The REIT SWAN-A-Bees Are Coming

Summary

• AMT is a blue-chip REIT with an iREIT iQ score of “100” and over the last 30 days or so shares have declined by around 15%.
• With swans being such beautiful and elegant creatures, it’s no surprise that baby swans start out incredibly cute.
• And this got me thinking….
• What are the up-and-coning SWANs, or what I commonly refer to as the Swan-a-bees?
• Looking for a helping hand in the market? Members of iREIT on Alpha get exclusive ideas and guidance to navigate any climate. Learn More »

Earlier this week I was going on my routine early morning walk when I ran into one of my neighbors who also was on his daily stroll.

Dennis is his name and in addition to being a routine neighborhood walker, he's also a stock investor.

Whenever I see him, I usually provide him with my very best REIT pick, and as I explained to him last week, my Super SWAN pick was no other than American Tower (AMT).

As I explained to Dennis, AMT is a blue-chip REIT with an iREIT iQ score of “100” and over the last 30 days or so shares have declined by around 15%. We have been adding shares to our Durable Income Portfolio, and after Friday’s close – at $200 per share – AMT is now considered a Strong Buy.

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Ironically in the same day that I was recommending AMT as a SWAN, Dennis was informing me that the baby swans in our neighborhood lake had left their nest and are now paddling across the pond.

Some interesting SWAN facts, by Justfunfacts.com:

• The swans are the largest members of the waterfowl family Anatidae and are among the largest flying birds.
• The largest species, including the mute swan, trumpeter swan, and whooper swan, can reach a length of over 1.5 meters (59 inches) and weigh over 15 kilograms (33 pounds).
• Their wingspans can be over 3.1 meters (10 feet).
• Swans live for approximately 20 to 30 years.
• Some variations exist between the more common swan species.
• The trumpeter swan, which is the largest swan in North America, lives for an average of 24 years in the wild but has been known to live for 33 years in captivity.

With swans being such beautiful and elegant creatures, it’s no surprise that baby swans start out incredibly cute.

And this got me thinking…

What are the up-and-coning SWANs, or what I commonly refer to as the Swan-a-bees in REIT-dom?

Source

5 Swan-A-Bees

At iREIT on Alpha we are extremely focused on quality names, and if there’s one thing that we have learned from the turbulence in 2020, it's that quality is closely correlated to best-in-class total return performance.

Last year we launched a quality model in which we score each REIT base upon over a dozen fundamental metrics.

Our 0-100 model provides us with a terrific snapshot of the REIT’s quality in real time as we consider metrics such as the payout ratio, debt, dividend history, growth prospects and other relevant indicators. Here's a snapshot of some of the top SWANs (90-100) listed by property sector:

Source: iREIT on Alpha

Today I thought I would provide a snapshot of five Swan-A-Bees, that score below 90 and above 75. These up-and-coming SWANs are solid companies that have not established a long track record in REIT-dom, yet they’re on a path to one day become “best-in-class” names.

The first Swan-A-Bee on the list is Medical Properties Trust (MPW), a pure play hospital landlord that owns 430 facilities and approximately 43,000 licensed beds in 33 states in the U.S., in six countries in Europe, across Australia, and in Colombia in South America.

Based on iREIT’s iQ (quality model) MPW scores an “82” that's considered above average, but not superior. MPW has improved its dividend growth profile over the years by accelerating its annual dividend per share from $.80 in 2012 to $1.12. On Feb. 18 the company declared a $.28 per share quarterly dividend that was a 3.7% increase from the prior dividend of $.27 per share. This means that MPW has now increased its dividend nine years in a row.

MPW shares are now trading at $21.24 with a P/FFO multiple of 13.x (three-year average is 13.0x). Our Buy Below price if $22.75 per share and the current dividend yield is 5.3% with a payout ratio (based on FFO) of 65%. Analysts forecast MPW to grow FFO by 9% in 2021 and 7% in 2022. We maintain a BUY rating as we forecast annual returns of just under 20%:

Source: FAST Graphs

The next Swan-a-bee on the list is Essential Properties (EPRT), a net lease REIT that owns over 1,000 free-standing properties in 43 states. The company went public in mid-2018, and we have been bullish because of EPRT’s E-Commerce Resistant portfolio: 96% of cash ABR comes from service-oriented and experience-based tenants.

Although just around three years old, EPRT scores well (based on our iQ model) with a “79” that is weighted toward the company’s exceptionally low payout ratio (77% based on AFFO prior to the pandemic) and strong growth profile (+18% in 2021). EPRT was our top pick in 2019 as shares returned over 85% and we also backed up the truck in 2020 and shares have since returned over 103%.

EPRT shares are now trading at $22.89 with a P/FFO multiple of 22.9x (average is 20.5x). The dividend yield is 4.2% and the company recently provided 2021 FFO per share guidance of $1.22 to $1.26 per share. In Q4-20 EPRT collected approximately 91% of contractual cash ABR, with another 3% attributable to recognized rent deferrals. We recently increased our Buy Below target upwards to $22.75 per share which puts this stock within our nibble range.

Source: FAST Graphs

Our next Swan-a-Bee pick is STAG Industrial (STAG), an Industrial REIT that owns 492 buildings in 39 states. STAG is differentiated from the peers by its focus on secondary markets and its ability to aggregate assets to create a diversified rental stream.

STAG listed shares in 2011 and has been able to generate steady dividend growth by raising its dividend for nine years in a row (STAG also pays monthly dividends). iREIT’s iQ model scores STAG at “77” based upon its improved payout ratio – was 92% in 2012 and 85% currently – and disciplined capital markets execution.

STAG shares are trading at $32.14 with a P/FFO multiple of 16.8x (three-year average is 16.0x). We recently increased our “Buy Below” target for STAG to $30.00, but shares are still a tad rich for our taste today. The dividend yield is 4.5% which suggests that investors can expect to see total returns of 10% (+5% average growth in 2021 and 2022).

Source: FAST Graphs

Many of the so-called “tech” names in the REIT sector have been selling off and QTS Realty (QTS) is not immune. Most data centers traded lower this week, following earnings from Switch (SWCH) (2021 guidance behind expectations) and a broader market sell-off. QTS owns more than 7 million square feet of owned mega scale data center space throughout North America and Europe.

QTS scores an “83” based on our iQ (quality) model that puts the company closer to our SWAN elite list. QTS is the fastest growing data center provider to enterprises, hyperscale customers and government agencies and in addition to its facilities the company owns over 785 acres of land. The company generated 12% revenue growth in 2020 and over 20% growth in adjusted EBITDA.

Shares are now trading at $59.06 with a P/FFO of 20.6x (three-year average is 20.0x). The dividend yield is 3.4% and we consider the distribution safe based upon the safe payout ratio of 66%. Shares are edging closer to our new Buy Below price of $57.00 per share, and we are maintaining a Hold for now.

Source: FAST Graphs

Our last Swan-A-Bee pick is Vici Properties (OTC:VICI), a gaming REIT that owns 28 gaming facilities comprising 47 million square feet and features approximately 18,000 hotel rooms and more than 200 restaurants, bars, nightclubs and sports books.

Last week the company announced that was acquiring the Venetian Resort for $4.0 billion at a 6.25% cap rate. The deal is expected to close by year-end 2021 and AFFO accretion is estimated to be ~5%. This is just another example of how VICI’s management team is able to use its cost of capital advantage to enhance its scale advantage (also decreases top tenant/CZR concentration to ~70% of ABR from 83%).

VICI’s iQ score is “84” and although the company just listed in 2018, it has quickly accelerated its quality score by achieving exceptional rent collection during the pandemic (100%) and continuing to boost its dividend. Shares are now trading at $29.72 with a P/FFO multiple of 16.3x. The dividend yield is 4.5% and we bumped our “Buy Below” target to $29.00 recently, so shares are definitely worth nibbling on (wait on $29 or less to accumulate).

Source: FAST Graphs

March Madness

As I mentioned in a recent article, “during our March Madness series we will be screening for not only growth REITs, but also for other quality scoring metrics including payout ratios, capital markets discipline, and of course, the overall safety of the dividend. Who knows, there may even be a Cinderella Story in the making?”

We're in the process of scouting the entire U.S. REIT universe in hopes of selecting the most high-quality names that are trading at the widest margin of safety. As I told Dennis (my neighbor) when I was walking this week,

“Always insist on quality stocks that have demonstrated a successful history of dividend growth.”

I added,

“Then make sure that you are always buying these high-quality stocks at a discount, or what Ben Graham defined as a suitable margin of safety.

These so-called SWANs are considered some of the best stocks to own because they provide a stress-free vehicle for generating wealth and they will help you sleep well at night.”

Happy SWAN Investing!

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.

Analyst’s Disclosure: I am/we are long EPRT, QTS, STAG, VICI, MPW. 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.