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In a few days, I will be flying out to Denver to speak to investors with the American Association of Individual Investors (or AAII).
One of the hot topics today is the fear of losing money, that is often the culprit that detracts from a quality lifestyle. I’m certain that many in the audience will be hoping they can enjoy the “golden years,” after all, retirement satisfaction appears to be positively correlated with income, net worth and health.
As the editor of The Forbes Real Estate Investor, I am keenly focused on helping investors reduce risk and sleep well at night.
In fact, I created a popular SWAN (sleep well at night) portfolio specifically to assist investors with building their nest eggs. To qualify as a SWAN, a REIT must have a long track record of paying and growing dividends.
REIT (real estate investment trust) income should be a part of the retirement process and investors should take a closer look at the asset class that offers an outsized dividend yield along with very predictable sources of income. However, REITs should not be painted by the same brush - just because you are an investor in a REIT does not guarantee that the dividend income will be sustainable. Most all retirees are counting on the income to fund expenses or enjoy their quality of living, a dividend cut could mean be devastating.
Most REITs are publicly traded (although some are private so make sure you know the difference) and this means that they must disclose financial information and report on material risks. This transparency enables investors to analyze and value REIT assets independently. Stock exchange-listed REITs are held to the same standards as other public companies and reporting is governed by the SEC.
I have never seen a REIT that sells swampland but if there were such a company, the prospective investor could find out about it by reviewing company filings and thus avoid being duped by conducting careful due diligence.
In my newsletter, I recently decided to build a new REIT collection called the KISS Portfolio, and of course that means that my goal is to “keep it simple, stupid.” Included in this basket are 39 REITs, around one-third are rated SWAN--that means they offer a high degree of dividend predictability.
Included in the portfolio are four of my favorite picks: Federal Realty (FRT), Realty Income (O), Ventas, Inc. (VTR), and Healthcare Trust of America (HTA). The reason I selected these names is because I consider them to be high-quality and the shares are now trading at attractive levels.
4 High-Quality REITs For Retirement
Federal Realty (FRT) is a recognized leader in the ownership, operation and redevelopment of high-quality retail-based properties located primarily in major coastal markets from Washington, D.C. to Boston as well as San Francisco and Los Angeles.
Founded in 1962, FRT's mission is to deliver long term, sustainable growth through investing in densely-populated, affluent communities where retail demand exceeds supply. FRT's expertise includes creating urban, mixed-use neighborhoods like Santana Row in San Jose, California, Pike & Rose in North Bethesda, Maryland and Assembly Row in Somerville, Massachusetts.
These unique and vibrant environments that combine shopping, dining, living and working provide a destination experience valued by their respective communities. FRT's 105 properties include over 2,800 tenants in approximately 24 million square feet and over 2,000 residential units.
Federal Realty is one of just a handful of REITs with an A-rated balance sheet. In October 2016, Fitch Ratings affirmed FRT's ratings, including its A- long-term issuer default rating with a stable cash flow. The ratings and outlook reflect FRT's "consistent and steady" cash flow growth generated from its community shopping centers, as well as the prudent management of its balance sheet and its creative redevelopment and mixed-use development.
Federal Realty is trading at $117.32 per share with a P/FFO (price to funds from operations) multiple of 19.7x. While 3.4% dividend yield may seem modest, keep in mind that Federal Realty has increased its dividend for over 50 years in a row (talk about a blue chip).
Realty Income's (O) free-standing Net Lease portfolio continues to be diversified by tenant, industry, geography, and to a certain extent, property type which contributes to the stability of cash flow.
At the end of 2017 the company’s properties were leased to 249 commercial tenants and 47 different industries located in 49 states in Puerto Rico. 81% of the rental revenue is from traditional retail properties, the largest component outside retail is industrial properties at about 12% of rental revenue.
Walgreens is Realty Income's largest tenant (at 6.5% of rental revenue) and drugstores remain the largest industry at 10.6% of rental revenue. Within the retail portfolio, over 90% of rent comes from tenants with a service, non-discretionary and/or low price point component to their business. Realty Income believes these characteristics allow tenants to compete more effectively with e-commerce and operate in a variety of economic environments.
During 2017 Realty Income invested $1.52 billion in 303 properties located in 40 states at an average initial cash cap rate of 6.4% and with a weighted average lease term of 14.4 years. On a revenue basis, approximately 48% of total acquisitions are from investment grade tenants.
Realty Income's continued low cost of capital allows it to acquire the highest quality in properties that provides favorable long-term returns while also creating meaningful near-term earnings growth. Realty Income estimates that 2018 acquisitions to be $1 billion to $1.5 billion in 2018.
Realty Income is trading at $51.28 per share with a P/FFO multiple of 17.8x. The company also boasts at attractive dividend yield of 5.1% and the company is a “dividend aristocrat” (for being recognized for increasing dividends for over 25 years in a row).
Ventas, Inc. (VTR) has evolved into a leading healthcare REIT, with a deliberately constructed portfolio of more than 1,200 assets. The company focuses on high-quality real estate that is well-located in attractive markets with high barriers to entry.
Ventas partners with the top operators in each asset class that are leaders in their sectors and are well positioned for growth. The properties are located in the United States, Canada and the United Kingdom.
Ventas’ management expertise, access to low-cost capital, and proven track record position it to take advantage of significant growth opportunities in the highly fragmented and growing $1 trillion senior housing and healthcare real estate market.
These opportunities are supported by powerful demographic and financial forces: aging Baby Boomers, a sharply rising 85+ population, increased healthcare spending, and growing demand for lower-cost outpatient settings.
While most of the retail REITs are unable to execute large-scale acquisitions, Ventas (and a handful of healthcare REITs) are sitting in an enviable position in which they can take advantage of the noise and build on powerful cost of capital and scale.
Ventas is trading $50.38 with a P/FFO multiple of 12.2x (that is “cheap”). The dividend yield is attractive 6.3% and well-covered (by FAD or “Funds Available for Distribution).
Healthcare Trust of America (HTA) listed shares on June 6, 2012, and the company is a fully integrated, self-administered healthcare REIT that was founded in 2006 (as a non-traded REIT).
HTA focuses on acquiring, owning, and operating high-quality MOBs that are located on the campuses of nationally recognized healthcare systems. The company is the largest MOB owner with a portfolio of over 24.2 million square feet (averaging $807 million in annual acquisitions since 2012).
HTA became the largest owner of MOBs in the U.S. after acquiring the Duke Realty (DRE) MOB portfolio (70 MOBs). Around 85% of DRE’s MOB assets are HTA markets and this significant overlap provides tremendous economies of scale.
HTA’s market strategy is to drive growth by investing in targeted markets that have attractive healthcare and real estate demographics. Target markets benefit from current trends in baby boomer population growth, and from long-term trends driven by increasing populations of millennials anchored by a strong academic university presence.
HTA shares are trading at $25.97 with a P/FFF of 15.8x. HTA has an attractive dividend yield of 4.7% and I expect the company to continue boosting its dividend over time.
I own shares in FRT, O, VTR, and HTA.
