Los Angeles-based retailer Forever 21 filed for bankruptcy protection on Sept. 30. The news was not good for retail real estate investment trusts, whose stock prices took a big hit.
For Taubman Centers (NYSE:TCO), a real estate investment trust that owns 17 of the malls where the retailer has locations, the bankruptcy of Forever means the loss of its largest tenant by square footage. None of the large retail REITs is exempt from the carnage.
Worse still, if Forever 21 closes a particular store and that closure triggers co-tenancy clauses, other retailers could possibly break their leases, putting even more pressure on the mall REITs.
With that in mind, it might make sense to avoid these REITs for the time being. Here are 10 that Forever 21’s bankruptcy doesn’t affect.
REITs to Buy: Seritage Growth Properties (SRG)
Although Warren Buffett is the REITs most famous owner with 5.4% of its stock, the largest is Toronto-based EdgePoint Investment Group. In July 2017, I named EdgePoint’s publicly traded investment vehicle, Cymbria Corporation one of the best investments for the next decade. Since then, it’s up 13.1%, which doesn’t sound like a lot, but that’s because Cymbria’s lost ground so far in 2019.
The people behind EdgePoint are really smart, long-term value investors. If they’re this heavy into SRG, I see good things happening over the long haul.
A recent example of what it does: Safehold acquired the ground lease for the Alohilani Resort in Waikiki Beach in Hawaii for $195 million. The resort is one of the largest hotels in the Waikiki market. The leasehold on the property was acquired in 2017 for $515 million.
One of the benefits of Safehold ground leases is that they allow building owners to better plan their cash flow as there are no fair-market value provisions that raise the rent based on escalated land values.
CEO Jay Sugarman argues that an individual property consists of land and buildings and that the two are very different investments. By selling the ground under a building, a property owner gains additional capital to invest in the building itself, leading to higher rents and larger shareholder returns.
“We are narrowing our focus to really strategically build around this ground lease innovation,” Sugarman told Bisnow in an interview. “We think we are revolutionizing how real estate is owned.”
The REITs performance over the past year suggests investors agree.
Outfront Media (OUT)
Outfront Media (NYSE:OUT) is a specialty REIT that owns 510,000 billboards and transit displays across North America that generated $1.7 billion in revenue in 2018 along with $480 million in operating income before depreciation and amortization. Its stock is up 50.2% over the past year.
Back in April 2016, I recommended OUT along with four other REITs that brought something different to the table. My argument for owning Outfront’s stock was that its business had a high barrier to entry given each billboard had to have a permit from the city to display ads in the first place.
It’s not the kind of business where you can instantly make money. It takes a lot of legwork to get these permits, which is why it’s become a hot commodity with investors.
From a market perspective, New York, Los Angeles and Miami accounted for 42% of its overall revenue. Its top 15 markets accounted for 76% of its sales, with 64% from billboards and the rest from transit.
Yielding 5.2%, it’s a nice way to get paid until the capital appreciation next comes along.
EPR Properties (EPR)
EPR Properties (NYSE:EPR) is a specialty REIT based in Kansas City that owns entertainment, recreation and education properties across the U.S. Its stock has a total return of 21.2% over the past year.
EPR is another REIT I recommended back in 2016 along with Outfront Media. Since April 2016, it’s up almost 19%, not including dividends. Currently yielding 5.8%, its annualized total return over the past decade is 12.9%, slightly better than its peers in retail REITs, without the downside that comes with mall ownership.
Since 1997, EPR’s total shareholder return is 1,798%, more than three times the MSCI US REIT Index and more than five times the Russell 1000.
Owning 417 properties in 43 states and Canada, it’s a big player in the $100+ billion experiential real estate market. Thanks to millennials, it’s expected to get even bigger.
In the past year, its $7.3 billion real estate portfolio generated more than $628 million in net operating income.
In June, Ventas announced that it had acquired 85% of a $2.4 billion CAD portfolio of 31 Class A, purpose-built senior housing communities in Quebec, Canada. In addition, there are four additional properties under development. The owners of the buildings, Le Groupe Maurice, will continue to manage the portfolio and own 15% of the partnership.
LGM is a leading brand in the Quebec seniors market with 9% market share.
The LGM assets account for 4% of the REITs annual net operating income, while its total Canadian assets now account for 8% of its overall net operating income.
“We are pleased to complete our compelling investment with Le Groupe Maurice in its outstanding portfolio, with stable cash flows, strong occupancy and built-in growth from existing and new developments,” said Ventas Chairman and CEO Debra Cafaro. “We are delighted to partner with Luc Maurice and his outstanding team as we enter the attractive Quebec seniors market.”
Expect Ventas to use LGM as its platform for future Canadian growth.
JBG Smith Properties (JBGS)
JBG Smith Properties (NYSE:JBGS) is a REIT that owns 20 million square feet of mixed-use office, retail and multi-family real estate in Washington, D.C. In addition, it has 18 million square feet of future development in the pipeline. Its stock has a total return of 7.7% over the past year.
On Oct. 2, JBG Smith announced that it was going ahead with plans to redevelop 2.6 million square feet of aging multi-family and office buildings it inherited in 2017 when it merged with Vornado Realty Trust’s (NYSE:VNO) D.C. business.
The latest addition to its pipeline in the National Landing neighborhood of D.C. brings its total square footage in the area to 6.9 million.
These developments are very close to where Amazon (NASDAQ:AMZN) is putting its second headquarters, making JBGS stock a great long-term hold.
Colony Capital (CLNY)
Colony Capital (NYSE:CLNY) is a REIT undergoing a major transformation that will see its business become a lot less busy — in a good way. It now plans to focus on digital real estate and infrastructure. Its stock has a total return of 2.3% over the past year.
On Sept. 30, Colony announced that it had sold Colony Industrial, the REITs last-mile light industrial portfolio for $5.9 billion. Colony expects net proceeds of more than $1.2 billion. Since its formation in 2014, Colony Industrial has doubled in size. The sale accelerates Colony Capital’s move into digital real estate.
On the same day, Colony announced that it completed the sale of NorthStar Realty Europe (NYSE:NRE) and its 1.1 billion euro portfolio of European office properties to AXA Investment Managers for approximately $850 million.
In July, Colony acquired Digital Bridge Holdings for $325 million. In May, Colony and Digital Bridge closed Digital Colony Partners, a $4.1 billion fund that will invest in digital infrastructure.
Digital Bridge CEO and founder Marc Ganzi will become Colony’s CEO. Founder Tom Barrack will return to his role as executive chairman over a transition period of 18-24 months.
Together, Colony will manage $60 billion in assets, which includes the $8.2 billion deal to take Zayo Group Holdings (NYSE:ZAYO) private. It appears Tom Barrack has found the person to reignite Colony Capital’s growth.
Invitation Homes (INVH)
Invitation Homes (NYSE:INVH) is one of the largest owners of single-family rental homes in the U.S. It was created in 2012 by alternative asset manager Blackstone Group (NYSE:BX) to buy up single-family homes, whose prices cratered after the 2008 recession. Its stock has a total return of 35.5% over the past year.
Between 2012 and 2016, Blackstone acquired almost 50,000 homes in 13 markets including Southern California and Florida. To reduce its debt and provide liquidity for some of Blackstone’s investors, Invitation Homes went public in January 2017 at $20 a share.
At the time of its IPO, Blackstone and its affiliates owned 73% of Invitation Homes’ shares. As of April 2, its ownership stake was down to 34%.
The move from owner-occupied single-family homes to rental properties has been dramatic — with something like 12 million single-family homes rented in the U.S. worth an estimated $2.3 trillion, accounting for 35% of the entire rental housing market. An estimated $220 billion in homes are now owned by large companies such as Invitation Homes.
Given the student debt burden of millennials, I don’t see this phenomenon of Americans renting single-family homes ending anytime soon. That’s great news for owners of INVH.
Americold Realty Trust (COLD)
Americold Realty Trust (NYSE:COLD) is one of the world’s largest owners and operators of temperature-controlled warehouses. It owns and operates 178 warehouses with over 1 billion cubic feet of storage space in five different countries including the U.S., Canada, Australia, New Zealand and Argentina. Its stock has a total return of 53.1% over the past year.
Areas that have a strong demand for cold storage include Los Angeles, Seattle, Chicago and the Northeast. In addition, South Florida and other warmer market cities are also experiencing significant demand.
Americold is attractive because it is the only publicly traded REIT focused on temperature-controlled warehouses. In addition, it has a U.S. market share of 26%, with plenty of room to grab more.
It’s become an indispensable component of food infrastructure with major companies such as Conagra Brands (NYSE:CAG) relying on its warehouses around the country to safely get their products to end-user customers.
As cash flows go, you can’t get more stable.
Store Capital (STOR)
Store Capital (NYSE:STOR) is an internally managed net-lease REIT that invests and manages single-tenant real estate. Warren Buffett and Berkshire Hathaway (NYSE:BRK.A, NYSE:BRK.B) is the second-largest shareholder with 8.2% of the company. Its stock has a total return of 40% over the past year.
Warren Buffett invested $377 million in Store Capital in June 2017, buying 18.6 million shares of its stock in a private placement at $20.25 a share.
As I write this, the shares are worth $703 million. In addition, Store increased its quarterly dividend by 2 cents with the Oct. 15 payment to 35 cents a share, an annualized rate of $1.40. This will generate $26.1 million for Berkshire Hathaway over the next year.
Why did Buffett buy?
It didn’t hurt that Store’s stock was yielding 5.7% at the time, 200 basis points higher than today’s yield. It also helped that Store Capital’s business model was a safe way to bet on retail, manufacturing and the service sector as a whole.
The company estimates that its target market is almost 200,000 companies, providing it with plenty of growth. In 2018, it was the fastest-growing company by revenue in Warren Buffet’s equity portfolio. Even at a 3.7% yield, STOR is a REIT worth owning.
At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.