Four "Sleep Well at Night" REITs

11/02/2017 5:00 am EST

Focus: REITS

Brad Thomas

Editor, Forbes Real Estate Investor

REIT income should be a part of the retirement process and investors should take a closer look at the asset class that offers an outsized dividend yield along with very predictable sources of income, asserts Brad Thomas, editor of The Intelligent REIT Investor.

I am keenly focused on helping investors reduce risk and to sleep well at night. Here are four of my favorite picks, and all of these REITs can now be purchased at a discount, or recognizable margin of safety.

Omega Healthcare Investors (OHI) is the largest healthcare REIT that invests almost exclusively in skilled nursing properties. As of Q2-17 Omega owned 992 operating facilities in 42 states and the United Kingdom. The company receives fixed rent payments from tenants, with annual escalators, and operators receive revenues through reimbursement.

Omega has more than $1 billion to liquidity (cash and revolver) to fund new investments and in the latest quarter the company generated $.87 per share of Funds from Operations (or FFO). The dividend is well covered ($.64 per share) and Omega has increased the dividend 21 consecutive quarters in a row.

Omega has modest growth forecasted for 2018; however, the high-dividend yield of 8.1% and continued growth make this healthcare REIT an attractive investor for the retiree or pre-retiree. The shares are now valued at 9.3x P/FFO and I consider Omega a solid sleep well at night REIT.

Tanger Factory Outlets (SKT) is considered a mall REIT, although the company has no department stores in the portfolio. The Greensboro-based REIT owns a portfolio of 44 outlet centers in the U.S. (22 states) and Canada. Tanger is the only “pure play” outlet center REIT.

What makes Tanger the perfect retirement REIT is that the company has exceptional fundamentals, including a “fortress” balance sheet (rated BBB+ by S&P), limited secured debt (just 9%), and an attractive payout ratio (mid 50% range).


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Tanger’s discipline has led to an extraordinary record of dividend growth — the company has increased its annual dividend for 23 years in a row (since the IPO in 1993). Tanger is also cheap, shares are now trading at 11.9x P/FFO and the current dividend yield is 5.4%.

Given the sentiment in retail today (fear of e-commerce), Mall REITs have been beaten down and Tanger represents one of the best value picks today – a quintessential “bargain” in the outlet sector. I rate the stock a strong buy

LTC Properties (LTC) is a healthcare REIT that has been around over 25 years. The company invests primarily in senior housing and long-term healthcare property types.

LTC has a strong balance sheet with well-laddered debt maturities and less than 8% secured debt. At the end of the second quarter, LTC’s credit metrics compared favorably to the healthcare REIT industry – debt to annualized normalized EBITDA of 4.2x and debt to enterprise value of 24%.

LTC pays monthly dividends and the company has increased its annual dividend by an average of 5%. Shares are now trading at 15.5x P/FFO with an attractive dividend yield of 4.8%. Given the smaller-cap composition of the portfolio, I find this gem to be attractive based on the steady and predictable growth that produces favorable returns over time.

Realty Income (O) is a perfect dividend-paying stock for retirees and there is a very good reason that the company brands itself as “the monthly dividend company”.

Since going public in 1994, the company has paid and increased dividends every single year. This is no easy feat, and the simple secret behind the success is risk management.

Realty Income has a “fortress” balance sheet (rated BBB+ by S&P) with the lowest cost of capital in the Net Lease REIT sector. As of the second quarter, occupancy was 96.5%, the highest achieved in 10 years, and the company continues to expect occupancy to grow closer to 98% in 2017.

Realty Income is one of the most diversified REITs in the world, and when combining the predictability of future cash flows along with low cost of capital, you can see why this highly defensive dividend grower has all of the ingredients to “sleep well at night”.  Shares are trading at 19.2x P/AFFO with a dividend yield of 4.5%.

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