REIT Expert's Best Buys: From Beantown to Biotech

08/23/2018 5:00 am EST

Focus: REITS

Brett Owens

Chief Investment Strategist, BNK Invest, Inc.

Brett Owens, editor of Contrarian Outlook, is a leading expert in income investing, including an expertise in real estate investment trusts, which offer high yields through their investments in various real estate holdings. Here's two of his latest favorites in the REIT space.

Alexandria Real Estate (ARE) is still available for a lower price than you could snag it for in early January. But that won’t last after the trust’s second-quarter results recently poured in — a greatest-hits list that was the envy of the REIT world.

To wit: revenue jumped 19% year over year; adjusted per-share funds from operations (FFO; the best measure of REIT performance) spiked 9%; and management upped its full-year FFO forecast to between $6.57 and $6.63 a share, a big leap from the $6.02 ARE generated in 2017.

There’s more to come: unlike the average mall landlord, ARE is enjoying superb occupancy, with 97.1% of its operating properties taken up as of quarter-end. That’s thanks to its focus on the growing life-sciences industry: biotech firms working on the latest breakthrough drugs.

Don’t confuse “biotech” with “speculative”: ARE’s clients are some of the biggest in the business, including Novartis AG (NVS), Bristol-Myers Squibb (BMY), Sanofi (SNY) and the Massachusetts Institute of Technology.

Which brings us to the dividend, which gives you the best of both worlds: a decent yield (2.9%) and superb payout growth. Over the last five years, ARE’s dividend has surged 37%—with the payout regularly getting bumped up twice a year.

The kicker? The payout is safe, at just 53% of FFO (low for a REIT) and reasonably priced: ARE trades at 19.4 times the midpoint of forecast FFO, cheap for a stock with rock-solid tenants and a surging dividend (which will drag the share price higher as it rises).

Don’t let the name fool you: Boston Properties (BXP) goes way beyond Beantown, with 164 office buildings (48.4 million square feet) in Boston, New York, Los Angeles, San Francisco and Washington, DC. It cuts its risk further by evenly spreading those properties out among those growing metropolises.

Like Alexandria, BXP boasts top-notch clients, including ultra-steady Verizon (VZ); in Q2, Boston Properties leased 440,000 square feet to a subsidiary of the telecom giant and broke ground on its 627,000-square-foot office tower in Boston (50% owned). Verizon will lease 70% of that space for 20 years.

Meantime, management is calling for serious FFO growth, with forecast FFO coming in at $6.36 to $6.41 a share in 2018, up from BXP’s previous estimate and way ahead of last year’s tally of $6.22.

Like ARE, BXP’s shares are below where they were in January, and they boast a similar valuation: 20.6 times forward FFO — again, reasonable for a REIT with an above-average dividend yield (2.4%) a growing payout (up 23% in the past five years) and a healthy balance sheet (its $10.3 billion of long-term debt is around half its market cap).

Plus there’s a hidden benefit no one pays attention to: Boston Properties loves to drop outsized special dividends on shareholders, having done so in three of the past five years. With the “regular” payout accounting for a meager 49% of forecast FFO, another one of these surprise “specials” could come our way any day. Let’s buy now, before that happens.

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