Kindel Media
Investing in real estate is one of the oldest high-yielding forms of investments, and equity REITs provide access to a diversified property portfolio without the hassles of ownership and maintenance. Equity REITs can shelter a lot more cash flow from taxes as they can recognize asset depreciation effectively. As a result, taxable earnings for these companies tend to be a lot lower than their actual cash flow, giving them much more stability with their dividends.
Another significant benefit is the triple-net-lease structure that many eREITs pursue. For landlords, a triple-net lease is appealing because it makes most of the day-to-day expenses and maintenance the responsibility of the tenant. A lightbulb goes out? It's the tenant's responsibility. A window breaks? The tenant needs to fix it. Property taxes go up? That's on the tenant too. As a result, the landlord does not have to have maintenance staff and has much more predictable expenses. Something like replacing the roof is the landlord's responsibility, but that is a predictable and planned expense.
eREITs make terrific long-term investments, and without further ado, let's examine two strong picks that enjoy the benefits of a large portfolio of necessary properties and triple-net leases.
Pick 1: O – Yield 5%
Realty Income (O) is a "Dividend Aristocrat" that calls itself "The Monthly Dividend Company," operating a large portfolio of over 15,000 properties in the U.S. and Europe. Source
Realty Income Q2 2024 Presentation
O has been building its portfolio for nearly 70 years and it has a commanding lead over peers. With an A- credit rating, the REIT is able to use its scale towards cost efficiency, generating greater profits for the same property compared to its peers, growing its AFFO (adjusted funds from operations) per share by an average of 5.1%/year
Its strong balance sheet also allows it to flex its muscles in the M&A space during times of sector weakness, and O recently acquired two peers - Spirit Realty Capital and VEREIT, both reasonably sized REITs in their own right.
Interest rates are soon to edge downward, and O's price is going to continue its recent climb. This might be the last opportunity to buy this blue-chip REIT with a 5% yield.
Pick 2: EPR – Yield 7.2%
The use of Real Estate is changing as new technology emerges, resulting in the need for property operators to quickly transition their portfolio towards in-demand assets. Let us look at EPR Properties (EPR), which was originally founded by AMC entertainment executives who saw an opportunity to establish a REIT that focussed on multiplexes.
Fast-forward 27 years, and today’s EPR manages a $6.8 billion-plus portfolio with 354 locations and over 200 tenants in 44 states and Canada. While theaters still represent 37% of the portfolio, the REIT has aggressively diversified into amusement parks, ski resorts, and other entertainment properties.
Q2 Investor Presentation
While EPR was hard-hit by the COVID-19 pandemic, the company carries 9% lesser debt and has 3% fewer shares outstanding compared to January 2020. Notably, the REIT collected all the deferred rent from tenants and persistently maintained a defensive posture. With headwinds from rising interest rates and the bankruptcy filing by one of its largest tenants, Cineworld, EPR continued its defensive stance.
With high liquidity and a conservative balance sheet, EPR is well-positioned to take advantage of rate cuts. Management has been very patient, waiting for the opportunity to start buying up real estate and increasing leveraging up. Today, EPR pays a 7% yield, setting investors for dividend growth that matches the REIT’s FFO growth, and we maintain our outlook for 60-80% capital upside.
Conclusion
Today, high-quality REITs are trading at valuations below their historical averages. If we see declining interest rates, their upside will be driven by the macro environment, and it will also be driven by improvements at the company level.
Dividend growth among the REITs that we hold will be driven primarily by their ability to expand their portfolios. REITs that are capable of issuing equity or otherwise raising capital, will be able to expand faster and grow their dividends more. Declining interest rates make it more favorable for the real estate sector, as REITs use leverage to fuel their growth. Until these catalysts take effect, we sit back and collect our growing dividends. This is the beauty of our Income Method.
We're offering a limited-time 30% discount on our annual price of $599.99 via this link only:
Are you ready to become an income investor?
We can't say it better than our members:
Stop wondering if you will have the income you need in retirement; start growing your income stream now. We are the largest community of income investors and retirees, with over 8,000 members. Our "Model Portfolio" targets a +8% yield, with the highest and safest dividend stocks, preferred stocks, and bonds. This service is ranked #1 in dividends, income, and retirement. If you are looking for high, sustainable income, you have come to the right place!
Comments