There’s so much investing information out there to digest.
Some of it is specific to certain classes or categories, such as real estate investment trusts (REITs). Or tech stocks. Or global assets.
Other parts and pieces are broader, published to give general advice on how to best utilize your money overall.
Naturally, with so many individuals coming from different perspectives with varying goals… there are also many takes on the “right” way to invest. But from what I’ve seen – not to mention experienced personally – the best of the best advice available usually ends up agreeing on the bottom lines.
For instance, I really liked what I saw in a recent email from Andrew Sather. As founding publisher of The Sather Research eLetter, it’s his job to provide guidance on proper portfolio construction.
And, in my opinion, he didn’t disappoint this time around.
While describing “the key pillars for The Sather Research eLetter portfolio,” he mentioned five specific techniques he combines:
- A long-term approach (40 years total)
- Diversification (around 5% position sizes for most stocks)
- Dollar-cost averaging ($150 per month)
- Compounding interest (dividend reinvestment)
- Discount to intrinsic value (margin of safety)
If much of that sounds familiar, it should. Great minds really do think alike.
Human Nature Doesn’t Change, and Neither Does the Value of REITs
To reiterate – and despite the mounds and mountains and molehills of advice out there these days – there really isn’t anything new under the investment sun in regard to strategy.
I was going to say “in regard to effective strategy.” But the truth is that even the bad ones aren’t any different than they used to be.
There are still get-rich-quick schemes out there… just as there always have been.
There are still “shortcut” opportunities… just as there always have been.
There are still “sure thing” deals… just as there always have been.
That’s because human nature doesn’t change. We want what we want when we want it, which is now. And anyone offering the good stuff at a discounted price is going to get our attention.
That’s actually why I like REITs so much. Not to say that they’re shortcuts. That would be doing them a major disservice considering their track record.
As industry advocate Nareit explains, “REITs historically have delivered competitive total returns.” But that doesn’t mean they’re overnight stock success stories that make you a million in one day.
As I like to say, the quickest way to make a million bucks is to start out with $2 million. Then invest poorly.
There are just no worthwhile shortcuts to making sustainable amounts of money.
With that said, over time in a properly prepared portfolio, REITs’ “high, steady dividend income and long-term capital appreciation” does have a way of paying off.
Nareit adds, “Their comparatively low correlation with other assets also makes them an excellent portfolio diversifier that can reduce overall portfolio risk and increase returns. These are the characteristics of REIT-based real estate investment.”
In short, they fit in with the same-old, same-old yet oh-so-wise advice most other successful, ethical experts will tell you.
REIT Pillars 1-4
Let’s unpack that REIT description further by listing the key pillars that hold them – and their investors – up:
- Liquidity
- Diversification
- Transparency
- Dividends
- Performance
Here’s what I mean by each…
Liquidity: With more than 200 REITs traded on U.S. stock exchanges for a combined $1 trillion market cap, REITs take a traditionally illiquid asset – real estate – and makes it easily accessible. As such, they allow you to get in on a money-making proposition with long-term demand.
And they do so without locking you into months-long buying and selling ordeals. This also allows for better, faster asset allocation and portfolio rebalancing capabilities.
Diversification: REITs really do offer historically low correlation with other stocks and bonds. When they go down, those investing counterparts tend to go up. When they go up, the others usually go down.
Far from a see-saw effect, this helps balance out your portfolio so you don’t get more motion sickness than you can handle.
It leads to higher-risk adjusted returns through tangible assets – which are still very much in need despite the digitalization of seemingly everything around us.
Transparency: Because they’re bought and sold on the stock market, publicly-traded REITs give clarity to real estate. This isn’t one of those situations where you buy a property – only to find out after the fact that you’ve got major problems. What you see is what you get, with audited financial reports.
Admittedly, those audited reports can take some time to go through and understand. But they’re available nonetheless.
Dividends: While most people find very little “sexy” about dividend stocks, that’s because they don’t appreciate true beauty. True investment beauty is an asset that helps you accumulate wealth (or maintain it, if you’re retired) through a healthy combination of safety and growth.
The Big-Picture REIT Pillar
When it comes to REIT rewards, I saved the best for last…
Performance: Because of the four previous pillars, REITs have been able to provide higher total returns than the S&P 500 over the past quarter-century. Higher than corporate bonds too.
They boast a reliable track record of growing dividends. And, when combined with steadily growing stock prices, we’ve got a killer combination.
To quote Nareit again:
“REITs’ track record of reliable and growing dividends combined with long-term capital appreciation through stock-price increases, has provided investors with attractive total return performance for most periods over the past 45 years compared to the broader stock market, as well as bonds and other assets.
“Listed REITs are professional managed, publicly traded companies that manage their businesses with the goal of maximizing shareholder value. That means positioning their properties to attract tenants and earn rental income, and managing their property portfolios and buying and selling of assets to build value throughout long-term real estate cycles.”
Need more proof that this five-pillared portfolio booster works? How about this supportive chart:
As Nareit concludes that overview with:
“This drives total return performance for REIT investors, who benefit from a strong, reliable annual dividend payout and the potential for long-term capital appreciation. For example, REIT total return performance over the past 20 years has outstripped the performance of the S&P 500 Index and other major indices – as well as the rate of inflation.”
And that’s why I’m more than happy to allocate a significant chunk of my portfolio to REITs.
5 REITs I’m Buying Now
Now, another reason that you're reading this article....
Physicians Realty (DOC) is a buy. Shares are trading at $17.21 with a dividend yield of 5.4%. The P/FFO multiple is 16.3x, below the average (P/FFO) multiple of 17.9x.
The payout ratio is 87% but should drop to 85% by the end of 2021 (based on analyst FFO estimates). We expect to see the first dividend increase in 2022 and FFO is likely to grow by another 5% (analyst estimates).
Source: FAST Graphs
From the onset of the pandemic through Q4-20 DOC collected cash equal to over 90% of all rent and other charges due, culminating in the collection of 99.6% of rent due in Q4-20.
DOC anticipates $400 million to $600 million of new investments in 2021 and we like the investment grade focus that provides investors with very predictable income. We target annual returns of 15% based upon a clear path of accretive investments and disciplined capital management.
Source: FAST Graphs
Highwoods Properties (HIW) is a buy. Shares are trading at $41.37 with a dividend yield of 4.6%. The P/FFO multiple is 8.7x, below the average (P/FFO) multiple of 14.1x. The payout ratio is 53% and HIW has always maintained a comfortable cushion to protect the dividend (only office REIT that did not cut in 2008-2009).
We expect to see the dividend increase modestly in 2021, based on analyst growth estimates. Also, HIW is positioned to generate 5% growth in 2022 and beyond.
Source: FAST Graphs
HIW’s southeastern focus has been a key to surviving the pandemic, and we remain especially bullish with the long-term future for the company. The 1.2 million square feet, $503 million, 79% pre-leased development pipeline remains on budget and on schedule.
This pipeline will provide over $40 million of annual NOI upon stabilization, only $8 million of which is scheduled to be recognized in 2021. The 2021 FFO outlook is $3.50 to $3.66 per share which signals upside to our buy thesis as we target annual returns of 15% to 20%.
Source: FAST Graphs
Regency Centers (REG) is a buy. Shares are trading at $55.29 with a dividend yield of 4.3%. The P/FFO multiple is 18.6x, the same as the five-year average (of 18.6x).
The payout ratio is 81% and should improve as the company generates +10% growth in 2021. We expect to see the dividend increase again in 2021, based on analyst growth estimates.
Source: FAST Graphs
In February 2021 REG’s cash rent collections had improved to 90% and in Q4-20 the company provided FFO guidance of $2.96 to $3.14 per share. We always have admired REG’s balance sheet discipline and this conservative strategy is one of the reasons that the company did not cut its dividend in 2020. REG should return to normal valuation levels and we model annual returns in the range of 14% to 16%.
Source: FAST Graphs
Iron Mountain (IRM) is a buy. Shares are trading at $34.73 with a dividend yield of 7.1%. The P/AFFO multiple is 11.1x, below the five-year average (P/FFO) multiple of 11.6x. The payout ratio is 81% however the management team said it plans to steer the ratio closer to the industrial REIT range (of 70%).
Analysts are forecasting AFFO/sh growth of 10% in 2021 and 6% in 2022 (assuming the dividend does not increase, the payout ratio ay YE 2022 will be 69%).
Source: FAST Graphs
At the end of Q4-20 IRM said it “maintained focus on Project Summit” and “increased the targeted sustained annual cost savings from $200 million to $375 million and has already achieved over $200 million on an annual run rate by the end of 2020.”
Also, IRM continues to monetize more sale/leasebacks after competing $358 million properties last year at a cap rate of 4.5%. The company is planning for $125 million of recycling in 2021. IRM expects AFFO to be in the range of $945 million to $995 million or $3.25 to $3.42 per share in 2021. We have modeled annual returns of 15% to 20% (IRM was formerly a Strong Buy).
Source: FAST Graphs
American Tower (AMT) is a buy. Shares are trading at $213.77 with a dividend yield of 2.1%. The P/AFFO multiple is 24.8x on par with the three-year average of 24.2x. The payout ratio is 58% and analysts are forecasting AFFO/sh growth of 9% in 2021 and 8% in 2022.
Source: FAST Graphs
During Q4-20 AMT’s revenue increased 10% to $2.1 billion, adjusted EBITDA grew by 13%, and AFFO per share increased by 8.8% to $2.10. On an FX neutral basis, growth rates for property revenue, adjusted EBITDA and consolidated AFFO per share would have been 13.4%, 15.9% and 11.9%, respectively.
AMT expects its 2020 investments in new builds and M&A to generate around $0.15 in increments of consolidated AFFO per share in 2021. AMT’s globally distributed macro tower business is set to benefit from high-growth markets, although we expect the AFFO payout ratio to increase modestly.
As noted, analysts forecast 9% growth in 2021 and we’re delighted to add more AMT shares to the Durable Income portfolio. We target annualized returns of ~20%.
Source: FAST Graphs
Closing Thoughts…
You may not know that I had my very own radio show a few years ago called “The Ground Up.” I plan to reincarnate that show via podcast soon, so that investors from all over the world can listen and learn.
Of course, as I have advised thousands of investors over the years, the five pillars to REIT investing are the keys to unlocking enormous wealth.
One of the most important pillars to consider are the attraction that REITs have with other high yield investments like bonds and utilities - their significant capital appreciation potential and steadily increasing dividends.
Long-term investors should be looking at REITs with dividends that are not just safe but also have good growth prospects. All of these REITs referenced provide a combination of quality (growth) and value (trading at a reasonable margin of safety).
As Benjamin Graham wrote in The Intelligent Investor, the value investor’s purpose is to capitalize upon “a favorable difference between price on the one hand and indicated or appraised value on the other.”
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