Buy These 3 REITs With A 100-Year Time Horizon

Summary

I have a birthday coming up this weekend. And no, I’m not telling my age.
But I'm old enough to be thinking about succession and the REIT portfolio I’ll be leaving my kids and grandkids.
I must make intelligent decisions with recommendations that can stand the test of time… even up to 100 years. Or more.
Looking for a portfolio of ideas like this one? Members of iREIT on Alpha get exclusive access to our model portfolio. Get started today »

In case you missed it, the Oracle of Omaha, Warren Buffett, held his very first virtual annual meeting on Saturday, May 2.

It was an interactive, informative, four-hour call that gave a lot of food for thought for a lot of people. I know because I listened to it.

For anyone who was worried, Buffett was adamant that he’s not breaking up Berkshire Hathaway (BRK.A) (BRK.B). To quote him directly, “It isn’t going to happen.”

However, he did sell certain stocks in the past quarter, including every single share of his airline positions. That place in his publicly-traded portfolio simply doesn’t exist anymore. "The world has changed for the airlines,” he told his audience, adding:

“… I hope it corrects itself in a reasonably prompt way. I don’t know whether the Americans will have now changed their habits or will change their habits because… we’re semi-shut down in the economy.”

I got the impression he was generally sorry to see them go. And he complimented their CEOs, wishing well to all four airlines he used to own.

But they’re going to have to do so without his financial backing nonetheless.

Even with that bearish stance though, Buffett still has a positive outlook on Wall Street. And that’s because he still has a positive outlook on America.

Believe it or not, there’s still good news to grasp.

Source

What Warren Buffett Said on Saturday

There are two more parts of the call I’d like to point out, starting with this one:

“(The government-mandated shutdowns are) quite an experiment, and… we may not know the answers to some very important questions for many years. So it still has this enormous range of possibilities. But even facing that, I would like to talk to you about the economic future of the country because I remain convinced as I have.

“I was convinced of this in World War II. I was convinced of it during the Cuban Missile Crisis, 9/11, the financial crisis, that nothing can basically stop America. We faced great problems in the past. We haven’t faced this exact problem, but we faced tougher problems. The American miracle – the American magic – has always prevailed. And it will do so again.”

I like those words. And I’m sure you do too unless you’re an extreme pessimist – whether in general or specifically because of these truly difficult times.

Either way, the second snippet is much more up your alley:

“… I’m not recommending that people buy stocks today or tomorrow or next week or next month. I think it all depends on your circumstances. But you shouldn’t buy stocks unless you expect… to hold them for a very extended period and you are prepared financially and psychologically to hold them…”

By that, he meant, “You’ve got to be prepared when you buy a stock to have it go down 50% or more and be comfortable with it.”

Ouch!

I added that more cautious clip specifically to stay one step ahead of any negative comments below. Again, I listened to the call. I know what he said.

Buffett isn’t a raging bull right now. And neither am I.

But I do see opportunity at hand.

Warren Buffett and Me

At the risk of putting myself in the same position as a market master like Warren Buffett, I think it’s safe to say we’re both realists. We look at opportunities, analyze them for everything we can, and make decisions from there.

That’s where we’re similar. Here’s where we’re different:

As of last May, at least, he was the third-richest man in the world. I’ve never made that particular Forbes list.
He runs a $428.755 billion portfolio. I don’t.
When he buys into a company, he does so for big money. I’m more of a mom-and-pop shop acquirer.

If those differences sound obvious, don’t worry. I’m getting to a very important point, which might be best summed up by Motley Fool writer Brian Feroldi. The article is over a year old now, but his intro still works:

“Those gargantuan numbers (Buffett works with) limit Berkshire’s investment universe to only the largest and most liquid stocks.

“This is a ‘problem’ that… Buffett has openly acknowledged for years. He has said numerous times that ‘a fat wallet is the enemy of high investment returns,’ meaning that he can no longer buy smaller businesses that have big growth potential, no matter how attractive they might be.”

As such, he’s far removed from my “little guy” position. And that’s his loss. I might not be able to make millions or billions off the positions I’m most assuredly buying into now.

But when I apply another one of his famous pieces of advice – to buy wonderful companies at fair prices – I can make thousands, tens of thousands, or maybe even more.

That’s especially true when I add in one more word of wisdom from him… the advice to look for companies I can hold “forever.”

Because “forever” is how long they’re going to last.

3 REITs I’m Holding for 100 Years. Maybe

I know the title to this article is going to get some interesting comments and possibly a few trolls. But that’s OK. I’m prepared.

If you’ve read any of my articles lately, you should know that I’ve become much more bearish on the mall REIT sector. So while I’ll be watching earnings this week, I’m definitely not warming up to retail anytime soon.

We have Spec Buys on Simon Property Group (SPG) and Brookfield Property Partners (BPY). But that’s as far as I’m recommending for the sector right now.

That also goes for hotels. For evidence of why this is the right route to take, just take a look at shares of Park Hotels (PK), Hersha Hospitality (HT), and Apple Hospitality (APLE). Tourism is not going to bounce back anytime soon, so we’re staying on the sidelines until we get more clarity about airline travel.

Overall, there’s been a total of 30 REIT dividend cuts or suspensions thus far. And we anticipate more pain ahead.

On a seeming side note, I have a birthday coming up this weekend. And while I don’t really want to disclose my age, I will tell you that I don’t think I’ll live another 100 years.

I’m old enough to be thinking about succession and the REIT portfolio I’ll leave my kids and eventual grandkids. Plus, as the author of The Intelligent REIT Investor, due out this October, I must be able to walk the walk, and talk the talk.

Simply put, I have to make intelligent decisions with recommendations that can stand the test of time, maybe even 100 years down the road.

A Dividend King...

My first pick in this regard is Federal Realty (FRT). It’s a stalwart REIT with a record of paying and increasing dividends for 52 consecutive years.

As the chart illustrates below, FRT’s market cap has fallen drastically due to COVID-19. And shares have tanked about 39% year to date.

Source: Yahoo Finance

Yet two things make me sleep well at night over owning them.

First, FRT owns a diversified portfolio of:

104 properties
About 3,000 tenants
Roughly 24 million square feet
Over 2,700 residential units.

Although the majority is retail related, no single retail category is greater than 9%. Plus, FRT is becoming a mixed-use landlord, with 11% invested in residential properties and 9% in offices.

That hardly makes it immune to rent abatement. With LA Fitness and Gap as tenants, I fully expect to see it collect less rent in April.

Even so, FRT is well positioned to weather the pandemic due to its impressive balance sheet. Besides, none of its tenants represent more than 2.6% of annualized base rent. And its top 25 account for just 27%.

Secondly, FRT enjoys an exceptional capital structure consisting of 25% debt to total market cap and net debt to earnings before interest, taxes, depreciation, and amortization (EBITDA) of 5.5x.

It also has:

A fixed charge coverage of 4.2x
An average debt to maturity of 10 years. (The weighted average interest rate is 3.82%.)
An A rating (one of just a few REITs that can claim as much)
A 65% payout ratio as of Q4-19.

FRT is one of two shopping-center REITs on our current Buy list. And although consensus FFO/share for 2020 is $4.42, its dividend should be covered.

Furthermore, 2021 consensus estimates put it back on track in 2021 with 16% growth. We maintain a Strong Buy.

Source: FAST Graphs

The Silver Tsunami...

Our next 100-year pick is Omega Healthcare Investors (OHI). This skilled-nursing REIT owns 964 operating facilities located across 40 states and the U.K.

As the chart illustrates below, OHI’s market cap has fallen drastically this year, with shares returning -34% year-to-date.

Source: Yahoo Finance

Skilled nursing properties are hardly considered central to fighting the pandemic. But that doesn’t mean it can’t fight mid-term financial losses with its portfolio full of long-term, triple-net master leases.

Moreover, its tenants tend to have strong credit profiles.

Now, OHI has noted that declining occupancy and significantly elevated costs have impacted those tenants' financial performance. However, government funding has enabled the larger sector to manage the crisis, allowing this specific REIT to collect 98% of its April rent.

Consistent with several of its peers, OHI recently withdrew 2020 AFFO/share guidance. Its Q1-20 AFFO/share was $0.79, and it declared a Q2-20 dividend of $0.67.

The FFO-based 85% payout ratio is reasonable – and much better than it was over a year ago. We credit management for improving the company’s risk profile and maintaining healthy credit metrics.

As a result, its net funded debt to adjusted annualized EBITDA is 5.38x, and its fixed charge coverage is 4.1x.

As of Q1, OHI had $618 million of outstanding borrowings on its $1.25 billion credit facility, with about $490 million in cash. It has no significant debt maturities until August 2023.

Our dividend analysis is a big part of the reason OHI is included on this list. The company has paid and increased dividends for 17 consecutive years. And while the coronavirus will put more pressure on its earnings, we consider the dividend safe.

OHI shares are trading at $27.09, with a dividend yield of 9.9% and a P/FFO multiple of 11.3x. We maintain a Buy.

Source: FAST Graphs

O, O, O, It's Magic

Our final 100-year pick is Realty Income (O), a triple net REIT that's also my top holding. As viewed below, O has returned -34% year-to-date.

Source: Yahoo Finance

Despite having 84.1% retail exposure, the company’s top four industries are deemed “essential”:

Convenience stores (11.9% of rent)
Drug stores (9.0% of rent)
Dollar stores (8.0% of rent)
Grocery stores (7.7% of rent).

Of course, non-essential exposure is what’s weighing on O:

Theaters (6.3% of rent)
Health and fitness: (7.2% of rent)
Restaurants: (9.2% of rent).

As of May 1, Realty Income said it collected 82.9% of contractual rent due for April. And it’s in rent-deferral talks with the remaining tenants, as well as those that paid contractual rent.

In comparison, EPR Properties (EPR) said its “tenants and borrowers have paid ~15% of April 2020 contractual base rent and mortgage payments.”

Then again, Realty Income has one of the most diversified platforms in the REIT sector. Its portfolio holds over 6,500 properties that consist of 630 tenants in 51 industries.

It’s O’s tremendous scale advantage and majority investment-grade rated tenants that provide us comfort during this challenging times. That and its highly disciplined capital structure, with:

Modest leverage (31% net debt)
Low cost of capital
Ample liquidity that provides financial flexibility (about 5x debt/LTM EBITDA).

The company has less than $3 billion of liquidity on hand – bolstered by its $752 million equity offering in February.

More Magic From Realty Income

In Q1-20 the company generated adjusted FFO/share of $0.88 on top of revenue of $414.3 million. It also announced a quarterly dividend increase of 3.1% to $0.693.

This is through a relatively healthy 79% AFFO coverage. That’s well below retail REITs that recently cut or suspended their dividends, such as American Assets Trust (AAT), Retail Opportunity Investments Corp. (ROIC), SITE Centers Corp. (SITC), and even certain other triple-net peers like Spirit Realty Capital (SRC) and VEREIT (VER).

Realty Income did withdraw its prior 2020 guidance. But, as viewed below, the analysts’ consensus forecast is for 5% in 2020.

Shares now trade at $52.05 with a dividend yield of 5.4% and a P/FFO of 15.5x. We maintain a Strong Buy.

Source: FAST Graphs

Last but not least, stay tuned for my next Buffett-inspired article: “If I Had Buffett Bucks, I Would Buy These REITs” and “A Mall REIT Backed by Buffet Bucks.”

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

113.95K Followers

Brad Thomas has over 30 years of real estate investing experience and has acquired, developed, or brokered over $1B in commercial real estate transactions. He has been featured in Barron's, Bloomberg, Fox Business, and many other media outlets. He's the author of four books, including the latest, REITs For Dummies.

Brad, with his team of 10 analysts, runs the investing group iREIT® on Alpha, which covers REITs, BDCs, MLPs, Preferreds, and other income-oriented alternatives. The team of analysts has a combined 100+ years of experience and includes a former hedge fund manager, due diligence officer, portfolio manager, PhD, military veteran, and advisor to a former U.S. President. Learn more

Analyst’s Disclosure: I am/we are long O, FRT, OHI. 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.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.