SPECIAL REPORT TOP 15 WATCH I N

Transcription

1 SPECIAL REPORT TOP 15 REITs TO WATCH I N

2 One advantage investors have when selecting a real estate investment trust is that they are capitalizing on an asset class that has very predictable income. Unlike C-corps that may or may not pay out a dividend, REITs are FORCED to pay out at least 90% of taxable income. Therefore profits and dividends paid by REITs are very predictable and provide a terrific road map for future success. That s why I decided to build an income portfolio just for REIT investors. There are plenty of exchange-traded funds that provide a bucket of good, mediocre (and bad) REIT securities; I want to provide exposure to highly predictable income, backed by strong fundamental research. While the benefits to gain market exposure within a diverse portfolio of similar holdings is seemingly wise, it contrasts my research in which an investor can uncover REIT stocks that will outperform and underperform the broader index. Quite clearly, an equity index ETF is constrained to the singular objective of mimicking the index while my research and investing strategy takes a fundamental approach to valuation analysis in which I look for companies that offer the best long-term value creation or wide moat. By focusing on analytic research centered on sustainable competitive advantages, valuation, and margin of safety investing, I was able to return 39.9% in 2014 with my durable heavy weights and around 34% overall that includes modest losses from ARCP and CCG in Build a REIT Portfolio like Cal Ripken Cal Ripken Jr. is nicknamed the "Iron Man" for his "unbreakable" record of the most consecutive games played at 2,632. The former shortstop and third baseman played 21 seasons in Major League Baseball and is deemed one of the most offensively productive players of all time. It was Ripken's consistency that earned him the reputation as one of the greatest athlete's ever and that predictability is also the reason Ripken is considered an ambassador of the game. As I mentioned above, one of the best tools I use is to filter out the companies differentiated by the same patterns of predictability as Cal Ripken. By focusing on REITs with traits of consistent and durable profits, investors can better predict risk and steer away from loss (remember, it's hard to hit 400). Remembering that REITs as an asset class offer one of the most predictable forms of profits since the revenue that generated are lease contracts. So unlike C-corps, REITs can better forecast the rental income that grows over time. So how can we find real estate investment trusts with the most meaningful patterns of repeatability? I decided that in order to provide the best possible model of predictability I would design a portfolio that ranks the "Cal Ripken REITs" based on metrics that identify future profitability defined by wide moat differentiation. Since dividends are the most critical metric in my book, I created a list of REITs that have demonstrated a pattern of dividend consistency. 2

3 The REITs in this report are ranked based on an overall score generated from the following criteria: Three-year average dividend growth Dividend growth in 2014 FFO payout ratio in 2014 S&P credit rating Consecutive years of dividend payouts Remember, it's the consistency in profits or dividends that provide one of the best barometers for predicting shareholder success. It's a fact that companies that maintain consistent and growing dividends lead to superior risk-adjusted returns. Ignore the market noise and focus on the best GPS devise that was ever invented that s what I call sleeping well at night. BEST BANKS Federal Realty (FRT) is not only one of the oldest REITs but the best-in-class operator of shopping centers also enjoys the longest streak of paying and increasing annual dividends for more than 47 years in a row. When evaluating this blue chip stock it s easy to understand the dynamics behind the dividend machine: a fortress balance sheet (A- rated by A&P), experienced management led by CEO Don Wood and vetted assets clustered in densely populated markets. Federal has a market cap of just under $10 billion and while I like the steady and reliable earnings history, shares are rather pricey and that's reflected in the nose bleed valuation of 29x price-tofunds from operations. 3

4 HCP (HCP) is a best-in-class health care REIT that has excelled at providing very reliable dividend payments. As one of three larger diversified health care REITs, HCP s balance sheet has provided the company with very attractive cost of capital (BBB+ rated by S&P). HCP is trading at sound value today as the 15.9x multiple tells me that this stock is a safe bet, not to mention the 4.9% dividend yield is one of the most reliable. Universal Health Realty Income (UHT) is a small-cap health care REIT ($688 million market cap) that invests in a full spectrum of senior housing and health care real estate properties. Although the company is too small for an investment rating, I like the predictability that has provided investors with relative safe sleep well at night dividends. The current dividend yield is 4.7% and while it s safe, I recommend waiting for a better entry price. 4

5 National Retail Properties (NNN) owns small free-standing properties scattered across the U.S. With arguably one of the most diversified revenue models, NNN has been able to withstand multiple recessions with an unscathed dividend record. It currently yields 3.9%. In addition, National's balance sheet has less than 1% of secured debt and that makes the business model highly attractive (BBB+ rated by S&P). The $5.7 billion REIT has become pricey (21x P/FFO) so you might want to look for a better entry price. Tanger Factory Outlets (SKT) is the gold standard at least that s how I define the successful track record of this dividend payer. With a market cap of $3.8 billion, Tanger is the only pure play outlet sector REIT and with such a wide moat business model, Tanger has been able to build considerable brand equity. Not only has Tanger maintained strong operating metrics (occupancy around 99%), the North Carolina-based REIT has also demonstrated exceptional balance sheet management (BBB+ rated by S&P). Tanger caters to bargain hungry shoppers and so do I. I would wait for shares to pullback as the current valuation of 21.5x is not cheap. 5

6 Urstadt Biddle (UBA) is not a well-known REIT and in fact, most have never heard of the $632 million (market cap) company based in Connecticut. However, the small cap shopping center REIT is included in my predictable list of champions because of its reliable track record of paying and increasing dividends (current yield: 4.3%). Shares are soundly valued today at 18.4x P/FFO and I would look for a pullback. Realty Income (O), better known as The Monthly Dividend Company has evolved into a bond-like business model that spits out consistent monthly checks. The San Diego-based REIT recently hit the record books with a record of paying and increasing dividends for 20 years in a row. The company invests in free-standing buildings and its overall quality is reflected in its low cost of capital advantage. The balance sheet is top shelf (BBB+ rated S&P) and the seasoned management team has demonstrated that it can take a lick n and keep on tick n." Shares aren t cheap and while I m hanging onto mine, I would recommend a pullback for new buyers. 6

7 Essex Realty (ESS) owns and invests in apartment buildings and while the company has a powerful dividend record, I don t see value in the share price. With a muted dividend yield of 2.3% and sticker shock P/FFO multiple of 26.8x, I would wait for Mr. Market to hibernate. Simply put, safe dividend but unsafe price. W.P. Carey (WPC) is a gem. I have always liked this REIT and it s a good buy now. Shares are trading in my sweet spot at 15.8x P/FFO and the dividend yield of 5.3% is safe and robust. I can definitely sleep well at night with this powerful pick and I m hanging onto my shares for the long haul. 7

8 National Health Investors (NHI) invests in a swath of health care related assets: senior housing (assisted living, memory care, independent living and senior living campuses), skilled nursing, medical office buildings and specialty hospitals. The diversified company, which has a market cap of $2.4 billion, appears to be trading at sound value at 18.2x P/FFO but the dividend yield of 4.1% could be stronger. The company has no investment grade rating and I would look for better options at this time. Omega Healthcare Investors (OHI) is favored among many dividend growth investors, including me. One of the attractions to the assisted living REIT has been the reliable and predictable dividend history. The $5.6 billion (market cap) REIT has increased its quarterly dividend by $.01 per share for a dozen quarters in a row. It s the consistency that makes me sleep well at night and I love collecting dividends that grow. Omega has climbed a tad above the company s historic valuation with current P/FFO of 16x) and at 4.9% the current yield is just slightly below my target of 5%. Wait for a better price. 8

9 Digital Realty (DLR) has demonstrated that it can handle adversity. I picked up shares when the company was under attack from a hedge fund and after riding out the storm, I was richly rewarded with more than 50% total return. I m not selling the shares as I believe the fundamentals for the data center REIT are solid (BBB rated by S&P). Like other blue chips, Digital is somewhat pricey at 15.2x P/FFO. I would recommend waiting for a pullback. Digital has a current yield of 4.6%. Ventas (VTR) has one thing that no other REIT has: Debra Cafaro. I m a big fan of this REIT s CEO and her skill set is demonstrated by her masterful risk management strategies. She steers a big boat $23.5 billion market cap and she delivers an undisputed record for rewarding shareholders. The fortress balance sheet (BBB+ rated by S&P) and powerful diversification makes Ventas dividend one of the strongest. Ventas paid $0.725 per share for each of the first three quarters of 2014 and $0.79 per share for the fourth quarter. Yes this is a reliable name but also a rich one. I would wait for a pullback as current P/FFO is 18.2x. 9

10 Simon Property Group (SPG) is a gigantic $62.5 billion in market cap mall REIT that has diversified into other global markets and other asset sectors (outlet centers). Its balance sheet (A rated by S&P) scores well and so does the dividend record Simon did cut its dividend during the Great Recession but rewarded them with shares instead. You have to pay up for quality though. Simon s valuation of P/FFO is 22.9x is steep and the dividend yield is 2.8%. I'd wait to get in for now. Health Care REIT (HCN) has been good to me. Like the others, HCN has an exceptional record for managing risk and that alignment of interest is a good reason I still own shares. I consider the company to be soundly valued; P/FFO is 20.3x and the dividend yield is 4.1%. It's not a bargain so I'd keep this one on your watch list. 10