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Retirement is meant to suggest a joyful time to enjoy the "golden years" in life, the fear of losing money is oftentimes the culprit that detracts from a quality lifestyle. For most investors, retirement satisfaction is 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 to sleep well at night. In fact, I created a SWAN (sleep well at night) portfolio specifically to assist dividend 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 (and pre-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 have designed a core dividend growth portfolio called the Durable Income Portfolio. Included in this basket are 39 REITs, many of which are rated SWAN--that means they offer a high degree of dividend predictability.
Included in the portfolio are four of my favorite picks, and all of these REITs can now be purchased at a discount, or recognizable margin of safety. They include
Omega Healthcare Investors (OHI), Tanger Factory Outlets (SKT), LTC Properties (LTC) and Realty Income (O). Here’s a recap of my BUY recommendations:
Omega Healthcare Investors is the largest healthcare REIT that invests almost exclusively in skilled nursing properties. As of Q2-17 Omega owned 992 operating facilities in 42 states and the United Kingdom, operated by 77 third=party operators. Omega has over $8.9 billion of gross assets and revenue is broken down as follows: Medicaid (51%), Medicare (37.3%), and Private Pay (11.7%). The company receives fixed rent payments from tenants, with annual escalators, and operators receive revenues through reimbursement.
In the second quarter Omega delivered a solid quarter, despite persistent headwinds related to tightening operator profit margins. Omega has been focusing on repositioning a number of assets, and pruning exposure to weaker tenants. Omega has more than $1 billion to liquidity (cash and revolver) to fund new investments and in the latest quarter the company generated $.87 per share of Funds from Operations (or FFO). The dividend is well covered ($.64 per share) and Omega has increased the dividend 21 consecutive quarters in a row.
Omega has modest growth forecasted for 2018; however, the high-dividend yield of 8.1% and continued growth make this healthcare REIT an attractive investor for the retiree or pre-retiree. The shares are now valued at 9.3x P/FFO and I consider Omega a solid sleep well at night REIT. Recommendation: BUY
Tanger Factory Outlets is considered a mall REIT, although the company has no department stores in the portfolio. The Greensboro-based REIT owns a portfolio of 44 outlet centers in the U.S. (22 states) and Canada. The company commenced operations over 34 years ago, when the outlet industry was virtually unknown.
Uncommon to malls that are costly to build (~$100 million) and with higher operating costs, Tanger set out to create a differentiated retail model that could provide both scale and low-price brand recognition aimed to meet the demands of the bargain-hunting consumer. Tanger is the only “pure play” outlet center REIT, as noted above, there are no department stores in the portfolio.
What makes Tanger the perfect retirement REIT is that the company has exceptional fundamentals, including a “fortress” balance sheet (rated BBB+ by S&P), limited secured debt (just 9%), and an attractive payout ratio (mid 50% range). Tanger’s discipline has led to an extraordinary record of dividend growth – the company has increased its annual dividend for 23 years in a row (since the IPO in 1993).
Tanger is also cheap, shares are now trading at 11.9x P/FFO and the current dividend yield is 5.4%. Given the sentiment in retail today (fear of e-commerce), Mall REITs have been beaten down and Tanger represents one of the best value picks today – a quintessential “bargain” in the outlet sector. Recommendation. STRONG BUY
LTC Properties is a healthcare REIT that has been around over 25 years. The company invests primarily in senior housing and long-term healthcare property types, including skilled nursing (57.6%), assisted living (47%), independent living properties, and combinations thereof. LTC owns 201 properties, 3 development properties, and 4 land parcels in 29 states.
The vast majority of LTC’s properties (94%) are considered 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. Also, all leases are triple net, this means that there is absolutely no operator risk.
LTC has a strong balance sheet with well-laddered debt maturities and less than 8% secured debt. At the end of the second quarter, LTC’s credit metrics compared favorably to the healthcare REIT industry – debt to annualized normalized EBITDA of 4.2x and debt to enterprise value of 24%.
LTC pays monthly dividends and the company has increased its annual dividend by an average of 5%. Shares are now trading at 15.5x P/FFO with an attractive dividend yield of 4.8%. Given the smaller-cap composition of the portfolio, I find this gem to be attractive based on the steady and predictable growth that produces favorable returns over time. Recommendation: BUY
Realty Income is a perfect dividend-paying stock for retirees and there is a very good reason that the company brands itself as “the monthly dividend company”. Since going public in 1994, the company has paid and increased dividends every single year. This is no easy feat, and the simple secret behind the success is risk management.
As of the second quarter, Realty Income owned just under 5,000 properties in 49 states and Puerto Rico. No tenants represent more than 6.7% of revenue and 45% of the tenant base is considered investment grade. Also, no industry represents more than 11% of rent and the company has considerable exposure to defensive industries – the top 10 industries represent significant exposure to non-discretionary, low price point, service-oriented industries.
Realty Income has a “fortress” balance sheet (rated BBB+ by S&P) with the lowest cost of capital in the Net Lease REIT sector. As of the second quarter, occupancy was 96.5%, the highest achieved in 10 years, and the company continues to expect occupancy to grow closer to 98% in 2017/
Realty Income is one of the most diversified REITs in the world, and when combining the predictability of future cash flows along with low cost of capital, you can see why this highly defensive dividend grower has all of the ingredients to “sleep well at night”. Shares are trading at 19.2x P/AFFO with a dividend yield of 4.5%. Recommendation: BUY
I own shares in SKT, LTC, O, and OHI.
