This text was coproduced with Nicholas Ward.
We have seen an enormous rally play out over the last couple of weeks because the elections.
But actual property funding trusts (REITs) had been largely unnoticed at first. The wave of optimism appeared to favor the extra growth-oriented names that had bought off the week earlier than.
However then got here that Monday once we heard about Pfizer’s (NYSE:PFE) COVID-19 vaccine. Identical to that, a “re-opening” rally relating to the broader financial system fashioned, and REITs had been using excessive too.
For months now, we have been speaking about many subsectors’ turnaround potential. From malls, to hotels, to office buildings, to the coastal metropolis multi-family area, we noticed a coiled spring forming. (Hoya covers these in nice element, as proven within the 4 earlier hyperlinks.)
For those who doubted us, we don’t utterly blame you for it. There was little mild on the finish of the pandemic tunnel for thus lengthy, what with circumstances surging all through a lot of the Western world.
But we have recognized because the starting that we’d see brighter days once more. You’ll be able to click here for proof of iREIT’s staunch stance on the matter.
If we mentioned it as soon as, we mentioned it dozens of instances: This too shall move.
We By no means Doubted REIT’s Resilience
Since March, we maintained a constant opinion in regards to the pandemic’s place in historical past. As in, it wasn’t going to swallow it entire.
But we have additionally acknowledged that, the longer it lasts, the harder will probably be for the financial system to bounce again. That’s why we have spent numerous hours fascinated by what the “new regular” will appear to be in a post-pandemic world.
Lots of the financial and social traits related to COVID-19 will probably persist lengthy after the illness is managed. Sure already-existent traits have been accelerated intensely, and we don’t see that altering a lot.
Take e-commerce. It is unclear to this point how a lot, if any, of the “offline” retail market share misplaced will get well. The identical goes for the “work-from-home” phenomenon or the city exodus.
Briefly, there are various uncertainties forward, even with a vaccine within the image.
Nonetheless, additionally briefly, we’re sustaining a bullish stance on a handful of blue-chip triple-net lease REITs anyway. As a sector, we are able to’t assist however admire the readability their long-term lease agreements present.
When deciding which of them to in the end purchase then, we then dug deeper to take a look at:
- Particular person firm high quality
- Dependable passive earnings
In mild of the rally, it’s that final one we need to consider once more for anybody who didn’t get in earlier than. Particularly, we’re assessing the highest 5 highest-rated net-lease REITs, as decided by our iREIT high quality scoring system.
Let’s get to it!
Realty Earnings: iREIT IQ Rating of 90
Realty Earnings (O) is the highest-rated web lease inventory we monitor with the iREIT IQ ranking system. This firm is well-known for its month-to-month dividend, which has been paid out for 603 consecutive months.
O is a dividend aristocrat with 27 years of consecutive payout will increase. And it’s already supported that streak with a number of extra throughout 2020.
Realty Earnings additionally has managed to take care of bottom-line development prospects even all through the pandemic interval. Its 2020 AFFO development is anticipated to be within the 3% vary.
It runs a well-balanced net-lease portfolio of almost 6,600 properties that span roughly 600 tenants throughout 51 industries. These property stretch throughout 49 states and the U.Ok.
And all of this with an A-rated steadiness sheet that’s offered a 15% – or greater – complete return compound annual development price (or CAGR) since its IPO in 1994. Proper now, its dividend yield is 4.45%.
With all these high quality metrics in thoughts, it is no marvel the inventory rallied final week, up 8.73% over the last 5 buying and selling periods. This has pushed its share worth up above our honest worth estimate.
Realty Earnings at present trades for $63.08, which interprets into an 18.6 worth to adjusted funds from operations (AFFO) a number of. That is above its 20-year common of 17.6x and barely above its 10-year common of 18.5x.
Briefly, the rally we noticed final week eliminated this inventory’s margin of security. Whereas O does not by any means seem like grossly overvalued at $63, we additionally do not contemplate it low cost.
It’s definitely not one of the best worth within the web lease sector to be discovered.
(Supply: FAST Graphs)
Retailer Capital: iREIT IQ Rating of 76
Retailer Capital (STOR) has been considered one of our favourite investments within the net-lease area since its IPO in 2014. Ever since, it’s offered best-in-class dividend development relative to its friends.
STOR at present presents a 4.58% dividend yield. And whereas its AFFO will probably fall by some 8% this yr, administration’s conservative strategy towards its payout ratio makes us assured in its payouts.
(Supply: STOR Q3 ER Slide Show, page 14)
The efficiency listed above? That’s pushed by administration’s considerably distinctive give attention to the middle-market space, the place STOR has higher leverage.
It does not have the identical high quality tenants by way of credit score rankings as different names on this record. Nonetheless, as CEO Christopher Volk continues to level out – together with in considered one of our exclusive iREIT CEO interviews – STOR has confirmed its means to signal enticing grasp leases that present safety and investment-grade rankings on a deal-by-deal foundation.
It owns beneath 2,600 properties, however these are nonetheless effectively diversified between 511 tenants. And 60% of these offers have investment-grade rankings as a result of firm’s direct origination platform.
Shares rose an astounding 15.21% final week, which pushed them above our fair-value estimate. Buying and selling for $31.43 finally test, STOR’s p/AFFO has risen to 16.94x, which is effectively above its common of 15.43x since going public.
(Supply: FAST Graphs)
Don’t get us unsuitable. We had been happy to see it go up as a result of our lengthy positions throughout a number of iREIT portfolios. However we nonetheless discover ourselves compelled to look elsewhere to advocate one of the best net-lease worth for brand spanking new traders.
Important Properties Realty Belief: iREIT IQ Rating of 72
Important Properties (EPRT) was our greatest thought in 2019, with complete portfolio-entry returns of greater than 100%. As such, we determined to take income earlier this yr and await a greater alternative to get again in.
COVID-19 offered precisely that, so we purchased again shares at $10.79 on April 26 – shares which have now rallied some 81%. Together with dividends, we’re almost 86% complete returns.
So EPRT might find yourself being our greatest choose in 2020 as effectively.
The corporate solely went public in 2018 and subsequently has little dividend development historical past to talk of. Nonetheless, it’s elevated its dividend twice since. It yields 4.7% with a reasonably extensive 2020 AFFO dividend payout ratio of 74.7%.
This leads us to imagine it’s fairly secure.
Now, EPRT remains to be comparatively small in comparison with its friends, with a market cap of simply $2 billion. It owns 1096 properties leased to 214 tenants throughout 14 industries and 43 states. Nevertheless it does keep a formidable 14.6-year weighted common lease time period.
Grasp lease contracts symbolize 60.4% of its annual base hire (ABR). Its occupancy ratio was at 99.4% finally quarter’s finish. And 99% of its leases have base hire escalations, with a weighted common annual escalation of 1.5%.
This gives dependable earnings that traders have flocked to.
Final week, EPRT shares rose 16.42%, pushing its p/AFFO as much as 17.4x. This takes it effectively above the 14.7x we noticed on the finish of October.
But even after this massive transfer, shares traded for $19.57 – nonetheless barely beneath our $20 honest worth goal.
(Supply: FAST Graphs)
Even so, it is clear the rally eradicated a lot of EPRT’s earlier margin of security. It continues to be considered one of our high concepts on this subsector, however it’s pretty much as good as it will possibly get.
Agree Realty : iREIT IQ Rating of 75
Agree Realty (ADC), one other comparatively smaller net-lease REIT we actually like, has a $3.7 billion market cap. It presents publicity to 1,027 properties owned throughout 45 states.
ADC’s portfolio could be very spectacular, with 66.1% of its leases being with investment-grade tenants. This focus has allowed it to generate a few of the finest hire assortment knowledge we have seen in all of REITdom.
In October, this determine was 99%.
The corporate’s dividend development has been particularly spectacular this yr, elevating it twice throughout the pandemic interval (2.6% in Might and 5.3% in September) and three of the final flour declarations.
But its yield stays comparatively low at simply 3.58%.
We would not be shocked to see extra dividend will increase within the close to time period as a result of ADC’s:
- Strong AFFO development in 2020
- Ahead development expectations in 2021
- Present AFFO dividend payout ratio of 75.7%
Just like the earlier shares, ADC benefited from final week’s rally, rising some 6.37%. That decrease quantity is due to its prior stronger efficiency, leaving a smaller margin of security.
It is a high quality firm, however it’s buying and selling above our fair-value estimate. Its p/AFFO rose to 21.3x – the very best to this point and effectively above its 14.2x long-term common.
Briefly, we do not see a lot in the way in which of margin of security, leaving us as soon as once more wanting elsewhere.
(Supply: FAST Graphs)
With that mentioned, we interviewed ADC CEO Joey Agree final week, the place he defined:
“It was a file quarter, however I feel what’s most vital is we will not be sacrificing asset stage or credit score high quality. That is a testomony to the self-discipline right here. We is not going to go up the chance curve.”
That’s a sentiment we are able to respect.
Nationwide Retail Properties: iREIT IQ Rating of 77
Like Realty Earnings, Nationwide Retail Properties (NNN) is a dividend aristocrat, growing its dividend for 31 consecutive years now.
Streaks like that do not simply occur. To take care of multi decade-long dividend development, an organization should repeatedly show that it will possibly evolve and adapt. And that type of excellence shouldn’t be underestimated.
Together with the longest dividend development streak on this record, NNN additionally has the very best dividend yield at 5.23%. And the bottom p/AFFO a number of at 15.93x.
Evidently then, it’s one of the best worth we at present see in web lease REITs.
NNN shares participated out there extensive rally final week in an enormous method, rising 19.54%. However clearly there’s extra room to rise.
This firm does supply extra publicity to experiential retail, which has been crushed this yr. Nonetheless, administration’s strikes lately to diversify its portfolio and money flows away from the normal brick and mortar retail area will ultimately and actually pay dividends.
The inventory nonetheless did wrestle earlier within the yr with hire assortment. However its monetary knowledge has improved in latest months, and it collected 94% of hire due in October.
Briefly, the general power of its 3,114-property portfolio has allowed administration to take care of its dividend aristocracy.
As you may see on the FAST Graph beneath, NNN nonetheless trades with a p/AFFO ratio beneath its long-term common. Mixed with every part else, it’s one of the best worth amongst its blue-chip friends.
(Supply: FAST Graphs)
In reality, with the inventory nonetheless buying and selling effectively beneath our $47.50 honest worth estimate, it nonetheless contains a double-digit margin of security. If we needed to choose only one web lease REIT to purchase right this moment, it could be this dividend aristocrat.
We price it a Robust Purchase.
As defined in an article last week:
“The worldwide pandemic has created a singular alternative. REIT traders can capitalize on mispricing within the web lease sector by proudly owning shares within the highest-quality corporations… and at iREIT on Alpha, we’ve been busy shopping for such shares which have turbocharged our portfolios in return.”
Our Money Is King Portfolio has greater than 26% publicity to web lease REITs, together with 3.3% publicity in gaming. This obese technique has confirmed to be a superb blueprint for sleeping effectively at evening.
By sustaining strict self-discipline in our screening processes, we’ve not solely averted losses, we’ve capitalized on a singular alternative to personal a few of the easiest REITs round.
We definitely didn’t coin the time period, “sleep effectively at evening,” or SWAN. However we do know that net-lease investing has been one of many secrets and techniques to our success.
When requested what gave him pleasure, John D. Rockefeller as soon as mentioned, “It is… my dividends coming in.” Possibly somebody will ask us that very same query sometime.
Regardless, we’re having fun with our dividend-paying web leases very a lot certainly.
Replace: As of three:15 ET on Nov. 16, 2020, the Internet Lease REIT sector is up a median of three% for the day:
Writer’s observe: Brad Thomas is a Wall Avenue author, which suggests he isn’t all the time proper along with his predictions or suggestions. Since that additionally applies to his grammar, please excuse any typos chances are you’ll discover. Additionally, this text is free: Written and distributed solely to help in analysis whereas offering a discussion board for second-level pondering.
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Disclosure: I’m/we’re lengthy O, EPRT, NNN, STOR, ADC. I wrote this text myself, and it expresses my very own opinions. I’m not receiving compensation for it (apart from from Looking for Alpha). I’ve no enterprise relationship with any firm whose inventory is talked about on this article.