3 Top Growth REITs To Fight Inflation (2024)

We just wrote about inflation the other day in “3 Monthly Paying REITs for Mom.”

In fact, I’ve been writing about inflation a lot. So I understand if you’re sick of hearing about it.

If it’s any consolation, I’m right there with you. If I could, I’d wave a magic wand and make all this inflation go away.

Problem is, it isn’t going away. I know the debate continues about whether it’s transitory or not. But the one about whether it’s going to happen or not is dead and buried.

The jury is back on that one. The verdict is in, and it’s not in our favor.

We’re just waiting to see how long the sentence will be.

A number of reports proving as much were released this week, including one from MarketWatch (repackaged on MSN Money). “World’s Biggest Sovereign Wealth Fund Is Bracing for Inflation Shock That Hits Both Stocks and Bonds” begins like this:

“The CEO at Norges Bank Investment Management, responsible for managing the Norwegian Sovereign Wealth Fund… is warning of the potential for an inflation shock that would hurt both stocks and bonds, according to a report by Bloomberg News on Wednesday.”

That doesn’t sound fun, to say the least. Nor do the next two paragraphs, as detailed down below.

(Source: Storyblocks)

Inflation Is Everywhere

I hope you’re reading this during the day. Because I wouldn’t want it to keep you awake at night knowing there really are monsters lurking.

Not under your bed, mind you. But definitely by your bank account.

To continue that MarketWatch article:

“Given extremely low bond yields and high stock valuations, ‘any major change in inflation will hit both parts of the portfolio,’ CEO Nicolai Tangen of Norges… which manages Norway’s $1.4 trillion sovereign aid fund, told Bloomberg Television in an interview. ‘In the past, it’s been one and not the other. But this time, both can move in the same direction.’

“Investors and analysts are increasingly sounding the alarm about the risks of inflation in recent days, with some saying it has the potential to drive major currency moves for the rest of the year and that higher expectations are the biggest risk facing financial markets through mid-2022.”

Meanwhile:

• Barron’s reports, “U.K. Inflation Subdued, but Spike Is Still Expected Ahead.”
• Bloomberg writes, “Russia’s Battle Against Inflation Erodes Its Wheat Dominance.”
• Reuters declares, “Canada’s Hot Inflation Takes Center Stage in Election Campaign.”
• Fox Business notes, “(U.S.) Economy Losing Momentum to Higher Prices: John Lonski” (Moody’s chief economist).

So it’s clearly a global problem. This only makes sense considering how the world largely followed the same guidelines that helped cause this crisis.

Even so, The Wall Street Journal cautions, “Inflation Is Higher in the U.S. Than Elsewhere, but Don’t Panic.” It has an interesting argument to support that claim, which may or may not be true.

But I’m going to take another route to arrive at the same conclusion (i.e., not to panic). And it shouldn’t be surprising at all that this conclusion involves real estate investment trusts (REITs).

The Great Growth Stock Collection (Part II)

The “3 Monthly Paying REITs for Mom” article centered around beating inflation with monthly paying REITs. Obviously. The extra number of payments, you see, allows you to reinvest your rewards for faster accumulation rates.

It might be little by little at first, but it adds up immensely in the long run.

Today though, I’m going to take a different tack by telling you a thing or two about growth REITs.

This February, I published “Top 10 Growth REITs for 2021,” touting how “Investors looking for the best total returns will look for REITs whose dividends are not just safe… they also have good long-term growth prospects.”

So an alternative name for this new piece could be “Top 10 Growth REITs for 2021 – 2.0.”

To define this category, I’ll briefly turn to my new book. Because The Intelligent REIT Investor Guide explains how:

“Some see the term “growth REIT” as an oxymoron, believing that REITs can’t grow per-share earnings at rapid rates by their very nature. This is an understandable perception since they can’t retain such large chunks of their earnings. Yet there are times when some REITs are classified that way regardless…

“Growth REITs are those that can increase their FFO (funds from operations) at rates much faster than historical norms of 4%-5% annually, perhaps even higher than 10%. This might be because a specific sector is enjoying a boom phase when rental rates and occupancies are rising rapidly. Or a specific business might be implementing a very aggressive acquisition or development program…”

Now, a REIT – like any other stock – can grow too quickly. So we want to make sure the ones we consider are doing so in a sustainable manner.

But again, that’s not as rare as you might think…

Data, Data, Data on Growth REITs

Sherlock Holmes once said, “Data, data, data. I cannot make bricks without clay.”

We’ve worked hard to build a data-backed platform that analyzes REITs based on quality and value. And one of the best ways to screen for quality is to examine forward-looking growth profiles using analyst estimates.

So we’ve filtered out some of the highest-growth REITs based on consensus estimates for 2021, 2022, and 2023. This is based on funds from operations, or FFO.

(Source: iREIT on Alpha)

Clearly, we can’t just go out and buy all 20 today when most are trading at premium valuation levels. That’s why we’ve also sorted them based on quality and value.

When we do, we get three REITs worthy of deploying capital today. As legendary investor Seth Klarman described:

“The best investments have a considerable margin of safety. This is Benjamin Graham’s concept of buying at a sufficient discount that even bad luck or the vicissitudes of the business cycle won’t derail an investment.

“As when you build a bridge that can hold 30-ton trucks but only drive 10-ton trucks across it, you would never want your investment fortunes to be dependent on everything going perfectly, every assumption proving accurate, every break going your way.”

(Source: iREIT on Alpha)

Wise words I’m more than willing to follow.

A Growth-REIT Diamond in the Rough

RPT Realty (RPT) is an open-air shopping center REIT that owns 50 such properties. And 68% of them have a grocery-anchored component.

Plus, since it’s 99% suburban-situated, it’s perfectly aligned to accelerate the COVID-19 trends we’re seeing now.

RPT also has a $2 billion market cap, a smaller size that allows it to better adapt to the rapidly evolving retail landscape. Then there are the two growth leverages that differentiate it further.

First, in December 2019, it formed a new joint venture with GIC Private Limited, Singapore’s sovereign wealth fund. It contributed five properties worth $244 million and received $118.3 million for its 48.5% stake in the deal.

This validated its business, provided growth capital, and further differentiated it.

Second, RPT, GIC Private Limited, Zimmer Partners and Monarch Alternative Capital LP formed a net-lease retail platform with equity commitments totaling $470 million. This will target $1.2-$1.3 billion in essential, resilient, high-credit real estate over the next three years subject to long-term contracts.

RPT seeded the partnership with 42 single-tenant existing or scheduled properties. The initial portfolio was valued at $147 million and accounted for about 6% of RPT’s Q4-20 annualized base rent.

These transactions enhance RPT’s FFO growth profile, fueling higher effective yields through arbitrage opportunities and earned management fees. So, as you can see below, RPT is forecasted to grow earnings by low double-digits over the next few years:

(FAST Graphs)

In valuation terms, RPT is trading at $12.39 per share with a 14.8x p/FFO versus a 17.5x industry average. And its dividend yield is 3.9% vs. 3.5% – yet its payout ratio is just 38% based on 2021 FFO.

We consider RPT an easy Buy, with a projected 15%-20% annual return target.

(FAST Graphs)

Hey, Diddle, Diddle, Where’s All That Growth Coming From?

The next pick on the list is Urstadt Biddle (UBA), another shopping-center REIT. And one that’s differentiated by its focus on high-barrier-to-entry demographics.

Its portfolio consists of 80 properties that total 5.2 million square feet of gross leasable area. The company has one of the strongest demographic profiles among public shopping-center REITs.

By that, I mean its properties are within three miles of residential areas with median household incomes that are 69% higher than the national average.

UBA also has a very defensive tenant base with about 84% of GLA anchored by:

Grocery stores.

Pharmacies.

Wholesale clubs.

In addition, some 76% is leased to internet-resistant tenants like Stop & Shop, CVS, ShopRite, BJ’s Wholesale, and Walgreens.

We also like UBA’s conservative risk-management profile. Its debt-to-total assets are 33%, and it has a fixed-charge coverage ratio of 2.9x.

The REIT has modest mortgage rollover risk, with no maturities in 2021 and 2023, and just $50.9 million in 2022.

Although UBA did cut its quarterly dividend last year, it’s now back to paying $0.23 per share. Like RPT, UBA also has a lower payout ratio of just 55%. And this provides plenty of cushion for future dividend growth.

As viewed below, analysts are forecasting it to grow by low double-digits in 2021 and 2022.

(Source: FAST Graphs)

Shares are trading at $18.96 and a p/FFO multiple of 14.7x. (That’s in line with RPT and lower than the sector average of 17.5x). Meanwhile, its dividend yield is 4.9%, with plenty of earnings capacity to boost its dividend from here.

We’re targeting UBA to return 25% over the next year, making this little gem with its $750 million market cap a Strong Buy.

(Source: FAST Graphs)

Postal Delivers Growth and Dividends

Our final pick is iREIT favorite Postal Realty (PSTL).

This specialty net-lease REIT went public in May 2019 with 270 postal properties amounting to 871,843 interior square feet. Since then, it’s acquired 614 additional properties for approximately $256 million.

Year to date, PSTL has closed on $68 million with an additional $7.6 million under agreements. This puts it on track to exceed its $100 million target.

In fact, it’s looking at above-average growth and multiple expansion in general.

PSTL’s portfolio remains 100% occupied, with a weighted average rental rate of $8.75 per square feet, up from $8.62 in Q1. The company has an executed letter of intent in place to renew essentially all its remaining Q2-21 expirations.

This compromises 55 leases, 118,000 square feet, and $1.3 million in annualized rent versus today’s $1.1 million. As such, it’s looking at an average 2%-3% annual net operating income (NOI) increase on those leases.

Plus, PSTL boasts $4.9 million of cash with $42.5 million drawn under its new $150 million line of credit. Net debt-to-adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) was 4.8x in Q2, up from 4.2x in Q1. And, to help fund acquisitions, it issued:

• Around 320,000 shares for $6 million under an at-the-market equity program.
• 482,000 of operating partnership units for $9 million.

The REIT recently increased its quarterly dividend for the eighth consecutive quarter by 1.1% to $0.2225. This equates to an annual 4.6% yield.

As seen below, analysts are modeling growth of around 15% per year in 2021 and 2022:

(Source: FAST Graphs)

PSTL trades at $19.42 with a 20.9x p/FFO multiple. Its dividend yield is 4.6%, and its payout ratio is a comfortable 84% based on adjusted FFO (AFFO). As seen below, iREIT maintains a Buy with a targeted annual return of 15%-20%.

(Source: FAST Graphs)

In Conclusion…

In The Intelligent REIT Investor Guide, I explain that:

“One of the attractive attributes of a REIT, compared with other higher-yielding investments like bonds and preferred stocks, is their significant long-term capital appreciation potential and increasing dividends…

“If a REIT is viewed as having virtually no capacity to grow its FFO, AFFO, or dividend, its shares would be bought only for yield.”

In addition:

“Investors looking for the best total returns, combining dividend yield with capital appreciation, will look for REITs whose dividends are not just safe but also have good long-term growth prospects.”

That sounds good to me on paper or off. Just as long as we’re emphasizing the fundamentals, we’re more than happy to own so-called growth REITs.

In fact, many outstanding REITs will, over many years, be able to report FFO growth of 5%-10% per year. Maybe even higher.

Happy REIT Investing!