Thank you, Janet Yellen, for postponing the inevitable. The Fed’s minutes from its July meeting, which were released this week, noting that “Most [Fed officials] judged that the conditions for policy firming had not yet been achieved” due in part to a lack of confidence that inflation will come close to the Fed’s 2% target.
The market took this as a sign that a September rate hike is now less likely … and so we get to do this little song and dance again leading up to the December meeting.
Sigh…. Bond prices, and by proxy the prices of REITs and other high-yield stocks, have been in a state of suspended animation, waiting for “liftoff” from 0% interest rates.
While I expect high-yield REITs to do well in the next tightening cycle (see “Will the Fed Kill REITs”), I don’t expect prices to do much while the Fed’s policy is in limbo. So, the sooner the Fed starts its tightening cycle — which I expect to amount to all of 0.50% in total, making it the shortest tightening cycle in history — the sooner we can all move on.
Alas, we might have to wait another few months. But in the meantime, I consider this a good opportunity to load up on high-quality REITs. REIT prices have spent most of 2015 in free fall, but if you’re looking for a nice combination of dividend yield and growth, it’s hard to beat REITs at today’s prices.
So with no further ado, let’s jump into five bargain REITs to snap up on any additional dips.
Bargain REITs: Ventas, Inc (VTR)
Dividend Yield: 5.2%
I’ll start with one of the bluest of blue-chip REITs, diversified health giant Ventas, Inc. (VTR).
With a market cap of $20 billion, Ventas is one of the largest REITs currently on the market. It’s also one of the biggest constituents in most real estate mutual funds. With Ventas’ size comes stability and financial strength, but Ventas is far from being a stodgy, old bond proxy. The stock has generated total returns of about 26% per year over the past 15 years, making it a growth dynamo.
As a diversified health REIT, Ventas is a nice play on the aging of the Baby Boomers. About half of Ventas’ portfolio is invested in senior housing. Another 18% and 17%, respectively, is invested in medical office buildings and skilled nursing facilities with the rest invested in hospitals and assorted loans and other properties.
Ventas is not the highest-yielding REIT, but its dividend yield is formidable nonetheless at 5.2%. And importantly, Ventas is a major dividend raiser. Ventas has grown its dividend at a 9.0% clip over the past 10 years.
A demographically-favored portfolio with a high dividend yield and a long history of raising dividends? That’s about as close to a perfect stock as I’ve ever seen.
Ventas recently divested most of its skilled nursing facilities via a spinoff of Care Capital Properties (CCP). If you already own Ventas and received the Care Capital shares, I would recommend you sell them … and use the proceeds to buy more shares of Ventas.
Bargain REITs: Realty Income (O)
Dividend Yield: 4.7%
Of course, no list would be complete without “the monthly dividend company” itself, blue-chip retail REIT Realty Income (O).
I said years ago that I would never sell my shares of Realty Income. I would literally hold them until my death, and if I raise my kids right, they will do the same with their inherited shares. How can I be so confident about a stock’s future prospects in an age when a single smartphone app can turn entire industries upside down?
Well, to start, Realty Income isn’t really a “company.” It’s a property owner that really doesn’t do a whole lot except cash rent checks. Realty Income owns a portfolio of more than 4,300 properties. As a triple-net REIT, the tenants are responsible for all maintenance, taxes and insurance, and Realty Income has a long history of leasing to stable tenants in stable industries.
Realty Income has paid 541 consecutive monthly dividends, and has raised its dividend for 71 consecutive quarters. It has produced 5% compound annual dividend growth for 20 years and counting. And nothing the Fed does has a realistic chance of stopping that impressive streak.
Bargain REITs: Vereit (VER)
Dividend Yield: 6.4%
Next up is the recently rebranded Vereit (VER), formerly American Realty Capital Properties.
I have to admit, I’m not crazy about the name “Vereit.” But I certainly understand the thinking that went into it. Coming out of the American Realty Capital accounting scandal last year, new CEO Glenn Rufrano had a reputation to repair, and what better way to improve a soiled image than to include the Latin word for truth, veritas, in your company name?
But I digress. In Vereit, we good a solid portfolio of triple-net-leased properties trading at a pretty substantial discount. Vereit trades for just 0.87 times book value. And as property prices have risen in recent years, I believe that that book value is actually understated by a pretty wide margin.
Most REITs trade at a significant premium to their book value because, in addition to paying for the properties you, also pay up for professional management and a lower cost of capital. Today, the market is effectively pricing in that Vereit’s new management team will destroy value. That seems ridiculously harsh.
Vereit currently sports a respectable dividend yield of 6.4%, and I expect its payout to grow pretty aggressively in the years ahead.
Management can do all the talking it wants, but I like to see them back it up with cold, hard cash. And we’re starting to see that. Julie Richardson, a director of the company, recently made a large purchase, buying 17,400 shares worth about $150,000.
Today, Vereit is a screaming value in an otherwise overpriced market. I believe this is a stock that could deliver total returns of 50% over the next year and a half and still be modestly cheap.
Bargain REITs: Digital Realty (DLR)
Dividend Yield: 5.1%
Moving a different direction, we get to Digital Realty (DLR), the world’s largest datacenter REIT. Most REITs own real estate for people, such as hotels, office buildings, or retail stores. That’s distinctly not Digital Realty.
You can think of Digital Realty as a landlord for the cloud. This REIT owns a network of data centers scattered across the United States, Europe and Asia that hold the servers of some of the biggest names in tech and telecom, such as IBM (IBM), Facebook (FB) and AT&T (T), which make up 7.0%, 2.4% and 2.1% of its base rents, respectively.
But Digital Realty does more than just provide “spillover” capacity for tech companies. Its major tenants include some of the world’s largest banks and financial services companies, including Morgan Stanley (MS), JP Morgan Chase (JPM) and Deutsche Bank (DB). Importantly, no single tenant makes up more than 8% of DLR’s base rents.
The datacenter business is anything if not reliable. Companies may close unprofitable retail locations or move their offices as their needs change. But how likely are they to need less computing power the following year? As the economy becomes more and more data-centric and cloud-centric, the need for data centers should only continue to grow
As Digital Realty’s business has grown, so has its dividend. Over the past five years, Digital Realty has grown its dividend at a nice 16.8% clip. At today’s prices, Digital Realty sports a competitive dividend yield of 5.1%.
Bargain REITs: Stag Industrial (STAG)
Dividend Yield: 7.3%
And finally, we get to industrial REIT Stag Industrial (STAG), a relatively young REIT that specializes in single-tenant industrial properties (“STAG” stands for “Single Tenant Acquisition Group”) and owns things like distribution centers and warehouses.
STAG has been in operation since 2003 and publicly traded since 2011, and in terms of total returns (including capital gains and dividends), it has doubled since its debut. STAG has also grown its dividend by 33% (7% annualized) and is one of those rare gems that pays its dividend monthly as opposed to quarterly. At current prices, STAG sports a juicy dividend yield of 7.3%.
STAG’s business is a little more cyclical than most of the other REITs I’ve covered in this article, but I’m OK with that. Its portfolio is diversified across 265 properties in 37 states. Plus, 88% of its tenants are large companies that do more than $100 million per year in sales, and 61% do more than $1 billion in sales.
STAG has been absolutely punished this year, dropping from $27 per share in January to under $19 now, due largely to Fed fears. STAG is also a relatively small REIT with a market cap of just $1.3 billion, so it tends to be a little more volatile than many of its larger peers.
I can’t say with any certainly when STAG’s stock price will find a bottom. But I can say this: At current prices, you’re getting a high-yielding growth dynamo trading at an attractive price. A patient investor willing to hold on should see very nice returns over the next 12 to 24 months.
Charles Lewis Sizemore, CFA, is chief investment officer of the investment firm Sizemore Capital Management and the author of the Sizemore Insights blog. As of this writing, he was long DLR, O, STAG, VER and VTR. Click here to receive his FREE weekly e-letter covering top market insights, trends, and the best stocks and ETFs to profit from today’s best global value plays.