Last week, I officiated the showdown of the Dream Team REITs, and in case you missed it, the Final Four went down to the wire.
The finalists - Federal Realty (NYSE:FRT), Realty Income (NYSE:O), Simon Property Group (NYSE:SPG), and Public Storage (NYSE:PSA) - all earned their way to the top by out-maneuvering the other teams in a hard-fought battle.
But at the end of the day, the most durable candidate rose to the occasion by demonstrating exceptional risk-management skills. As you will find with any blue chip investment, the price for admission is usually high, and that's the case with most of the REITs, including the victor, Simon Property Group.
To get to the top of the leader board, these finalists had to face certain obstacles along the way and successfully demonstrate their leadership skills. When the buzzer goes off, generally the most durable teams win, and that simply comes down to perseverance under pressure. As Gary Player said:
Greatness is talent applied consistently.
The Great Recession was arguably the greatest economic test of all time, and since that period, there have been a number of new REITs formed, including many companies that have not been battle-tested. It's easy to score points when there's no risk for loss; however, the good teams inevitably become great when they learn to control risk.
The Dream Team REITs (referenced above) are all distinguished by their remarkable records for dealing with risk, but what about the future talent? Which REIT could become the next Realty Income or Federal Realty? More importantly, will these REITs be prepared to combat the next big risk - rising rates? Let's get started...
The Sweet Sixteen
Since the end of the Great Recession, there are number of new REITs that have found their way to REIT-dom. Some of these have listed through traditional IPOs, and others have listed after aggregating assets via the non-traded REIT model. The common denominator, though, for most REIT investors is the chase for yield. Since REITs must payout at least 90% of taxable income, investors have gravitated to these higher-yielding instruments.
Of course, one risk for many of the new REITs is small size and lack of trading history. As in any small-cap stock, shares are usually thinly traded, with a limited earnings history. This combination makes it extremely difficult to provide a quality rating, and investment decisions become much more subjective.
For my "future" Dream Team list, I have handpicked these 16 REITs: Preferred Apartment Communities (NYSEMKT:APTS), United Development Funding (NASDAQ:UDF), Physicians Realty Trust (NYSE:DOC), Healthcare Trust of America (NYSE:HTA), Chatham Lodging (NYSE:CLDT), STAG Industrial (NYSE:STAG), Chambers Street Properties (NYSE:CSG), Gramercy Property Trust (NYSE:GPT), Brixmor Property Group (NYSE:BRX), Retail Opportunity Investments Corp. (NASDAQ:ROIC), CorEnergy Infrastructure Trust (NYSE:CORR), Hannon Armstrong Sustainable Infrastructure Capital (NYSE:HASI), Pebblebrook Hotel Trust (NYSE:PEB), American Realty Capital Properties (NASDAQ:ARCP), STORE Capital (NYSE:STOR), and CyrusOne, Inc. (NASDAQ:CONE).
Now, let's get ready to rumble...
In the first match, we have APTS facing GPT. As you know, GPT has been around before the Great Recession; however, I decided that the company needed a second chance (after the massive dividend cut in 2008, from $5.04 to $0.0). In fact, GPT literally rose from the ashes, and completely rebuilt the company into a net-lease contender. Conversely, APTS listed in 2011 (4 years ago), and since that time, the Atlanta-based REIT has built an impressive portfolio of around $700 million in assets.
Both companies match up nicely in terms of growth prospects, and I could see either REIT on the big boys floor in 5 or 10 years. Looking back (to 2014), they both scored well: APTS returned 44.6% and GPT returned 40%. However, GPT wins the first round: I view the payout ratio (for GPT) attractive, based upon the 2015 FFO Payout Ratio of 42%. APTS pays a sweet 6.5% yield (P/FFO is 9.4x), but GPT seems to offer the edge.
The next match offers another toss-up: UDF vs. DOC. I own both stocks, and I'm expecting good things ahead for both. UDF offers a compelling dividend yield of 9.3%. I recently added more shares when the dividend yield was around 10%; however, there are quantifiable risks: small-cap (just $543 million) and its concentration in Texas. Alternatively, DOC has grown into its dividend (the yield is now 5.1%) and its performance has been rock-solid. (See my last articles on UDF and DOC).
Now, we have HTA vs. CORR. There's really no competition here: HTA has scaled into a diversified MOB REIT with a market cap of around $3.5 billion, while CORR is much smaller (market cap of $325 million). HTA has an investment-grade rated balance sheet (S&P: BBB), with a stable dividend history (yield is now 4.1%), while CORR's energy infrastructure platform offers a new paradigm for investing in a variety of energy monetization assets. While I did pick CORR to be my "underdog" pick for 2015, HTA is the dominant team going into the Elite 8.
Continue reading this article here.
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