Many of you know I'm the parent of five children, one of whom now has a child of her own.
As such, I've changed a lot of dirty diapers.
Read a lot of bedtime stories.
Made a lot of doctors' appointments.
Praised a lot of victories.
And corrected a lot of behaviors.
Sometimes, those parental activities required the same sets of knowledge with the same results across kiddos. Not to be graphic, but most dirty diapers are pretty standard. You take off the old one, put on the new one, and kiss the baby nose.
Though there are the individual stories from the individual kids that do stand out.
(Don't worry. I won't share details - both for your sake and to keep my children from killing me if they ever read this article.)
Likewise, you usually have to tell your offspring to not lie at some point. But some take to that teaching more quickly, just like some are more prone to colds. Or better at basketball. Or good at taking tests. Or more successful at making you crack up laughing when you're trying to be stern.
Combine those characteristics (and so many more), and you've got one very unique individual.
Sometimes, I'll admit, I've wondered why one kid couldn't be more like another. For their sake or for mine.
But today, I want to celebrate what makes them distinctive by selecting one real estate investment trust ('REIT') that best suits who they are.
A Moment of Relevant REIT Self-Referral First Though…
In my new book REITs for Dummies, I devote an entire chapter to the topic of "Building a Smart REIT Portfolio From the Ground Up."
After all, it's great to know how REITs came to be, what rules govern them, and how diverse they are. But if you don't know how to apply that knowledge to your personal situation, it's all for nothing.
In which case, individuality needs to be addressed on multiple levels. So that's what I did right after the introductory remarks to Chapter 10:
"The first thing you need to do when thinking about adding REITs to your investment portfolio is ask yourself two questions:
- How should REITs be weighted relative to other investments?
- How should they be weighted relative to each other?
"How you answer the first question very much depends on two things, with one of them being your individual risk tolerance - how much uncertainty you can handle calmly and rationally."
Because, like children, REITs vary.
"… remember that REITs offer fixed-income characteristics that stem from their sometimes very different lease contracts. So once again, the answer depends on what type of investor you are."
That's why you want to know your property sectors.
"For instance, sectors with short-term leases such as self-storage facilities and hotels exhibit much greater inflation sensitivity. Other sectors explicitly allow landlords to pass higher costs on to their tenants. And in the case of retail properties like shopping centers, landlords can even receive a percentage of sales, as discussed in Chapter 6. That helps their value increase, not decline, with inflation.
"This kind of information can help you better determine what to put into your portfolio and what to leave out."
All based on what you can handle and what you can't.
Know Thyself, Investor!
At the risk of giving away too much of the (excellently understandable) book, here's some more of Chapter 10:
"Psychology plays an enormous part in what and when you buy, what and when you sell, and therefore what kind of profit or loss you end up taking and when.
"Unless you're willing to honestly acknowledge this reality and force some logic into your biases, failure awaits. It's critical that you spend time thinking about your goals and objectives instead of just acting on them. Don't just ask what you want. Ask why you want it. And if the answer isn't a good one, perhaps reconsider your original desire. Successful investing doesn't happen by fulfilling your every whim."
It happens when you analyze:
- How old you are - what risks can you recover from if they go wrong?
- How panicky you are - are you the type to jump ship at the first sign of trouble?
- How much money you have - what kind of funds do you have to spend on REITs to begin with?
- How diversified you are or aren't - where is your portfolio lacking when it comes to covering all the important areas of investment?
- How many children you have, if any - what are your financial priorities and responsibilities?
I can't answer all those questions for you. You're not my children, after all.
Admittedly, my children might argue that I can't answer all those questions for them either. I did try to help my son put together a portfolio, you might remember, and we ran into disagreement after disagreement after disagreement.
But…
I think I'm entitled to try considering all those dirty diapers I changed.
As for you, maybe you'll find some portfolio potential in the process!
Simon Property Group (SPG)
My youngest daughter is an 11th grader who loves to shop.
She recently bought a used Jeep (with dad's help of course) and she uses the car daily to drive to work (she works for a local retailer).
Given the fact that she loves to "shop till she drops" I decided to buy shares for her in Simon Property Group.
SPG owns 231 properties comprising 185 million square feet in North America, Asia, and Europe. In addition, the company owns an 80% interest in The Taubman Realty Group which owns 24 properties and a 22.4% ownership interest in Klepierre that includes shopping centers in 14 European countries.
I'm certain my daughter has been to some of these stores located within our area SPG mall, Haywood Mall, in Greenville, S.C.
- The Gap
- Victoria's Secret
- American Eagle
- LVMH Fashion Group
- Macy's
- Dillard's
- Cheesecake Factory
- Apple
My daughter isn't the only patron visiting SPG malls as evidenced by the $2.1 billion of cash flow the SPG portfolio has generated year-to-date ($1.2 billion in Q1-23).
Domestic property NOI increased 3.3% quarter-over-quarter and 3.6% for the first half of the year. Mall and outlet occupancy at Q2-23 was 94.7%, an increase of 80 basis points compared to the prior year.
Another good sign: Average base minimum rent for malls and outlets was $56.27 per foot in Q2, an increase of 3.1%. SPG signed more than 1,300 leases in Q2 for more than 5 million square feet of space. In addition, SPG has 1,100 deals in the pipeline.
How safe is Simon?
$8.8 billion of liquidity with A-rated balance sheet with a recent dividend increase of 8.6%. SPG has paid over $40 billion in dividends since going public.
How cheap is Simon?
SPG shares are now trading at $105.44 with a P/AFFO multiple of 9.7x (normal is 16.0x) and safe dividend yield of 7.2%. Analysts forecast SPG to grow by 4% in 2024 which translates into a total return estimate of 20% annually.
I think my youngest daughter will be happy with this pick!
Prologis Inc. (PLD)
My next youngest daughter is a freshman in college.
She and her boyfriend have started a business selling used shoes on the Internet. I'm not exactly sure how she makes money, but she seems to be succeeding.
Most every day there's an Amazon (AMZN) box at the front door which is usually shoes that she purchased in order to sell them again.
So given her interest in logistics I decided to buy her shares in Prologis, a leading warehouse REIT with over $209 billion of assets under management (1.2 billion square feet in four continents). The highly diversified REIT gas over 6,700 customers with $2.7 trillion of goods flowing through their distribution centers each year. I'm certain that my daughter recognizes the strength of the customer list (top tenants):
- Amazon: 7.0% of revenue
- Home Depot: 2.6% of revenue
- FedEx: 1.9% of revenue
- UPS: 1.0% of revenue
- Geodis: .90% of revenue
PLD has a proven development record (20-plus years) with a land bank that supports $38 billion of investment. In Q2 the company started 12 new projects and maintained $2.5 billion to $3 billion.
How safe is Prologis?
PLD has plenty of capacity to support the growth based on the A-rating (A3/A) and liquidity of over $6.4 billion and debt-to-EBITDA of 4.2x. In the latest quarter the company raised more than $7 billion in debt financing across four currencies at an interest rate of 4.9% and average term of eight years.
PLD has a solid dividend growth record with a payout ratio of 74% based on AFFO per share.
How cheap is Prologis?
Shares now trade at $109.46 with a P/AFFO of 23.5x (normal is 25.4x) and the dividend yield is 3.2%. PLD is not expected to grow much this year (+1% based on analyst estimates) but the long-term growth looks promising and according to BofA is "poised to bounce up next year as the sector normalizes."
I think my daughter will be happy with this pick!
Digital Realty (DLR)
My son is into crypto and market timing. Like me, he spends countless hours on the computer and appears to be most interested in things like AI and the hottest growth stocks. I tried to warn him about NFTs but he learned his lesson the hard way.
I keep reminding him that the way to become a "virtual landlord" is not by investing in NFTs, but by owning shares in real estate investment trusts. Given his penchant for AI, I decided to buy shares for him in Digital Realty.
As I told my son, DLR's data centers are used by more than 5,000 customers that includes more than 300 properties in over 50 metros located in 27 countries and on six continents. DLR's largest customer accounts for 10.2% of revenue, yet no other customer accounts for more than 3.6% of revenue. Here are a few customers:
- IBM
- Oracle
- JPMorgan
- Meta
- AT&T
- Comcast
- Verizon
In Q2 DLR generated FFO of $1.68 (+2%) and revenue grew by 20% (year-over-year). The company signed total bookings of $114 million and renewed around $211 million in leases.
How Safe is Digital Realty?
The data center REIT is investment grade with a BBB rating from S&P. The company has moderate leverage with a net debt to pro forma adjusted EBITDA of 6.3x with over $4 billion of liquidity. The dividend is well covered based upon a payout ratio of 79%.
How cheap is Digital Realty?
I'm glad I scooped up shares in April 2023 (under $90/sh) although I consider today's price of $119.05 reasonable. The P/AFFO is 19.5x, a tad below the normal range of 10.6x. The dividend yield is 4.1% and analysts forecast growth of 6% in 2024 and 10% in 2025.
Not a steal but worthy of a nibble right now.
Realty Income (O)
Moving onto my second oldest who also is a new mother - which makes me a grandfather. This means that when I buy a stock for her, I'm also investing in the next generation.
Realty Income is an easy pick.
I have already covered this company extensively here and the shares remain quote attractive based upon the current price of $50.55 and P/AFFO of 12.7x (normal is 19.3x). The dividend yield is 6.1% and analyst forecast growth of 4% in 2024 and 2025.
Highwoods Properties (HIW)
My oldest daughter went to the University of North Carolina, and now that she's living in New York City, I miss the basketball games and times spent on Franklin Street. As a (South) Carolina native, there's something special about owning real estate in the Carolinas.
This makes Highwood Properties another easy pick!
Highwoods is an office REIT based in Raleigh, N.C., that owns properties primarily located in the Sunbelt region, in markets such as Raleigh, Charlotte, Atlanta, Dallas, Nashville, Richmond, and Tampa. HIW's three largest industries are Finance/Banking, Legal/Accounting, and Insurance. The three largest tenants include:
- Bank of America: 3.8%
- Asurion: 3.5%
- Federal Government: 11.6%
As of the end of the second quarter, HIW's portfolio consisted of 28.5 million rentable SF of in-service properties, 1.6 million SF of properties under development, and development land that has the potential to add approximately 5.2 million SF of office build out.
As HIW's CEO, Ted Klinck, pointed out on the latest earnings call,
"We've long highlighted the benefits of the Southeastern U.S. with its strong demographic trends, business-friendly environments, low cost of living and high quality of life. In fact, according to Bloomberg, the Southeast has accounted for two thirds of all job growth across the country since early 2020, almost double its pre-pandemic share."
In Q2 HIW signed 918,000 square feet, 20% above the five-quarter average. This includes 222,000 square feet of new leasing over 39 deals, which is in line with the average quarterly new deal count for years 2018 and 2019.
Also, in Q2 HIW delivered net income of $42.3 million, or $.40 per share and FFO per share of $.94.
How safe is Highwoods?
The company ended Q2 with net debt-to-EBITDAre of 6x and improved liquidity by selling $51 million of non-core properties and received a $40 million from the repayment of our preferred equity investment in the McKinney & Olive JV.
HIW had nearly $750 million of total existing liquidity, more than enough to fund all of its current capital commitments, including development spending and debt maturities (totaled roughly $500 million through the expiration of the revolving credit facility in March 2026). HIW has a 83% payout ratio based on AFFO per share.
How cheap is HIW?
HIW is trading at $19.43 per share with a P/AFFO multiple of 7.9x (normal is 21.6x) with a dividend yield of 10.3%. Keep in mind that HIW was the ONLY office REIT that did not cut the dividend during the Great Recession.
Nothing could be finer than a REIT in Carolina!
In Conclusion
I hope you enjoyed my article today in which I highlighted the REITs that I plan to buy for my five kids. This is a photo of my kids around 15 years ago (when I was a real estate developer):
One day, hopefully my kids can appreciate the investments that I'm making for them and most importantly the dividends that will help them sleep well at night.
Happy SWAN investing!
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.
Sign Up For A FREE 2-Week Trial
Join iREIT on Alpha today to get the most in-depth research that includes REITs, mREIT, Preferreds, BDCs, MLPs, ETFs, Builders, Asset Managers, and we added Prop Tech SPACs to the lineup.
We recently added an all-new Ratings Tracker called iREIT Buy Zone to help members screen for value. Nothing to lose with our FREE 2-week trial.
And this offer includes a 2-Week FREE TRIAL plus my FREE book.
