3 high-yielding REITs for your retirement
After writing about Seeking Alpha for over a decade, I sometimes take it for granted that everyone has saved up for retirement.
I recently read a investigation which revealed that “23% of Americans have no savings for retirement” and “25% between the ages of 45 and 54 old haven’t started saving.
I find it an amazing statistic that about a quarter of Americans have no retirement savings, which means they probably rely solely on Social Security benefits.
In a recent Yahoo Finance articleGabrielle Olya explained that “the average monthly benefit is $1,542.22 in June 2022” and this is also an amazing data point, especially in the current environment where retirees are being hit hard by the inflation.
I don’t know about you, but it would be extremely difficult to live on $1,500 a month considering that I spend so much on utilities and fuel for the car every month.
I was talking with my mom over the weekend, and she’s a prime-time example of a pensioner pinching pennies. Fortunately, she has accumulated real estate during her working years and is not in bad shape financially.
Nonetheless, she’s like most retirees, in that she’s looking for income-oriented stocks to help her increase her disposable income. She told me she wanted high-yielding stocks that offer above-average total returns.
Mom is known to be a great cook, so I replied,
“Okay mom, you want to have your cake and eat it too.”
When I hung up the phone, I thought I should give her a list of three REITs she should buy.
She already owns several REITs, but I could sense her frustration that she was looking to invest her hard-earned capital in safe, high-yielding companies.
Not zero returns, like Global Net Lease (GNL) – now yielding 10.7% (with an AFFO yield of 11.8%) – or Annaly Capital (NLY) – now yielding 13.6%, but rather High-quality REITs that should generate consistent, predictable dividend income and attractive price appreciation.
Recognizing that I’m basically writing this article for my mom, you better bet I’m not going to lead her into a value trap. She’s counting on me to recommend three of the best high-paying REITs that can also help her sleep well at night.
I’m up for the task, because I know my mum isn’t the only one relying on me to deliver the goods – I have over 102,000 subscribers here on Seeking Alpha – so I can’t spoil this one .
STORE Capital (STOR): return of 5.6%
STOR is a net lease REIT that owns 2,965 properties (with 573 customers) where its largest customer has only 3% exposure and the company’s top tenants have a combined exposure of 18%.
This simply means that STOR is a very diversified business model with ~11.2 billion AUM (assets under management) and a $3.9 trillion addressable market (+2 million sites).
I’ve been STOR since the IPO and was the first analyst on Seeking Alpha to cover the company (first post was September 2014). STOR’s business model is highly predictable, based in large part on a focus on unit-level profitability (4.7x rental coverage) and strong capital markets discipline.
STOR maintains around 40% leverage and strong leverage ratios: 4.1x debt to EBITDA, 3.4x unencumbered assets and 7.1 debt service coverage. Rated Baa2 (Moody’s), BBB (S&P and Fitch) with internal growth engines that deliver attractive and consistent returns for shareholders: Since 2016 – AFFO CAGR of 5.7% and Dividend CAGR of 6.1%.
Additionally, STOR’s dividend growth rate is the highest in the net rental industry (6.1% per year) with the lowest payout ratio (69%) in the industry. Additionally, STOR has the second longest weighted average lease term (17.1 years) in the industry.
As seen above, STOR is valued with a P/AFFO of 1.9x, against a 4-year average of 16.5x. The dividend yield is 5.6% and well covered by AFFO (as mentioned, 69%). STOR is expected to grow AFFO by 8% in 2022 and analyst consensus growth is around 4% over the next two years.
We expect stocks to return around 20% over the next 12 months and, of course, that includes an attractive return of 5.9%. With such a diverse portfolio and strong balance sheet, our risk rating for STOR is low, which is why this net lease REIT fits like a glove on my mom’s high earner list.
Medical Properties (MPW): Renders 7.1%
MPW is a healthcare REIT with 440 hospitals in the United States (60%) and other markets including the United Kingdom (20%), Switzerland (6%), Germany (6% ), Australia (4%), Spain (1%), and other countries.
MPW’s core competency is to own and invest in critical hospitals where the REIT is the second largest owner of hospital beds in the United States, with approximately 46,000 and a US portfolio of $13.3 billion. .
In a recent article, I pointed out that “more often than not, hospitals are the largest employer in the region, with value created alongside medical office buildings (MOBs), surgery centers, residential communities and retail businesses.
Recognizing that hospital investments are not bulletproof, MPW has managed to diversify its business model to mitigate operator-specific risks so that even in the event of bankruptcy, rents are paid, value is protected and new tenants are available.
MPW uses several head lease structures that guarantee the company the right to “take back” all properties in the event of default. MPW leases guarantee immediate control of properties in the rare event of parental distress. In 2021, rent coverage by property-level earnings before interest, depreciation, rent and management expenses (EBITDARM) was 2.8x… demonstrating that properties are profitable.
Over the years, we have seen MPW improve its payout ratio, while increasing its dividend. At the start of the rounds, I was not a fan of the MPW business model, acknowledging that dividend growth was an essential part of the value creation process. However, MPW has proven it can manage properties globally and create value – since 2012 the company has paid out $3.2 billion in cash dividends and its capital has appreciated by 5, $1 billion (2012-2021).
As seen above, MPW shares have turned cheap, as the AFFO multiple is 11.8x, versus a 5-year average of 15.3x. The dividend yield is 7.0% and well covered based on the REIT/BASE payout ratio of 86.3% (as of Q1-22).
Given the high cost of capital (the AFFO yield is 8.5%), growth forecasts are modest: 2% in 2023 and 2024; however, we consider the upside to be attractive as our 12-month total return is 20%,
Simon Property Group (SPG): return of 6.5%
SPG is a shopping center REIT that owns and holds interests/properties in 199 income-generating properties in the United States, consisting of 95 shopping centers, 69 upscale outlets, 14 mills, 6 lifestyle centers and 15 other commercial properties in 37 states plus Puerto Rico.
SPG also owns an 80% non-controlling majority interest in TRG (Taubman Realty), which in turn owns interests in 24 regional, super-regional and outlet shopping centers across America and Asia.
In addition, SPG benefits from international exposure. The REIT holds interests in 33 properties in Asia, Europe and Canada, and also owns a 22.4% interest in Klepierre SA (OTCPK: KLPEF), one of the leading real estate companies in France and Europe.
GSP is skillfully managed by an SPG veteran of more than 20 years, David Simon, the nephew of Herbert Simon. Mr. Simon has held the position of Chairman since -07, CEO since -95 and has been a director of SPG since -93.
SPG has a fortress balance sheet which has credit ratings of A3 from Moody’s and A- from S&P, and this is a major advantage for the company and one of the reasons why they lead the sector with the best portfolio note.
Despite, you might say, the rate hike currently wreaking havoc on the market, it’s important to realize that SPG’s debt-weighted interest rates are still near record lows at this Q1-22 level. , and its payout ratio or AFFO dividend coverage (63.8% according to REIT/BASE), is at the best level since before and after the pandemic.
As seen above, SGP shares are also cheap, trading at a P/AFFO of 9.5x compared to the 5-year average of 15.x. The dividend yield is 6.6%. Again, we see value here, with our 12-month total return forecast of 20% to 25%.
More for mom…
Like I told my mom, you need to own more than 3 REITs, if your goal is to have a “high income”. So, from now on, I’ll be writing a monthly “High Yield” column for mom, and I’ll also share the picks with you.