I’m frequently approached with the question, “Nick, what’s your favorite REIT?” Real estate investment trusts (REITs) have captivated the interest of investors seeking exposure to real estate without the complications of property management.
Over the years, I’ve steered clear of investment properties due to the sheer hassle of management and maintenance. My aversion to plungers and paint cans, coupled with the horror stories of unruly tenants, led me to the more accessible world of REITs. These investments not only offer liquidity but also better diversification, handled by seasoned real estate professionals.
Choosing the finest REIT is no cakewalk, with only a handful standing out. Among these contenders, Realty Income (NYSE:O) and Rexford Industrial Realty (REXR) shine impressively, albeit in different lights.
Pondering the pivotal question — do I desire yield or growth? — leads to a tug-of-war between Realty Income’s 5.17% yield and Rexford’s 2.69% yield. While Rexford entices growth seekers, Realty Income lures those seeking substantial income streams. Gratefully, I indulge in both, envisioning a lasting commitment to these companies.
Presently, I delve into the star of the show: Realty Income – my preeminent REIT holding.
Let me elucidate why this standout company is my preferred high-yield REIT.
Unwavering Success: The K.I.S.S. Approach to REITs
Unlike my other market investments, the real estate investment model is resistant to disruption. While technology like iBuying simplifies transactions, the fundamental framework of generating cash flow from rented properties remains unaltered.
Why, you ask? Because real estate profits boil down to a straightforward process: secure desirable properties, avoid overpayment, secure reliable tenants, and reap the rewards. This time-tested system relies on access to affordable capital and prudent capital deployment.
It is implausible that an innovation will upset the capitalization rate equation. While the allure of specific locations may evolve, land scarcity remains constant, and natural habitat shifts occur gradually over time, well within my investment horizon.
The present risks, such as rising sea levels, are foreseeable and hence, manageable. With this in mind, a ‘Keep it simple, Stupid’ (K.I.S.S.) approach resonates with my REIT investments. In real estate, size, scale, and strategy take precedence, obviating any need for fancy maneuvers. Rather, I bank on proven winners and astute management, backed by robust portfolios, cash flows, and access to low-cost capital.
Furthermore, industry consolidation remains an enduring trend, with M&A presenting the clearest path to acquiring sizable property portfolios. Given the sector’s fragmented nature, antitrust concerns are minimal. Globally, REITs own approximately $4.5 trillion of real estate, a mere fraction of the $400 trillion global real estate market, hinting at abundant growth prospects.
All things considered, my optimism for Realty Income stems from the industry’s foreseeable trend of the affluent getting wealthier.
The Cream of the Crop
Net Lease REITs: A Stable Haven in Turbulent Markets
The Appeal of Triple Net Lease Agreements
Your average investor might find triple net lease agreements to be as thrilling as watching paint dry. These agreements, however, represent the bedrock of stability for real estate investment trusts (REITs) such as Realty Income. Under the terms of a triple net lease (NNN), tenants shoulder the burden of taxes, insurance, and upkeep, in addition to rent and utilities. The benefit to landlords is crystal clear: fat margins, to the tune of over 95% for Realty Income. It’s stability, not excitement, that draws investors to NNN REITs. In a market where uncertainty prowls, these unexciting cash cows offer a welcome respite and consistent high yields.
A Long Journey with NNN REITs
For many investors, the allure of NNN REITs is not merely theoretical—it’s grounded in personal experience. Realty Income is the crown jewel in a well-curated collection of these REITs. The quest for simplicity and quality has led to pruning lesser holdings and focusing on the gem of NNN—Realty Income. Even a seasoned investor like yours truly, with a history stretching back to VEREIT, has been lured by the appeal of these dependable assets. Further consolidation in the sector is expected to favor the already prosperous, paving the way for even greater rewards.
Navigating the Market Winds
W. P. Carey, while once a stalwart in the SWAN (sleep well at night) category, ultimately succumbed to market realities. As the pandemic loomed and the era of uncertainty dawned, WPC’s near-perfect rent collection was a source of solace. Its promise of solid diversification proved tantalizing. However, the siren call of higher-quality investments proved too strong to resist. Despite being a tough decision, selling WPC was more than just a mere cutting of losses; it was an intentional pivot toward quality and resilience. The harsh storms of dividend cuts and market volatility can never deter a seasoned investor—instead, they present opportunities to chart a new, more robust course.
Evolution and Adaptation
The winds of change are blowing, not just for individual REITs, but for the sector as a whole. Realty Income’s foray into diverse industries and global markets signifies a strategic shift toward resilient and promising ventures. As the tides of market dynamics ebb and flow, NNN REITs like Realty Income continue to evolve and expand, embracing opportunities to fortify their positions in the market.
The Landscape of Realty Income’s Diversification Strategy and REIT Comparison
Realty Income Corporation, known for its retail-centric portfolio, is swiftly broadening its horizons, eyeing a $12 trillion global market in the NNN (net-leases, net-leases, net-leases) space. This expansion comes alongside a significant alliance, as the juggernaut aligns with Digital Realty and strikes a strategic deal with Plenty Unlimited in the burgeoning industrial real estate vertical farming sector, valued at over $1 billion.
Aggressive Acquisition Pursuits and Diversification
Realty Income has been on an acquisition spree in recent years, consistently upping its acquisition guidance as it aggressively bolsters its portfolio. In its latest move, the company raised its acquisition forecast to a whopping $9 billion for the full year, signifying an ambitious push into new market territories. This insatiable appetite for expansion contrasts sharply with the approach of its peers, such as WPC, which anticipates a lukewarm ~$2 billion liquidity influx in 2024 for potential acquisitions.
Despite WPC’s attempts to make waves with its office spin-off, the subsequent dividend cut accompanying the move has sparked discord among investors and analysts. In stark contrast, Realty Income’s divestiture of office properties under Orion Office REIT did not lead to a dividend reduction, a testament to its unwavering commitment to shareholder value.
The Dividend Dilemma: A Tale of Two REITs
Boasting an impressive 642 consecutive months of dividend disbursements and a remarkable 105 consecutive quarters of dividend raises, Realty Income has cemented its status as a stalwart in the REIT domain. Dubbing its dividend as “sacrosanct,” the company has displayed an unwavering dedication to rewarding its investors, a stark contrast to WPC’s divisive decision to slash its dividend, eliciting discontent among shareholders.
The showdown between Agree Realty (ADC) and Realty Income culminated in the former relinquishing its position, much to the chagrin of steadfast supporters. The rationale behind this move stemmed from the need to augment liquidity following a significant real estate investment, as well as to offset tax losses incurred by ADC’s recent downtrend. Despite its commendable growth prospects, Agree Realty failed to measure up to the steadfast performance and reliability of its larger counterpart, Realty Income.
Affable Attempt at Emulating Excellence
While Agree Realty endeavored to mirror Realty Income’s illustrious trajectory with a dedicated monthly dividend payout and regular dividend increments, it paled in comparison to the robustness of its veteran peer. Realty Income’s unparalleled 30-year dividend escalation, coupled with a superior current yield and a more robust A- balance sheet rating, underscored its resilience in the face of market turbulence, outshining Agree Realty’s commendable yet pale imitation.
The Quality Quandary: Strategy versus Safety
Despite Agree Realty’s emphasis on securing investment-grade tenants and its noteworthy ground lease portfolio, comprising 12% of its rental income, the company couldn’t overcome the formidable stature of Realty Income. Likewise, the absence of industry diversification and capital strength to swiftly embark on a broadening journey stifled Agree Realty’s ability to rival the expansive capabilities of Realty Income.
In contrast, Realty Income not only boasts an unparalleled portfolio diversification strategy but also wields the financial clout to swiftly expand its territory, gravitating towards a position of unrivaled market dominance.
Perspective on Real Estate Investment Trusts: A Financial Tale of Two Companies
Real estate investment trusts, or REITs, have their ebbs and flows. While the market has been buzzing with excitement around one of the big guns, National Retail Properties (NNN), some are taking a more cautious stance due to its relatively slower growth. Nonetheless, for many investors, NNN has proven to be a stalwart choice, with one investor reportedly reaping a 14% return on their position. This investor, with most of their shares held in a taxable account, opted to sell another REIT, ADC, rather than NNN, citing reasons related to capital gains and a strategic portfolio maneuver. Furthermore, there is a rising sentiment that NNN is undervalued, with its shares currently trading at a significant discount compared to historical multiples.
The narrative shifts when we turn our gaze to another heavyweight in the REIT universe, Realty Income. Known as a blue-chip stock with a devoted following, Realty Income has garnered a cult-like status, especially among income-minded investors. However, despite the fervor, some skeptics dismiss the hype around the stock as irrational exuberance. It is not uncommon in the world of stocks for unfounded enthusiasm to lead to disappointing losses. However, in the case of Realty Income, the adulation is firmly rooted in the company’s robust fundamentals and an unassailable track record of sustainable dividends.
National Retail Properties: Seeking a Silver Lining
As the tides of the REIT market ebb and flow, National Retail Properties (NNN) has been a beacon for investors in search of solid returns. Despite concerns about its relatively slower growth, NNN has not failed to deliver for many investors. One stakes his claim on a remarkable 14% return on his NNN position, firmly rooted in a strategic decision-making process, including considerations of capital gains and overall portfolio management. Moreover, there is a growing chorus of voices touting NNN’s current undervaluation, with shares trading at an attractive discount compared to historical multiples.
The investor’s decision to hold onto NNN, while divesting another REIT, speaks volumes about his confidence in the company’s future prospects. The sentiment surrounding the REIT space is expected to undergo a metamorphosis, potentially leading to multiple expansions in the coming quarters. This would provide the ideal opportunity for the investor to exit his position in NNN, attaining a more favorable valuation in a new tax year.
Realty Income: Unraveling the Tapestry of Resilience
In the ever-boisterous world of REITs, Realty Income stands as a titan, enjoying a devout following particularly among income-oriented investors. While some naysayers question the unbridled enthusiasm surrounding its stock, it is essential to recognize that Realty Income’s allure is firmly entrenched in its unassailable fundamentals and a long-standing track record of sustained dividends. A deep dive into its occupancy record reveals a consistent outperformance spanning decades, a testament to the management team’s acumen in selecting prime properties in high-demand locations and effectively marketing them to potential tenants.
The company’s disciplined approach extends to its acquisition strategy, consistently securing buildings at attractive prices and maintaining a track record of robust rent recapture rates. This blend of quality and value is a testament to the expertise of the property management team. Anticipated growth rates for Realty Income in 2024 have slightly waned in the wake of a higher interest rate environment, leading to a temporarily elevated dividend yield. However, this apparent weakness has in turn contributed to an enticing valuation proposition for prospective investors.
Looking ahead, there lingers an anticipation of potential multiple expansions, driven by an expected shift in the interest rate environment. This, coupled with the historical trajectory of the company’s P/AFFO multiple, presents an intriguing upside for astute investors who believe in the company’s long-term resilience. If history is any guide, Realty Income’s shares may currently offer a significant margin of safety, making them an attractive proposition for those who espouse a value-based investment philosophy.
The Monthly Dividend Company: Realty Income
A substantial return CAGR of nearly 20% over the next 2 years is no small feat. This proposition is like finding a diamond in the rough, a rare gem with the potential for exponential growth.
Realty Income, true to its name, is an income play. It’s not the flashy, high-risk stock that promises sky-high returns but often disappoints. Instead, it’s a steady, reliable player in the market, much like a veteran quarterback who may not make the most headlines but consistently delivers results.
When purchasing shares at a discount to their fair value, the potential for double-digit total returns becomes a tantalizing possibility. It’s akin to snagging a sale on a high-end product that you know is worth every penny at its original price.
The current scenario with Realty Income trading at a discount to its fair value estimate is a promising one indeed. It’s like coming across a coveted item with a discounted price tag, an opportunity that savvy investors are poised to capitalize on.
With an estimated worth of approximately $71 per share, Realty Income presents an investment opportunity with a potential total return of around 26% over the next 12 months. That’s like purchasing a stock that’s primed to appreciate in value on a fast track.
A Shift in Sentiment
Of course, for this price appreciation to materialize, a significant shift in the sentiment surrounding the REIT sector is essential. It’s akin to waiting for the winds to change direction before setting sail on a new voyage.
Realty Income, being sensitive to interest rates, requires a change in the market’s mindset for its full potential to be recognized. It’s like waiting for the audience to appreciate the brilliance of a performance that has gone unnoticed for far too long.
Ultimately, the prospects for Realty Income to experience an expansion in multiples are high. Its dividend outshines bond yields, making it an enticing option for investors. It’s like holding a ticket to an exclusive show, where the value only appreciates with time.
The unpredictability of when this shift will occur is, undoubtedly, the most frustrating aspect of relying on mean reversion. However, in the interim, there’s comfort in collecting Realty Income’s monthly dividend payments. It’s like finding solace in a comforting ritual, a reliable source of stability amidst the unpredictable market.
When it comes to dependable REITs that allow investors to rest easy, Realty Income stands out. It’s like having a loyal companion that has weathered every storm, providing steadfast support in times of uncertainty.
For decades, Realty Income’s dividend has set it apart from its peers, and it continues to do so today. The enduring strength and reliability of the company’s dividend are like a timeless piece of art, valued and cherished through generations.
When dealing with blue-chip investments, there’s no need to complicate matters. It’s about sticking with top-notch companies, entrusting them to work their magic. It’s like having a master craftsman create a masterpiece, simply by letting them do what they do best.
Stay tuned for my breakdown of Rexford showing why that’s my favorite high-growth REIT.
