REIT Expert's Picks for "Mom's Portfolio"

03/10/2017 7:05 am EST

Focus: REITS

Brad Thomas

Editor, Forbes Real Estate Investor

I recently attended The Money Show in Orlando where I spoke to many retirees who were seeking reliable sources of income, notes Brad Thomas, real estate investment trust expert and editor of the Forbes Real Estate Investor.

As the editor of The Forbes Real Estate Investor, I am keenly focused on helping retirees reduce investment risk and sleep well at night. In my newsletter  I recently decided to build a new REIT collection called the Moat-Worthy REITS For Mom’s Portfolio.

Included in the portfolio are four of my favorite picks; I'll recap my BUY recommendations as follows:

Omega Healthcare (OHI)

Omega is the largest “pure play” REIT that invests in Skilled Nursing buildings. As of Q4016 Omega had an operating asset portfolio of 981 facilities with approximately 99,000 operating beds. These facilities were spread across 79 third-party operators and located within 41 states and the United Kingdom.

Omega’s leverage remains exceptionally strong as does its balance sheet – as of Q4016 the company’s net debt to adjusted annualized EBIDTA was 4.7x and the fixed-charge coverage ratio was also 4.7x.

The company has $1.2 billion of combined cash and revolver availability to fund future investments and provide capital funds for existing tenant leases.

Omega’s latest earnings were in-line and the adjusted FFO guidance for 2017 was $3.40 to $3.44 per share and the funds available for distribution (or FAD) guidance was $3.10 to $3.14 per share.

Tanger Factory Outlets (SKT)

Tanger is the only “pure play” REIT that invests in Outlet Centers. The company owns 42 outlet centers in the U.S. and Canada.

As of Q3-16, Tanger's consolidated portfolio was 97.4% occupied, up 20 basis points from 97.2% on September 30, 2015, and up 50 basis points from 96.9% at June 30, 2016. As of Q3-16, Tanger is expecting year-end occupancy to be between 97.5% and 97.7%.

The company's debt to total market capitalization ratio was 30% down from 32% at September 30, 2015. The company continues to maintain a strong interest coverage ratio during the third quarter of 4.48x.

Tanger's Q3-16 AFFO per share was up 5.1% to $0.63 per share or $62.3 million from $0.59 per share or $59.4 million in the third quarter of 2015. On a year-to-date basis, AFFO per share increased 7.3% to $1.76 per share or $177.5 million from a $1.64 per share or $163.3 million for the same period of 2015.

Tanger raised the dividend by 14% in April 2016 and the company has now raised its dividend each of 23 years as becoming a public company in May of 1993 and has also paid a cash dividend for 93 consecutive quarters.

Simon Property Group (SPG)

Simpn Property is the largest mall REIT with a portfolio that spans 200 properties worldwide. The Indianapolis-based REIT has amassed a portfolio of premier class A mall and outlet properties over the last decade and as the CEO, David Simon, boasted on the latest earnings call, “(SPG) has 434 department stores in (the) portfolio, and only one is vacant.”

Simon’s total portfolio Net Operating Income (or NOI) increased 6.7% or more than $380 million for the year and comp NOI increased 3.8% for the quarter and 3.6% for the year.

Over the last five years, Simon’s comp NOI has increased an average of 4.4% per year and its annual comp NOI has increased by $1.2 billion since 2012.

Simon enjoys a fortress balance sheet, as one of just three REITs that are rated “A” by credit agencies and 2016 was the first year that the company’s annual fixed charge coverage was over 5x. The company’s current liquidity stands at whopping $7 billion.

Simon paid a record dividend in 2016 of $6.50 per share and the company has achieved a compound annual growth rate of 12% over the last three years. A few days ago Simon announced a dividend of $1.75 per share for the quarter, a year-over-year increase of 9.4%.

Ventas, Inc. (VTR)

Ventas is the largest healthcare REIT and the company owns over 1,200 properties that generate in excess of $3.3 billion of annual revenue.

During the 2016, Ventas grew normalized FFO per share by 5% (the high end of the guidance range) and the company generates revenue by leasing to leading healthcare operators.

Ventas has one of the best dividend growth records in the REIT industry, and it remains an important component of the value proposition. In 2016 Ventas raised its dividend by over 6%.

At year-end, Ventas’ net debt to adjusted EBITDA improved to 5.7x, a 0.4x reduction from year-end 2015 leverage of 6.1x. The company’s fixed charge coverage grew to 4.8x; net debt to gross asset value improved by 4% to 38%; and secured debt to total indebtedness was just 6%.

The company’s Q1-2017 guidance for income from continuing operations is in the range between $1.72 and $1.78 per fully diluted share and normalized FFO per share is expected to be in the range of $4.12 to $4.18 per year.

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