Seeking Alpha

Great REIT Retirement Income For Life: 5 Income-Inducing Ideas

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Includes: DEA, DOC, IRM, LADR, SPG
by: Brad Thomas
Summary

While visiting DOC’s headquarters, it became clear to me that the company’s culture is a true differentiator.

DEA also is forging relationships with the FDA to develop new facilities.

LADR is one of my favorite commercial mortgage REITs.

SPG is trading at literally the highest yield and lowest price to cash flow in a decade.

Everything IRM does fits in with its mission to be a “trusted guardian” for the businesses that rely on it.

Planning is easy… if, by planning, you mean merely making a mental list or paper draft of everything you’ll need for a given situation.

Take a child’s birthday party. In order to make sure it’s the “best birthday party ever!” you know you’ll need to:

  • Order seven pizza pies for him and his 16 friends/classmates
  • Acquire his favorite chocolate cake, only with almond butter icing (since one of the 16 attendees has a peanut allergy)
  • Get an appropriate amount of drinks
  • Purchase the right amount of disposable plates, napkins, and utensils – because you want to do as little cleanup work afterward as possible
  • Rent a movie of choice
  • Cross your fingers and hope to high heavens that everything goes off without a hitch

(Which it rarely does. But more about that in a moment.)

Naturally, compiling those party props and chow are going to take some time. In order to put this plan into action toward the stated goal of hosting “the best birthday party ever!” you’re probably going to need to do some driving back and forth. Possibly, you’ll have to stop at more than one Redbox around town in your quest for the right movie.

(Which makes you miss Blockbuster, doesn’t it?)

Then, after you’ve amassed what needs to be amassed, there’s setup. Arranging the various dishes, drinks, and deserts in their proper places, your hope is that a minimal amount of everything gets accidentally dumped on the floor in an unholy mess.

However, all that planning and prepping can only do so much once the little hellions arrive. Then it’s all up in the air on how things are going to go…

Up in the air and, I hate to say it, but probably spilled on the ground too.

A person sitting at a table with a birthday cakeDescription automatically generated

Photo Source

You Can’t Plan for Everything

Look, birthday parties are supposed to be fun – even when you’re the one throwing them for your kids or grandkids. But you do have to go into them knowing there’s only so much you can control.

In that regard, they’re rather like retirement. You do the responsible thing and put money into your 401k with every paycheck you make during your working years. And you say no to many of life’s luxuries along the way, telling yourself it will be worth it in the end.

As a result – however many years later – you have a tidy nest egg that’s ready to hatch when you quit the rat race.

That’s great and all. I definitely don’t want to downplay that intelligence and commitment when, let’s face it… they’re too few and far between these days.

All the same, it’s almost always a bit of an adjustment – even a shock – to go from getting a steady paycheck every two weeks to not getting any kind of paycheck.

Don’t automatically think you’re properly prepared for that kind of difference. It can be a major one, leaving you at a psychological disadvantage, if not a fiscal one.

That’s one of the many reasons why I’m quick to promote real estate investment trusts, also known as REITs. Since they’re dividend-paying stocks, they provide that additional income you’re missing once you retire.

True, they don’t do this once every two weeks. Most of the U.S.-based ones don’t even pay out once a month. They’re quarterly. (With that said, here’s my latest monthly-paying picks.)

Yet that’s still four (or 12) paychecks every year that you wouldn’t otherwise see. And believe me when I say this next part:

That’s a very big deal.

More Benefits of Holding REITs in Retirement

The benefits of REITs don’t stop with their dividends though. For one thing, they’re not your average kind of bonus-bearing assets.

By law, they have to pay out 90% of their taxable income out to shareholders. Therefore, they tend to offer higher yields than their non-real estate focused stock-market brethren.

Also because of that legal requirement (at least in part), REITs tend to:

  • Provide a predictable source of income
  • Outperform over the long term compared to other asset classes

On that first point, they’re designed to be very stable structures committed to making money for everyone involved. As for the second, I’ll turn to what my fellow Seeking Alpha writer and iREIT on Alpha contributor Adam Galas said in September’s Forbes Real Estate Investor:

“… REITs in general are less volatile than the broader market over time. Since 1989, a time period that includes the Great Financial Crisis that decimated the asset class (something the sector has reacted to by deleveraging and creating the strongest collective balance sheet in history), REITs have been 33% less volatile than the S&P 500 and most other benchmarks, 42% less volatile than tech stocks (Nasdaq), 42% less volatile than (the) S&P 500 Utility Index, and 48% less volatile than (the) Dow Jones Industrial Average.”

If I’ve convinced you that it’s a good idea to hold some of these stellar stocks in your retirement portfolio…

Keep reading. I’ve got a list of intriguing investment opportunities to show you.

The Retiree’s REIT Wishlist: Physicians Realty

Last week, I was in Milwaukee meeting with Physicians Realty (DOC), a REIT that invests in medical office buildings (MOBs). Each year, I try meeting one-on-one with REIT management teams in order to understand their businesses and true competitive advantages.

While visiting DOC’s headquarters, it became clear to me that the company’s culture is a true differentiator. This much is evidenced in how it conducts its business.

For example, it’s an experienced credit underwriting group that vets each and every deal. DOC insists that every risk is measured and that every portfolio is healthy. The results of this due diligence are reflected in the latest 3.5% same-store NOI growth and 96% occupancy. Which, incidentally, is the highest in its peer group.

Plus, the REIT is targeting $200 to $400 million of new investments in 2019.

And even when DOC has seen turnover, it has managed the unexpected with good outcomes… such as with the 75,000 square feet it absorbed in the El Paso Specialty Hospital. Again, this company knows how to run its business right.

Approximately 93% of its lease renewals last quarter included at least a 2.5% annual rent escalator, driving organic growth.

At last check, shares were trading at $17.56. Its price-to-funds from operations (P/FFO) multiple was 17.1x, compared to a norm of 19.5x. And its dividend yield is 5.24%.

For all those reasons and more, we maintain a Buy.

Source: F.A.S.T. Graphs

Easterly Government

We first began covering Easterly Government (DEA) in July 2013 just after it completed its IPO in February 2013 where it raised a solid $207 million.

Its midpoint price that day was about $15, and shares have increased by around 35% since then.

Our main attraction to Easterly is the durable income it generates from its 66 mission-critical properties. Taking up a total of 6.1 million square feet, every inch of that space is occupied by government agencies – 31 in all, from the FBI to the IRS.

And yes, the DEA, is on its books as well.

Easterly also is forging relationships with the FDA to develop new facilities. Plus, the GSA recently chose it to develop a brand-new, build-to-suit, Class-A, potential 162,000-square-foot laboratory in Atlanta, Georgia.

That means it’s on track to deliver a build-to-suit project this year… next year… and possibly in 2021 or 2022 as well.

Easterly has guided FFO per share of $1.18-$1.20 in 2019. This represents expected FFO (adjusted per share on a fully diluted basis growth) of approximately 8% to 11%.

Shares have returned about 40% year to date. And we recommend buying in at $20.50 or below in order to target a 5% yield.

We maintain a Buy with a pullback.

Source: F.A.S.T. Graphs

Ladder Capital

Ladder Capital (LADR) is one of my favorite commercial mortgage REITs. For one thing, it’s internally managed. For another, it has a solid history of dividend growth.

Another advantage is how Ladder focuses on mid-market lending with an average loan size of approximately $20 million. Most of its peers, meanwhile, focus on much larger deals for obvious reasons. But these smaller loans offer layers of diversification that the competition can’t foster.

Will there be a problem loan here or there? Of course. That’s to be expected to some degree. However, Ladder has a customer base that knows where it’s at. And, apparently, “it’s at” this REIT since more than 50% of Ladder’s balance sheet loans are made to repeat borrowers.

In Q2-19, the company saw core earnings of $51 million, which came out to $0.43 per share. Annualized after tax return, its average return on equity was 12.5%. The dividend is wel covered with a 79% quarterly payout ratio, which allows Ladder to retain 21% of core earnings. That payout and its continuing growth serves as the primary catalyst to drive shares higher along the way.

The latest quarter was characterized by strong earnings, steady ongoing loan origination, and investment activity with a continued focus on conservative credit metrics.

Overall, management appears committed to its multi-faceted business model. So we maintain a Buy recommendation here given its stable cash flows and solid 7.94% dividend yield.

Source: F.A.S.T. Graphs

Simon Property Group

Moving over to the retail sector, Simon Property (SPG) is one of my top picks there. As I often tell readers… if you’re going to stay on a boat during tough economic times, make sure it’s a battleship.

Like Simon.

To put that analogy into perspective, this mall REIT has an absolute fortress of a balance sheet. It’s so strong that Simon has earned an A credit rating from at least two agencies.

Do you know how difficult that is? Out of the 292 publicly-listed American REITs, only six have achieved that status.

In addition, its debt is well staggered. No more than 5.3% of it matures in any given year. And it features about a 3.5% weighted average cost of capital.

Simon has a list of 30 redevelopment projects it’s currently working on at a total cost of $1.7 billion. It’s clearly got the future in mind then, since those efforts are expected to generate 8% returns on investment.

Speaking of long term, the company has a $5 billion development pipeline that it more than plans to use. If all goes according to plan, it will be spending approximately $1.5 billion per year into:

  • Improving its mixed-use properties
  • Driving steady lease spreads
  • Generating cash flow growth

Despite all of this, as I mentioned in a write-up last month:

Simon is trading at literally the highest yield and lowest price to cash flow in a decade, despite sporting the best fundamentals it has ever had. That doesn't make any sense, which is why buying this 5.5% yielding Super SWAN REIT could realistically deliver 11% to 18% CAGR total returns over the next five years.

And, for the record, I maintain that’s likely true even if we experience a mild recession. Thus, we maintain a Strong Buy for this gigantic retail landlord.

Source: F.A.S.T. Graphs

Iron Mountain

Finally, we have the outlier known as Iron Mountain (IRM). Founded in 1951, it has since evolved into an industry leader in the storage and information management services business.

This Boston-based company serves 230,000 customers in more than 50 countries across five continents. That’s impressive alone, but its diversity doesn’t stop there since it also serves every major industry. Small companies, big companies – including more than 95% of the Fortune 1,000 list – they all look to Iron Mountain to help handle their information storage needs.

Known primarily for its “box business,” that division does indeed account for about 61% of its revenue. But Iron Mountain is more diverse than that, also offering:

  • Data protection (which accounts for 12% of revenue)
  • Shredding (10%)
  • Data center services (6%)
  • Fine arts (2%)
  • Other (10%).

Again, diversity? Iron Mountain’s got it in all the right amounts, allowing it to perform significant cross-market services. Yet in doing this, you don’t have to worry about the company becoming the next overly expansive failure, unable to keep track of all its moving parts.

Everything it does fits in with its mission to be a “trusted guardian” for the businesses that rely on it.

As for key risks – and every company has at least one – you can turn to its debt, where it shows a net lease adjusted leverage of 5.8x. With that said, the credit rating agencies have seemed to warm up to it this year.

In Q1-19, S&P, for one, revised its outlook from stable to negative. And Moody’s also went on to classify it as stable in June. That was “based on the strength and diversification of the business model, with strong cash flows from the core storage business.”

Year-to-date, Iron Mountain’s shares have returned less than 5.7%. As such, we’ve got to acknowledge that they’ve drastically underperformed the REIT sector.

Industrial REITs, for instance, have returned 38% YTD.

Now, we don’t consider that category to be Iron Mountain’s perfect peer. So we’re not promising that same amount of run-up. However, it should still be clear that this company has some value waiting to be unlocked.

With that in mind, we’ve got it set as a Strong Buy. Shares are currently trading at $32.24 with a dividend yield of 7.58%.

Source: F.A.S.T. Graphs

Author's note: Brad Thomas is a Wall Street writer, which 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: Written and distributed only to assist in research while providing a forum for second-level thinking.

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