Seeking Alpha

2 Income Investments That Retirees Will Love

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Includes: BPR, BPY, DUNDF, MNR, MPW, SRC, VNQ
by: Jussi Askola
Summary

In the past weeks, we have been sharing several new income investment ideas with our followers.

We mostly focus on real estate investments as this is our favorite sector for long term income-driven retirement-friendly investments.

Below we discuss the benefits of REIT investments and present two investment candidates for the Portfolios of Retirees.

Do You Want to Become a Landlord?

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Own a bunch of rental properties with tenants that pay you every month while you wait for long-term appreciation. 90% of retirees and income investors credit real estate as a major contributor to their net worth.

Here, you might say, but only if there was an easy way to buy and own rentals, where experienced professional could handle the business of researching and picking the most opportunistic investments and share the results in an efficient manner. Well, read on. This is exactly what we are here for.

While some time ago, these highly profitable investments may have been reserved to high net worth individuals and institutions, it is today easier than ever before to invest in real estate through high-yielding real estate securities or REITs. Even better, with REITs, you get to combine the positive attributes of stocks:

  • Liquidity
  • Low transaction cost
  • No managerial work

With the benefits of real estate:

  • Higher total returns
  • High and stable cash flow
  • Inflation protection

As a result, REITs (VNQ) have historically produced much greater returns than the S&P500 (SPY) over long time periods:

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So, rather than investing in rental properties and having to deal with tenants, toilets, and trash in retirement, most investors would be better off just investing in the shares of publicly traded REITs. These investments enjoy liquidity, low transaction, professional management and greater diversification.

In fact, REITs have even outperformed private real estate investments due to their greater scale, lower borrowing cost, and greater access to better deals:

source: EPRA

But... How to Pick the Best REITs?

The REIT market is very vast with more than 200 names - and this can easily get overwhelming. We are very selective, and our Core Portfolio currently holds only 19 investments. This means that for every REIT investment that we make, we reject almost 10 of them:

We look for situations in which a given REIT is priced at a materially lower price than the value of the underlying real estate. By buying quality REITs at large discounts to NAV along with high dividend yields, we have a track record of achieving strong total returns while earning an ~8% dividend yield on average.

Here are a few notable examples of public recommendations for each year since we started writing on Seeking Alpha (2016-2019):

2019 example: Brookfield Property REIT (BPY; BPR) temporarily traded at a 50% discount to NAV back in late December 2018. We bought heavily and shares are up by over 35% in three months:

2018 example: Medical Properties Trust (MPW) traded at an estimated ~20% discount to NAV back in May of 2018. Total returns are upward of 50% since then:

2017 example: Spirit Realty Capital (SRC) crashed in May of 2017 after disappointing quarterly earnings. We recognized an opportunity to buy quality net lease assets at an estimated 30% discount to NAV. Total returns are approaching 50% in a less than two year holding period – from low risk assets.

2016 example: Dream Global (OTC:DUNDF) is an international REIT that owned highly desirable German properties back in October of 2016; and yet it was offered at a ~20% discount to NAV. The total return over the two-and-a-half-year holding period is ~80%:

To be fair, not all our investments performed so well and some even suffered losses. No one bats 1,000, but this approach has worked well on average and has the potential to strongly outperform market indexes.

Two Income Investments That Retirees Will Love

If you've read until here, we want to share with you two of our "Top Picks" among high-yielding REIT opportunities. These are REITs that are particularly well suited for retirees because of their more defensive nature, steady cash flow and high level of dividend security.

INVESTMENT #1 – Spirit Realty Capital (SRC): $2,820 invested

Spirit Realty Capital (SRC) is our favorite pick among traditional net lease REITs because it is deeply underpriced relative to close peers despite holding very similar assets and possessing a strong balance sheet. The main reason for this discount is past missteps in capital allocation, which appear to be (mainly) resolved today after the recent spin off of lower quality assets. Trading at an 5.3% dividend yield and just about 14x FFO, we see ample upside potential and we would not be surprised if the REIT got acquired by one of its larger peers. Most important, the dividend is easily covered at an ~80% payout ratio and in a private interview with the CEO, we learned that they expect to keep the dividend steady in the next recession.

Image result for net lease properties

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In the last quarter, SRC delivered blowout results that sent the shares higher by over 5%. This increase came after having already returned ~70% since our initial investment in 2017. The highlights of the last quarter:

  • SRC beat on FFO and revenue expectations by a large margin. This is what the market liked the most here.
  • They have finally reached a share price that allows them to follow the same growth model as other successful net lease REITs, such as Realty Income (O). They are now able to raise significant amounts of equity capital and reinvest it at accretive spreads.
  • They also earned the much-anticipated credit upgrade to BBB/stable from S&P – which will allow them to reduce cost of debt.
  • Overall, equity + debt, they raised $533 million and deployed $293 million into new investment opportunities.

Achieving a competitive cost of capital is a crucial turning point for SRC. Now that SRC has achieved this and made it clear to the market, the secret is out and the share price has greatly appreciated. The company is not as opportunistic as it once was, but there remains some meat on the bone for further outperformance at ~14x FFO – compared with 21x FFO for Realty Income.

INVESTMENT #2 – MNR Real Estate (MNR): $4,200 invested

Monmouth (MNR) is an industrial REIT that recently traded down for reasons that we believe to be unwarranted. As a result, the company has become undervalued at just 14x FFO while its closest peers trade at 22x FFO on average. The investment operations are very conservative and perfectly positioned in a late cycle economy with long lease terms, investment grade tenants, and exceptionally long debt maturities. The current dividend yield is 5% and retirees can sleep well at night knowing that MNR has never missed a single dividend payment in its multi-decade history (not even in 2008-2009). Combined with 5%-10% FFO Growth and some FFO multiple expansion, we expect MNR to continue its streak of market outperformance.

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The last quarterly results were not great. However, one needs to listen to the conference call to get the real story here because there are some unique circumstances and the headline numbers do not tell the real story:

  • The quarterly FFO per share missed expectations and showed a decrease as compared with last year. However, this miss is mostly a timing issue. MNR raised a significant amount of equity back in October when the shares traded at a higher price. It dilutes per share metrics until all the proceeds are invested in new properties. Most important, this is only a temporary issue and it positions the company for long term growth as it reinvests all these proceeds.
  • Another detractor in the past quarter was that occupancy dropped by 70 basis points. Again here, this is only a temporary issue. In fact, the company already resigned a lease with Amazon (AMZN) for 10 years – which will bump occupancy by 50 basis points – a positive for the next quarter.
  • The securities portfolio (~8% of assets) produced poor results due to REIT market volatility – this was largely expected and not a major concern for us. We are focused on the Class A industrial portfolio which is among the best of the entire REIT market.
  • MNR closed on the acquisition of a $25 million production facility occupied by Toyota (NYSE:TM) and has a $220 million pipeline to drive FFO per share growth over the coming quarters.

Put simply, this is a clear case of “short term pain for long term gain” in our opinion. The temporary dilution caused by the share issuance and occupancy rate caused a miss – but it positions MNR for stronger growth going forward. In fact, there was even some hints of a possible dividend hike in the near term. Our recent interview with the CEO of MNR leaves us confident that MNR is one of the best picks for a lower risk REIT in a late cycle economy.

Investor Takeaway

Early retirees need a diversified portfolio that can fund their lifestyle over many decades. It will need to weather all sorts of economic conditions, including several recessions and quite possibly even a depression or two.

We believe that retirees should build a highly diversified portfolio of cash flowing assets that they will never have to sell to meet their needs.

Furthermore, they will need to be able to survive over the long term and generate consistent, sustainable cash flow that will survive recessions and keep pace with inflation. They will also need investments that will be passive enough to allow them to truly retire rather than simply run another business.

For the reasons mentioned above, we believe that REITs are the best vehicle that retirees can find to make their dreams come true. However, investors need to remember that REITs also come in varying shapes, sizes, and risk levels. Therefore, investors need to take care to avoid stepping on landmines and instead focus on high quality, recession and inflation-resistant REITs like SRC and MNR.

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Disclosure: I am/we are long SRC; 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.