It’s been six months – a full half-year – since I wrote “The Most Reliable REITs for Retirees: the Coronavirus Edition.” It was a good article, if I do say so myself, filled with segments like this one:
“Let me give you a helpful tip about life: Coronavirus or not, there’s always something to panic over.
“Sometimes it’s personal. Sometimes it’s familial. Sometimes it’s national. Sometimes it’s global.
“But there’s always something out there waiting to go ‘Boo!’ I won’t provide you with the full list of boogey monsters lurking around potential corners up ahead. After all, the point of this piece is to assure you (and point you in the right direction), not freak you out any more than you already are.
“While, yes, there are always precautions we should take and future-focused thinking caps we should wear… there’s no point in obsessing over everything that could potentially happen in the future. It would be completely counterproductive.
“In this case, we’re much better off considering the past…”
Again, that was on March 3. Back at the very, very beginning of the ordeal we’re dealing with today.
But that doesn’t mean the advice isn’t still stellar. I’d swear by it every bit as much in the first week of September as in the first week of March.
What We Knew vs. What We Know Now
March 3 was the exact date I published this article’s predecessor. At the time, only random people were wearing masks out and about. And they ran the risk of getting berated about it.
“You’re reducing the supply for medical personnel,” more than one shopper was shamed with. “I hope you know how selfish you are.”
(They might not have said that last part, but that was the intended message nonetheless.)
That was after Dr. Anthony Fauci, director of the National Institute of Allergy and Infectious Diseases (NIAID) and a leading member of President Trump’s Coronavirus Task Force, said as much. Plus, as he also said, they didn’t work to stop the spread anyway.
About three and a half months later, of course, we learned from his own lips that he was speaking “at a time when personal protective equipment, including the N-95 masks and surgical masks, were in short supply. And we wanted to make sure that the… healthcare workers” were properly taken care of. But again, that was months later.
Also, at the time, we had no idea we were going to be shutting down entire swaths of the economy for “two weeks.” (The 2020 version of “a three-hour tour,” as it turned out.) And at the time, we thought that schools would certainly be open again in the fall.
Clearly then, there was a lot we didn’t know. Moreover, there’s still a lot that’s up in the air, we have to admit.
Then again, there always is. Isn’t there?
Past, Present, and Future REIT Profits
I want to go back to that “In this case, we’re much better off considering the past…” line from “Reliable REITs for Retirees” Round 1.
It’s that consideration that got us through the pandemic this far.
We’re always focused on the future here. Obviously, we invest in what we invest in to achieve future profits and ultimate future financial stability.
But the way to do that is by first evaluating past performance, asking questions such as:
- When were the companies in question established?
- How well have they performed in the past?
- What kind of dividend payment histories do they come with?
- Where have they focused their portfolios?
- Who runs them now and what experience do they offer?
- What is their historical fair value (FV) price?
That’s the best way to “predict” the future: know how well a company has handled itself before the present. As I also wrote in March:
“Simply put, you can only do so much to avoid getting the coronavirus. And you can’t really do anything at all about whether the markets will be fear- or greed-fueled.
“But that doesn’t mean you should take your money and run. Not even close.
“If you choose a portfolio of solid companies with reliable dividends, it largely doesn’t matter what the markets may do.
“Your share prices are still going to increase over time with the occasional blip here and there… But, up or down, they’re still going to pay you every quarter or every month.
“They’re still going to steadily, reliably make you money.”
Which means that, “no matter what everyone else is doing, you don’t have to panic.” Sounds nice, right?
Nothing but Net Lease
As my readers on Seeking Alpha know, I’ve been touting net lease REITs for as long as I can remember. To illustrate this, here are some lines from an article I wrote in May 2011:
“If you had asked Benjamin Graham to distill the secret of sound investing in three words, he might have replied, “margin of safety.” Those are still the right three words and will remain so for as long as humans are unable to accurately predict the future.
“All of the above-mentioned characteristics contribute to a strong ‘margin of safety,’ which is also the basis for investing in this most innovative and exceptional real estate investment trust – Realty Income, The Monthly Dividend Company…”
As I said, that was over nine years ago. And I’ve been cheering on this REIT ever since.
In fact, it’s now my second-largest individual holding. With good reason too.
As you can see below, even in the midst of a global pandemic, shares have returned 13.2% annually since my very first article.
(Source: F.A.S.T. Graphs)
Over the years, I’ve personally witnessed the power of this rental model, and not just as an investor. I’ve personally developed over 100 free-standing net lease properties for companies like Advance Auto Parts (AAP), CVS Health (CVS), Walgreens (WBA), Applebee’s (DIN), IHOP, and a long list of others.
That’s why, when the shutdowns struck, I knew their landlords would offer the best opportunities – discounted ones at that, since Mr. Market was behaving as if all real estate assets were worthless. Contrary to all logic.
The Highest-Quality New Lease REITs
Through both our free and premium content, we highlighted the highest-quality net lease REITs available. I even sent this exclusive message to iREIT members in May:
(Source: iREIT on Alpha)
Sure enough, I got to write this headline mid-August “Berkshire Hathaway Doubles Down On Net Lease REIT, STORE Capital” (for Forbes).
Now, that’s not to say there wasn’t damage done or that the effects of which have completely cleared up. Net lease REITs as a sector are down 19.2% for the year, which isn’t pretty.
Though it is better than the -57.7% for lodging and -47.5% for malls. Not to mention that the free-standing sector holds over a dozen companies with varying performance:
If you know these companies the way I do, you know right away that the ones that managed risk through the previous 10-year bull market have fared the best. Not surprisingly, their large, investment-grade tenants have caused few problems.
Also not surprisingly, smaller, riskier-credit tenants have had much less of an ability to pay rent in a timely manner.
To be fair, National Retail Properties (NNN) was once regarded as a blue-chip retail space pick. Yet, some of its largest tenants – such as AMC Entertainment (AMC) and Chuck E. Cheese (CEC) – have seen significant bankruptcy risk, giving it a rising “lower-quality” reputation.
This would normally open up an excellent opportunity. But NNN has similarly valued peers that are collecting significantly more rent. Some of them have even been able to resume acquisitions activity.
Going forward, this could lead to further re-ratings within the space… to the benefit of those portfolios that can continue growing.
Fueling Up on Net Lease REITs
At the outset of COVID-19, we’ve been especially busy accumulating net lease REITs in the “Cash Is King” and “Durable Income” portfolios. Here’s a look at the former’s holdings:
- Four Corners Property Trust (FCPT), up 88.6%
- Essential Properties Realty Trust (EPRT), up 61.7%
- STORE Capital Corp. (STOR), up 43.1%
- Realty Income Corp. (O), up 36.2%
- Spirit Realty Capital (SRC), up 26.3%
- W.P. Carey (WPC), up 18.9%.
As you can see below, it’s the largest sector in this portfolio (23.38%). And when you add in gaming (3.27%), the combined exposure is 27.07%.
Several of the REITs are at or near their fair values. Yet, we’re still accumulating shares due to emerging economic green shoots, such as:
- Gyms and movies opening back up
- Realty Income reinstating acquisition guidance ($1.25-1.75 billion)
- Rent collection improvements
- Restaurants managing through delivery and outdoor seating
Here’s a snapshot of the sector’s funds from operations (FFO) growth profile (using consensus estimates for 2020-2022):
As you can see, the most consistent growers include Agree Realty Corp., Four Corners Property Trust, and Realty Income Corp. Again, higher exposure to investment-grade tenants is resulting in higher rent collection.
Likewise, essential/open industries are more likely to pay rent in full, leading to dividend growth results like the following:
That information, of course, factors into our ratings (updated daily at iREIT on Alpha).
So do these companies’ dividend yields:
Now consider their P/FFO multiples:
In conclusion, we recently added NetSTREIT (NTST) to the REIT Lab, and interviewed its CEO as part of our ongoing CEO Vodcast series.
In uncertain situations like the one we’re in right now, the importance of reliability can’t be stressed enough.
As such, higher exposure to investment-grade tenants is resulting in higher rent collection. That means it’s the easiest path to become a SWAN (sleep well at night) investor too.
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.
You Get THIS When You Subscribe to iREIT on Alpha
At iREIT, we’re committed to assisting pre-retirees and retirees navigate the REIT sector. As part of this commitment, we conduct weekly C-suite interviews -in video format with transcripts – so that our members get to become part of the research. We ask our members what they want us to ask the CEO and by joining iREIT, you can see why iREIT offers the best value on the planet!
Disclosure: I am/we are long FCPT, O, SRC, STOR, WPC. 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.
Originally published on Seeking Alpha