Brad Thomas wrote this article and it previously appeared on IREIT investor on February 20, 2017.
There are many ingredients that make up the so-called SWAN portfolio and there are common denominators such as predictability, reliability, and durability. All of these attributes are part of the value proposition for owning a stress free investment portfolio.
It takes a real superstar to be included in the SWAN club, and to even qualify for this prestigious ranking system, a REIT must have demonstrated a long-term track record for paying and increasing dividends. Ben Graham wrote (in The Intelligent Investor),
One of the most persuasive tests of high quality is an uninterrupted record of dividend payments going back over many years.
My REIT research is granular and often tiresome, but at the end of the day, this REIT exploration is traced all of the way back to the stamina of the dividend itself.
In order to be considered a SWAN, the prospective blue chip REIT must have an earnings stream that is reliable and that can be relied upon over series of years, that’s simply why I call it “sleeping well at night.”
But most importantly, the REIT must have a growing dividend stream, not just a one-hit wonder , but a dividend stalwart, recognized for a long history of dividend growth through multiple economic cycles.
Each month I publish a newsletter with over 100 REITS included, and I carefully filter out the best performers based on a variety of metrics. To become a SWAN the prospective REIT must have an earnings stream that can be relied upon over a series of years.
But it’s not just a REIT’s dividend history that will help you sleep well at night, an intelligent REIT investor must also be able to find stocks with above-average price appreciation, and buy them at attractive prices.
4 REITs To Help You Sleep Well At Night
Simon Property Group (SPG) has a market capitalization of around $57 billion and the company owns or has an interest in 227 properties comprising 189 million square feet in North America, Asia, and Europe. Additionally, the company had a 20.3% ownership interest in Klepierre, a publicly traded, Paris-based real estate company, which owns shopping centers in 16 Europe.
SPG is a blue chip REIT based on all metrics: balance sheet (rated A), dividend growth (average 10% growth over 4 years), and payout ratio (62%). Over the last year or so, shares in SPG and the other Mall REITs have pulled back considerably due to store closures and e-commerce fears (SPG has returned -2.7% since Dec. 31, 2015).
For an opportunistic investor (aka value investor), SPG can be viewed as a cheap stock based on dividend yield (3.9%), Price/Funds from Operations (17.0x), and Net Asset Value. Keep in mind that SPG is the ONLY Mall REIT rated A by credit agencies and the dividend growth forecast for 2017 is over 7% (based on our research).
In short, SPG is viewed as a REIT that can “take a lick’n and keep on tick’n” and we believe this particular SWAN can now be purchased with a margin of safety.
Source: FAST Graphs
Ventas, Inc. (VTR) is also a large cap REIT that owns 1,270 properties that consist of 42% Triple Net, 30% SHOP (based on revenue), 25% office, and 3% in loans. VTR consider itself the “premier provider of capital to leading healthcare and senior living companies and university-based research institutions”.
VTR has made great strides in enhancing its balance sheet and financial strength. In 2016 the company issued around $1.3 billion in equity over the course of the year at an average gross price of approximately $70 per share. At year-end, VTR’s net debt to adjusted EBITDA improved to 5.7x, a 0.4x reduction from year-end 2015 leverage of 6.1x.
VTR plans to drive an even stronger financial profile and liquidity in 2017, including refinancing approximately $1 billion of low-cost short-duration debt with longer-dated notes. During the year VTR grew normalized FFO per share by 5%, at the high end of the guidance range presented at the beginning of 2016.
VTR grew its dividend by 6% in 2016 and the company expects 2017 normalized FFO per share to range from $4.12 to $4.18. Also the company expect the total same-store portfolio to grow cash NOI by 1.5% to 2.5%, with all segments contributing to growth.
Similar to SPG, VTR is also opportunistic in price, shares now trade at $62.16, around 25% below the August 2016 price of $76.16. VTR’s dividend yield is 4.8% and the P/FFO multiple is 15.0x. VTR is also considered a blue chip (or SWAN) based on the strong credit profile (BBB+ rated) and long history of dividend growth.
Source: FAST Graphs
PSB’s primary source of leverage in the capital structure is perpetual preferred stock or equivalent preferred units in the Operating Partnership. This method of financing eliminates interest rate and refinancing risks as the dividend rate is fixed and the stated value or capital contribution is not required to be repaid. PSB has the lowest leverage of all of the industrial REIT peers.
PSB also has a history of increasing dividends and of course, not cutting them. In addition, PSB has an investment grade rated (A-) balance sheet that supports the durability attributes referenced above.
However, PSB is not in our strike zone right now, shares are trading at $116.26 with a dividend yield of 2.6%. I recommend waiting on a pullback before purchasing shares.
Source: FAST Graphs
LTC Properties (LTC) is a healthcare REIT that has been around for over 24 years. The company was incorporated on May 12, 1992, in the state of Maryland, and commenced operations on August 25, 1992. LTC invests primarily in senior housing and long-term healthcare property types, including skilled nursing properties (55.3%), assisted living properties (40.3%), independent living properties, and combinations thereof.
LTC owns a portfolio with 216 properties – 97 skilled nursing facilities and 111 assisted living facilities. The other 4% is comprised of Range of Care facilities. Also, LTC owns or holds mortgages on properties that include investments in 30 states (coast-to-coast) leased or mortgaged to 32 different operators.
The vast majority of LTC’s portfolio (94%) is tied together in various master leases, such that an operator can’t cherry-pick the properties it chooses to keep without the risk of losing all of the assets embedded in the lease structure.
Most of the leases provide for a fixed minimum base rent, annual rent increases, and renewal options. There is just one lease maturity in 2017 (GAAP rent of $.4 million) and ALL leases are TRIPLE NET.
This means that there is absolutely no operator risk and the total portfolio is 52.1% private pay. The government pay model is riskier (than private pay) but LTC’s net lease model provides added protection since the leases are cross-defaulted.
LTC has always maintained a very stable balance sheet, and although the company has no agency rating, I consider the leverage metrics comparable to BBB-rated REITs. The low leverage and well-laddered maturities provide me with comfort that rising rates will not impact profitability. Also, because LTC has longer-term lease contracts, the company is able to match-fund debt, cushioning any impact to rising rates.
LTC is one of the smaller SWANs in the portfolio, but I like the blue chip metrics such a low leverage, predictable dividend growth, and triple net leases. Shares are now trading at $46.71 with a dividend yield of 4.9%. No bargain, but adequate appreciation potential for the sleep well at night investor.
For more information on the SWAN portfolio or the Forbes Real Estate Investor newsletter CLICK HERE.
Disclosure: I own shares in SPG, VTR, and LTC.
Brad Thomas is editor of Forbes Real Estate Investor. He is also the coauthor (with Stephanie Krewson-Kelly) of The Intelligent REIT Investor: How To Build Wealth With Real Estate Investment Trusts (Wiley/Forbes) and author of The Trump Factor: Unlocking the Secrets Behind the Trump Empire (Post Hill).
PS Business Parks (PSB) owns, operates, acquires and develops commercial properties, primarily multi-tenant flex, office and industrial parks. The company owns 14.6 million square feet of flex space (defines “flex” space as buildings that are configured with a combination of warehouse and office space and can be designed to fit a wide variety of uses).
The warehouse component of the flex space has a number of uses including light manufacturing and assembly, storage and warehousing, showroom, laboratory, distribution and research and development activities.
The office component of flex space is complementary to the warehouse component by enabling businesses to accommodate management and production staff in the same facility.
PSB owns 8.8 million square feet of industrial space that has characteristics similar to the warehouse component of the flex space as well as ample dock access. In addition, PSB owns 4.6 million square feet of low-rise office space, generally either in business parks that combine office and flex space or in submarkets where the market demand is more office-focused.