through May 20, and the fundamental operating position for most U.S. equity REITs remains strong, suggesting that they are on a solid footing for continued outperformance.

Setting the stage for this solid showing are the decreases in the federal funds target, which takes pressure off of near-term real estate financing fears and immediately higher-cap rates.

In this midst of this rapid rise in REIT stocks, investors must continue to maintain strict discipline for the sleep well at night (i.e., SWAN) picks, recognizing that principal preservation is always the No. 1 objective.

As we scan the “intelligent REIT lab” for the five best REITs to buy, we remain cognizant of the fact that valuation plays a critical role in the investing process. Thus, our top five picks have all been screened for a combination of sound fundamentals and overall cheapness.

Our first pick is Physicians Realty (DOC), which has returned over 21% year to date and over 31% since February 2018. As you can see below, DOC – like most healthcare REITs – has been unloved by many investors, but we recognize that medical office buildings (MOBs) constitute one of the healthiest sectors in the healthcare category.

Even after the run-up, we find DOC attractive: Shares trade at 17.7x P/FFO, still lagging the five-year norm of 18.3x. In addition, DOC’s dividend yield is 4.8%, and we think there’s a good chance the company will boost the dividend in 2020.

DOC has proven it can scale its business model and the portfolio is considerably more defensive today than it was three years ago (then, 26% of the tenants were investment-grade rated, as compared with 53% today). Also, DOC has just 3.5% of its leases expiring through 2022 (peer average is 10.5%) making the longer-duration leases more stable and predictable. We are maintaining a BUY on DOC.

A screenshot of a computerDescription automatically generated

Source: FAST Graphs

The next pick is Ladder Capital (LADR), a commercial mortgage REIT that we have been bullish with for quite a while. At the end of Q1-19 Ladder’s balance sheet loans totaled $3.3 billion and senior secured assets, plus cash, comprise 77.5% of the overall asset base.

In Q1-19 Ladder generated $46.9 million of core earnings ($0.40 per share) that resulted in a core after-tax return on average equity of 11.6%. The company paid a $0.34 per share dividend, reflecting a cash dividend payout ratio of 85%. The company said that “on a rolling 4-quarter basis, the payout ratio was 70.4%, reflecting cash dividends of $1.33 per share and $1.89 of core EPS.”

We have modeled (targeted) shares at $17.50 (end of 2019), which means that shares could return around 20%. Shares are trading now at $16.16 with a well-covered dividend yield of 8.4%. LADR returned over 24% in 2018 and we believe the recent pullback creates a good opportunity to generate 20% returns in 2019.

A screenshot of a cell phoneDescription automatically generated

Source: FAST Graphs

Kimco Realty (KIM) is our third pick, and although the shopping center REIT’s shares have performed well year to date (27%+ return), we believe there’s more room to run. When you consider the price line below, you can see that Kimco was beaten down hard by the “retail apocalypse” pundits – shares returned -46% since July 2016.

A screenshot of a mapDescription automatically generated

Source: FAST Graphs

Yet during that time, Kimco has been busy recycling its portfolio, and as I explained in a recent article, “the average quality is much higher than before, and (the properties are) mostly located inside of primary markets within America's most affluent 20 cities.” I also explained, “77% of its rent is from centers that are anchored by grocery stores - another important category that makes up 14% of rent. This means that much of Kimco's cash flow has a built-in cushion during any future recessions.”

We believe the valuation metrics still screen attractive: Shares trade at $18.18 with a well-covered dividend yield of 6.2%. The P/FFO is 12.4x that is still will below the five-year average of 15.0x. We are maintaining a Strong Buy.

The next “top 5 pick” is Iron Mountain (IRM), a leading storage company that is somewhat of a hybrid of sorts. The company owns and/or leases almost 1,500 facilities in 54 countries on six continents and serves more than 225,000 corporate clients, including 95% of the Fortune 1,000.

Most of the current revenue comes from developed market physical storage (with very low cap ex of ~3% of revenue) and the boxes make from strong pricing power (one- to three-year leases that allow for more frequent rent hikes). Thus, the margins are impressive (75% EBITD margins).

My attraction to Iron Mountain is that the company can upsell its storage customers into shredding, digitization, and data center storage products. The key to the successful integration is that Iron Mountain maintains around 98% retention, and that makes it easier for the company to maintain and grow its customer base.

As viewed below, Iron Mountain has underperformed year to date (-.60%) and this means that shares are cheaper than usual. So even with a mouth-watering and well-covered dividend yield of 7.8%, the company can expect long-term dividend growth of 3% to 5%.

Since November 2017 shares have returned -14.8%, creating a wider margin of safety. Shares now trade at $31.31 with a P/AFFO multiple of 10.3x, well below the 14.6x multiple back in November 2017.

A screenshot of a cell phoneDescription automatically generated

Source: FAST Graphs

Our last “top 5” pick is Monmouth Realty (MNR), a beaten-down industrial REIT that has fallen on hard times as a result of its association with FedEd (FDX) (FDX -36% in 12 months) and the company’s bad bets within its REIT securities business. (In the latest quarter MNR had $145.8 million invested in the REIT securities portfolio, representing 7.1% of gross assets and approximately $14 million in annual income.)

Back in March we boosted Monmouth to a Strong Buy, recognizing that the valuation was compelling. Since the upgrade, shares have surged by 10% (returned 16.8% YTD), yet compared with most peers, Monmouth still trades at a wide discount.

A picture containing screenshotDescription automatically generated

Source: FAST Graphs

As viewed above, Monmouth has returned -14.7% since November 2017, suggesting that Mr. Market is not pleased with Monmouth’s outsize FedEx exposure (59.6% of rent is derived from FDX), in addition to Monmouth’s poor capital allocation strategies (i.e., CBL & Associates (NYSE:CBL), Washington Prime (NYSE:WPG), and Government Properties (NYSE:GOV-OLD) were very bad bets).

However, we believe that Monmouth has a good growth pathway – with ~80% of rental revenue derived from long-term leases to investment-grade tenants. The analyst estimates suggest AFFO growth of 6% in 2020, a visible catalyst that suggests dividend growth is likely. The 4.8% dividend yield is well covered, and the shares remain cheap with a P/AFFO of 16.2x (vs. 19.7x five-year average). We maintain a Strong Buy.

In Closing

I wish you all a safe, happy and prosperous Memorial Day weekend and stay tuned for my next article: PERSEVERANCE.

A picture containing sky, outdoor, boat, buildingDescription automatically generated

Photo Source: Brad Thomas

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.

Disclosure: I am/we are long DOC, KIM, LADR, IRM, MNR. 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.