Seeking Alpha

REITs In Retirement

|
Includes: CUBE, DEA, DOC, IRM, KIM, O, SKT, SPG, VNQ, VTR, WPC
by: Steve Shea
Summary

This is my actual REIT portfolio which has been divided over four REIT industries.

The portfolio is compared to the Vanguard VNQ fund.

Brief descriptions of the 10 individual REITs are included.

A couple of years ago, I started investing in the REIT space by purchasing 100 shares of Simon Property Group (SPG) on August 16, 2017. I didn’t know much about REITs, but read various articles on Seeking Alpha and other sources. As a Do-It-Yourself investor, I like to do research and pick my own investments. However, since this is my retirement money, I wanted to see how my investments performed compared to the Vanguard Real Estate ETF (VNQ). At the end of June 2018, I started a REIT spreadsheet to chart the performance of my REITs as well as the price of VNQ (including dividends).

This article chronicles my learning curve during the past year.

First, I learned that all REITs are not created equal. Originally, I concentrated on Mall and office building REITs. Then, I added self-storage (if you want to include Iron Mountain (IRM) as a storage REIT) and medical buildings. My criteria were (in no particular order):

  • Self-managed
  • High yield
  • Safety of dividend
  • Conservative leverage
  • Quality management
  • Safety of principal (within reason)

My goal was to have $100,000 in this part of my investment portfolio. Within a few months, I had ten REITs in my portfolio and was watching the value of these investments decline with each passing month. I read the quarterly and annual filings of these companies, and in some cases I sold the stocks and in others I would increase my holdings. For instance, I added another 100 shares of Simon Property Group and kept buying Realty Income (O) until I had over 300 shares. The only problem was that I became overweight in REITs with over $150,000 invested. This is when I started my REIT spreadsheet to evaluate whether I should continue with this sector. If I did want to continue to own REITs, would it be better to invest in VNQ?

The following chart shows the value of my REIT investments (Shea REITs) and how the same starting capital of VNQ would have performed. From a low point (September 21st, 2018 at just over $150,000), I saw my REITs grow to over $170,000 on December 18th.

For the first 5 months, this was an apples to apples comparison. Then, I started buying new REITs and selling shares of companies I thought were becoming overvalued. As of the end of June 2019, the value of my REITs is $103,155 and I have $76,189 in cash equivalents because of selling more REITs than I have purchased during the past year. Through no fault of my own, I am currently at my goal of $100,000 in REITs. My original $153,446 has grown to $180,952 for an 18% annual increase (dividends reinvested).

Had I invested this sum in VNQ and made no further investments (except reinvesting the dividends), the ending value would have been $169,751 for a 10.6% annual return. My rudimentary comparison is no longer valid, because the cash portion of my portfolio is significant. So, VNQ will be more volatile than the Shea REITs. In poor markets (like this week, for instance), my REITs will outperform because the cash part won’t go down in value. In good REIT markets, VNQ will undoubtedly outperform my portfolio.

Source: Graph by Steve Shea, data compiled from TD Ameritrade daily quotes

I have attempted to categorize these investments by REIT sector. However, I have found that they don’t fit in neat categories. With that disclaimer, here are the actual REITs in my portfolio as of 6/28/19 sorted by REIT sector:

Source: Charts and graphs by Steve Shea, data compiled from TD Ameritrade

Individual stocks

Medical

Source: Chart compiled by Steve Shea, 10-K corporate filings (for FFO information), quotes from TD Ameritrade

Physicians Reality Trust (DOC) and Ventas Inc. (VTR) are my two stocks in the REIT medical space. DOC invests in large medical office buildings, and VTR has medical office buildings, senior housing and skilled nursing facilities. This sector has the lowest yield, but has the stability of being in a recession-proof industry.

Self-Storage

Source: Chart compiled by Steve Shea, 10-K corporate filings (for FFO information), quotes from TD Ameritrade

CubeSmart (CUBE) rents storage units and is a direct competitor of Public Storage (PSA). I think CUBE is the better value than Public Storage at this time. I was looking at an entry price of under $30 for Cube, and was able to start a position on September 20th. Its growth rate and dividend increases are higher than those of most of these stocks.

I have also included Iron Mountain in this sector, but the products are totally different. IRM stores documents for government and business. There is some concern that the stored document industry will become obsolete, but IRM stores many documents that are legally mandated to have a paper trail (as of this writing). Looking to the future, the company is building data centers and has a service that will convert stored documents to online files. I am not thrilled that IRM is one of my two losers, but its dividend yield is just under 8% and I consider the business model safe and recession-proof. Also, the dividend payments exceed the Funds from Operations (FFO). Maybe this is why IRM added Slide 35 in the NAREIT presentation given earlier this year, where it shows how the dividend will be funded in 2019. Nonetheless, I like the REIT's proposed business model. My position in IRM is 14% of this portfolio, so I am closely monitoring the quarterly reports.

Mall REITs

Source: Chart compiled by Steve Shea, 10-K corporate filings (for FFO information), quotes from TD Ameritrade

My first purchase in the REIT space was Simon Property Group, and I still think this is perhaps my highest-quality stock. The company invests in high-end malls, and it is the only REIT on my list that has an A- credit rating. At one time I had over 200 shares, but I sold 100 shares in September. The management team has great vision and converts some of the retail space into mixed-use spaces like fitness centers or quality apartments.

Kimco Realty Corp. (KIM) owns outdoor malls, often anchored by a grocery store. There is a Kimco property close to my home in Huntington Beach. Target (TGT) is the largest store, and there is constant activity in the parking lot when I drive by. The management has focused on top metro markets, and over half the revenues come from service and experiential tenants. In addition to Target, some clients are Walmart (WMT), AutoZone (AZO), Dollar General (DG), Costco (COST) and Sprouts Farmers Market (SFM). Of my three mall holdings, KIM has the least exposure to the online shopping threat. KIM is one of four stocks I recommended to my daughter, who started investing in individual stocks in her ROTH account this year.

My last mall REIT is Tanger Factory Outlet Centers (SKT). It invests solely in outlet malls and has been in a declining market in recent quarters. Along with IRM, this is my only other loser in the REIT space. The current yield is just under 9%. I rechecked my figures to make sure the Price-to-FFO ratio was correct. Granted, the FFO numbers are down 5% for the last quarter compared to the same quarter a year ago. But this company has weathered economic storms in the past. SKT offers twice the value on a Price/FFO basis compared to SPG and KIM. It has very little debt maturing until 2023. The dividend is safely covered. Based on these factors, I think SKT’s Price/FFO ratio has been beaten down so far that it will improve in the upcoming quarters.

Net Lease REITs

Source: Chart compiled by Steve Shea, 10-K corporate filings (for FFO information), quotes from TD Ameritrade

Realty Income is a large net lease REIT. It leases its space to creditworthy customers. This company is the only one I own that pays a monthly dividend. Because it is so large and has a great balance sheet, this company has a low cost of capital and quality tenants. I have sold my initial shares, and only have the shares that have been purchased with the monthly dividend. I think O is a great company, but thought it was overpriced earlier this year. I wrote covered calls on O at various times at a strike price of 62.5, another at 65 and another at 70. All these options were exercised, leaving me with a small O position. I made $477 in writing the calls, but history tells me that I would have been better off keeping the stock. The obvious lesson here is to take market timing advice from people far more talented than I. I still like the company, but don’t like its Price/FFO ratio of 22.

Easterly Government Properties (DEA) is a net lease company that only rents to government entities. It is one of the smaller REITs (only 32 employees at the start of 2019) in my portfolio, which equates to higher cost of capital. Most of its rental agreements contain escalation clauses, which could help offset potential inflation concerns. As of the end of years 2017 and 2018, DEA’s properties were 100% occupied. The REIT has almost no debt maturing until 2022.

W.P. Carey (WPC) is another large net lease REIT. Similar to Realty Income, WPC has 35% of its real estate outside the United States (Mainly Europe). The international exposure provides a level of diversification not present in my other holdings. It controls over 1,160 properties containing 130 million square feet of rental space. The average lease term is 10.2 years. With economies of scale, WPC enjoys a low cost of capital and attracts top-quality tenants. Such tenants include U-Haul (UHAL), government offices in Spain, the New York Times and Marriott (MAR). The REIT offers stability of growth, income and dividend payments.

Dividends and reinvestment

Source: Chart compiled by Steve Shea, financial information from TD Ameritrade

All dividends are reinvested in the stocks each as they occur. The purchase price is the sum of all original purchases of the stock. Dividend reinvestments are not included in the purchase price. The total profit of my current holdings is $14,274, of which $9,241 is the dividend reinvestment. So, 65% of my profits are from dividend reinvestment. As you can see, I don’t add a new position very often, and have only added one in 2019 (DEA). I have increased and reduced holdings in a few companies, but have not closed any positions this year.

At this point, I don’t need the dividends to fund my lifestyle, so I am happy to reinvest them into these same companies. Currently, my $104,763 investment provides $6,154 in yearly dividends for a 5.87% rate of return.

Unfortunately, most of the dividends from REITs are not qualified dividends, so they are taxed at the normal income rates. To combat this situation, the majority of these stocks are in my self-directed ROTH account. REITs are a great investment class to hold in a ROTH account.

Summary

In the past year, my original $153,446 has grown to $180,952 for an 18% annual increase (dividends reinvested). In the same time frame, VNQ would have grown to $169,751 for a 10.6% annual return (with dividends also reinvested). The difference is $11,201 for the year, which is over $933 per month. I will continue with my individual REIT investments because of the returns and because I like researching the stock market.

I was reluctant to put this portfolio online, mostly because I am not confident offering individual stock suggestions. I am much better at giving wealth management techniques, such as ROTH vs. IRA, or tips on how to balance a portfolio. Know that I do not offer any of the stocks mentioned here as investment advice. This article is meant to show how I have created and analyzed my REIT portfolio.

Finally, I would like to thank the Seeking Alpha community. Many of my REIT ideas have come from reading articles from their talented and generous authors. If any of you have suggestions about this article, I would appreciate hearing them.

Disclosure: I am/we are long O, CUBE, KIM, VTR, DEA, SKT, DOC, IRM, SPG, 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.