Trick Or Treat: My Favorite REITs

Oct. 12, 2019 7:00 AM ETCyrusOne Inc. (CONE), DLR, HASI, O, STOR78 Comments


  • I have tried to avoid the losses over the years by paying careful attention to underlying cash flows.
  • In this trick-or-treat scenario, there are so many sidewalks and pathways to choose from.
  • Now it’s time to highlight some of the home runs - the prized REIT treats.
  • Looking for a portfolio of ideas like this one? Members of iREIT on Alpha get exclusive access to our model portfolio. Get started today »

We tend to smile when we hear the words “trick or treat.” It brings to mind cute little kids dressed up as superheroes and fairy tale characters, witches and ghosts.

You know. That kind of non-scary stuff.

The most frightening element you have to face in that light is what comes from helping yourself one too many times to the candy stash in between answering the door. Now, that can be a heart attack waiting to happen. Or at least some really uncomfortable indigestion.

That’s never fun.

Then again, neither is the idea behind “trick or treat.” Really think about it for a moment. Because, cute little kids or not, it’s kind of a threat.

Actually, no. Scratch that. It’s definitely a threat: A demand for candy in exchange for non-toilet-papered houses, smashed pumpkins or other messes to clean up.

What kinds of kids are we raising here? Little mafiosos in the making?

Maybe we should give them brass knuckles to wear with their princess hats and ninja masks.

Or maybe we should just lock the door, turn off the front porch lights, and sit down to watch some scary movie all by ourselves. With the heartburn-inducing bags of candy, of course.

Trick or treat indeed.

Photo Source

It’s a Lot More Tricky Than That

Sometimes, dealing with the stock market can feel like a trick-or-treat situation. But an even less fair one than the situation described above.

In place of little kids who we don’t mind being swindled by out of a sum total of $50 – $100 tops – we’re faced with a trick-or-trick-or-treat scenario. Here’s how it goes…

In this grown-up version of Halloween “fun,” our roles are oddly reversed. No longer are we standing in our own doorways, holding onto buckets of candy with children crowding around.

Oh no. We’re the ones walking up those long pathways lined with realistic-looking spiders and haunted noises.

Do we want to approach them at all? Is the potential treat worth the risk?

That’s where the first trick comes in.

Like it or not, if we don’t walk down those investment sidewalks, we’re doomed. The hobgoblins of unfulfilled portfolios will haunt us right into our non-existent retirements.

Unless our jobs have the absolute best of 401k plans to offer – or we’re working toward claiming one absolutely amazing pension plan – we’re going to need to do some additional investing. That’s just how it goes.

Staying out of the markets and keeping money under our beds doesn’t cut it anymore, I’m afraid. If it ever did.

Nor is Social Security an automatic given after a certain to-be-determined point. We might be paying what seems like an awful lot into those government coffers right now, but those government coffers could snap shut at any time.

Moreover, they no doubt will snap shut at some point. Yet another dirty trick, this one courtesy of our supposed representatives who go into Congress with normal people-sized salaries and leave as millionaires or more.

Now that’ll really give you heartburn – and without the happy taste buds before it.

Photo Source

Spooky or Not, Investing Is the Only Viable Option We’ve Got

As a result of everything described above, we’re left with only one truly viable choice: Invest.

But what should we invest in? In this trick-or-treat scenario, there are so many sidewalks and pathways to choose from.

Some of them, we know, are going to have the good stuff. And, naturally, that’s our goal.

Some of them will feature nothing more than dollar-store candy: Lackluster off-brand offerings and stale Hershey bars.

Others though might offer something even worse. And it’s all up to you to decide which is going to be which.

With that kind of pressure at your back and the great unknown in front of you, you do it. You pick a sidewalk, knowing full well that in order to even hope to get any investment candy, you’re going to have to pay first.

Again though, this isn’t the kiddies’ version we’re talking about here. It’s serious stuff. And while you can end up making a whole lot of money by ringing company doorbells and knocking on doors, you’re ultimately not the one in charge of saying “trick or treat.”

They are.

That’s why it’s best to know the neighborhoods you’re going into: To research who’s got the good stuff and who’s one trick away from leaving you with nothing.

There are plenty of things to be scared of this October, from businesses that bite to those that flounder and fail. But I’m not going to lie, I’m feeling pretty good about the sweet offerings down below.

I don’t see a single trick among them. Only treats.

And the non heartburn-inducing kind at that.

These REITs Won’t Go Bump in the Night

A few days ago I posted a blogpost titled 21 Reasons To Become A Member Of “iREIT On Alpha” in which I provided a list of some of our top picks over the last year or so. Included on that list are some exceptional recommendations including,

CyrusOne (NASDAQ:CONE) that has returned 42.7% since Nov. 5, 2018.

Essential Properties Trust (EPRT) that has returned 86.3% since December 2018 (just 10 months).

Corporate Office Properties (OFC) that has returned 45.25% since Jan. 1, 2019.

Safehold (SAFE) that has returned 55.17% since April 2, 2019.

Brookfield Renewable Energy (BEP) that has returned 60.05% since Dec. 14, 2018.

Now as much as I like to write about these incredible numbers, I recognize that it’s not realistic to provide readers with such a short-term track record, because the whole purpose of investing is to generate safe returns over time.

And speaking of that, I have tried to avoid the losses over the years by paying careful attention to underlying cash flows. A few days ago I wrote about a few REIT tricks (here and here), and now it’s time to highlight some of the homeruns, the prized REIT treats.

But first, let me explain why I picked these top five REIT treats.

In 2013 I began building my own REIT portfolio and I decided to mirror that with my own model portfolio called The Durable Income Portfolio. Since August 2013 this portfolio has returned an average of 22.27%, compared with the Vanguard Real Estate ETF (VNQ) that has returned 9.60%.

We actively manage the portfolio and we are regularly monitoring the holdings with an emphasis on dividend growth and of course valuation. So it should not be surprising that this portfolio has outperformed the heavy weight ETF (market cap weighted).

Note: We use Sharesight to calculate percentage returns using a dollar-weighted (also referred to as “money-weighted”) return methodology. A dollar-weighted return measures investment performance by taking account of the size and timing of cash flows. Also, Sharesight annualizes returns, weighting the length of time that each capital input has been invested for by the amount of capital invested to determine the average years invested (or AYI) for each dollar of capital.

Now, I will summarize my favorite REIT treats, in order of the lowest annualized total returns to the highest. I also will include a brief reason as to why I decided to invest in each company and the future prospects for owning shares.

Digital Realty (NYSE:DLR) +20.12%

Source: Sharesight

Initial Investment: Oct. 13, 2013

Original Buy Thesis: Our rationale for buying almost six years ago was that data center demand would accelerate and that Digital Realty would become the consolidator for data centers (made six major acquisitions over eight years, totaling $14 billion). That thesis has played out nicely as the company has been able to capture considerable market share by utilizing its low cost of capital advantage (CAGR 13% FFO/share growth since 2005).

Current Ownership Thesis: We maintain a BUY with a pullback, suggesting that shares are soundly valued. We believe that a pullback may be warranted before buying.

Dividend Growth Record: Average 8.7% since 2010 (+9.1% in 2019)

Realty Income (NYSE:O) +21.95%

Source: Sharesight

Initial Investment: Sept. 30, 2014

Original Buy Thesis: Our rationale for buying around five years ago was to take advantage of the consolidation within the publicly-traded net lease REIT sector. Recognizing high fragmentation, I capitalized on the opportunity to own shares in the dominant monthly-paying REIT. Also, it seemed obvious at the time that Realty Income’s low cost of capital advantage would serve as the primary catalyst for growth. No other REIT has the kind of scale that Realty Income enjoys, which allows it to spread out administrative costs over so many properties, in every part of the country, and cash flow is generated from 265 tenants operating in 49 industries.

Current Ownership Thesis: We maintain a HOLD, recognizing that shares have returned 28% YTD. We might become interested again if the yield gets closer to 4%.

Dividend Growth Record: Average 5.2% since 2010 (+3.4% in 2019)

Store Capital (NYSE:STOR) + 31.81%

Source: Sharesight

Initial Investment: May 31, 2017

Original Buy Thesis: We were one of the first analysts to cover Store when the company IPOd in 2014 and we became a shareholder in 2017. Fortunately, we decided to upgrade Store to a Strong Buy (on May 17, 2017), just a month or so before Berkshire Hathaway opted to become a shareholder. We have since been on the “Store train” and even more recently decided to write a rebuttal debunking a short thesis from another writer. As I pointed out, “STOR has $130 million in annual free cash flow after dividends to reinvest. Then it has 1.8% annual rent bumps. Together that gets to about 3.7% unlevered internal growth, which are best-in-class numbers.”

Current Ownership Thesis: We maintain a HOLD, due to valuation, but we plan to maintain a healthy stake in this REIT that is differentiated by design.

Dividend Growth Record: Average +5.2% since 2014 (+7.0% in 2019).

Hannon Armstrong (NYSE:HASI)

Source: Sharesight

+32.46%: Initial Investment: Jan 31, 2017

Original Buy Thesis: We decided to initiate coverage on Hannon Armstrong in my first article in February 2015, as I explained “What makes (it) unique is the fact that the company aggregates assets in multiple categories, all pertaining to clean energy real estate projects.” That was Feb. 13, 2015, and on that very day, shares in this clean energy REIT soared by roughly 10%. I waited for the appropriate time to jump back in, when I determined their was an attractive margin of safety (Jan. 31, 2017). And since that time, the specialty finance REIT has returned 32.46% (annualized), led by a highly predictable core earnings profile.

Current Ownership Thesis: We maintain a HOLD, due to valuation, shares have returned 56.9% YTD (I have trimmed shares personally, although we maintain a HOLD in the portfolio).

Dividend Growth Record: Average 8.98% since 2015 (+1.3% in 2019)

CyrusOne (CONE)

Source: Sharesight

+39.3%: Initial Investment: Sept. 30, 2014

Original Buy Thesis: We began covering CyrusOne when the company announced it was spinning off from Cincinnati Bell in 2012. Our early attraction to this data center REIT was its development-focused platform that generates healthy low double-digit returns. I took my first nibble in 2014, in an effort to diversify exposure with Digital Realty, and began to continue adding shares. Then in late 2018 we recognized a sizable margin of safety, and we signaled to investors that we were increasing exposure, and upgraded to a Strong Buy.

Current Ownership Thesis: With M&A activity brewing, CONE shares have shot up – returning 33.6% YTD. We have moved the company back to a HOLD, based on valuation.

Dividend Growth Record: Average 13.6% since 2016 (+5.7% in 2019)

In closing: We plan to keep the Halloween fun going, so stay tuned for my article next week: Something Wicked This Way Comes.

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.

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This article was written by

Brad Thomas profile picture
Author of iREIT on Alpha
The #1 Service For Safe and Reliable REIT Income

Brad Thomas is the CEO of Wide Moat Research ("WMR"), a subscription-based publisher of financial information, serving over 6,000 investors around the world. WMR has a team of experienced multi-disciplined analysts covering all dividend categories, including REITs, MLPs, BDCs, and traditional C-Corps.

The WMR brands include: (1) The Intelligent REIT Investor (newsletter), (2) The Intelligent Dividend Investor (newsletter), (3) iREIT on Alpha (Seeking Alpha), and (4) The Dividend Kings (Seeking Alpha). Thomas is also the editor of The Forbes Real Estate Investor and the Property Chronicle North America.

Thomas has also been featured in Forbes Magazine, Kiplinger’s, US News & World Report, Money, NPR, Institutional Investor, GlobeStreet, CNN, Newsmax, and Fox. He is the #1 contributing analyst on Seeking Alpha in 2014, 2015, 2016, 2017, 2018, and 2019 (based on page views) and has over 102,000 followers (on Seeking Alpha). Thomas is also the author of The Intelligent REIT Investor Guide (Wiley). 

Thomas received a Bachelor of Science degree in Business/Economics from Presbyterian College and he is married with 5 wonderful kids. He has over 30 years of real estate investing experience and is one of the most prolific writers on Seeking Alpha (2,800+ articles since 2010). To learn more about Brad visit HERE.

Disclosure: I am/we are long O, STOR, HASI, CONE, DLR. 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.

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