4 ‘Sleep Well At Night’ REITs For Retirement

As the editor of the Forbes Real Estate Investor, I have gained many loyal newsletter followers, many of which are retirees. My primary objective in writing is to steer investors to safety so that their retirement portfolios don’t get whiplashed.

Over the years I have seen many writers attempt to lure retirees into high-yielding stocks, only to see their principal erode because they were chasing fool’s gold.

If you ever want to know why my writing style and investment advice is conservative, just take a look at my previous life as a developer. It just took a few painful losses for me to begin to realize that the most important way to achieve success is to always remember to focus on safety.

One of the reasons that my co-author and I decided to title our book, The Intelligent REIT Investor, is because we wanted to remind readers that the only way to become an “intelligent investor” is to always focus on fundamental research and that means selecting sound securities with a definitive margin of safety.

In Benjamin Graham’s book, The Intelligent Investor, the value investor explained that the margin of safety constitutes a “favorable difference between price on the one hand and indicated or appraised value on the other.”  For Graham, what was paramount was that all investments were logically sound from a business owner’s perspective.

Today I decided that I would treat readers on Forbes.com with four of my top “sleep well at night” REITs. This means that I am not only providing these ideas because the shares are cheap (in price), I am also including them because I believe that they are defensive “flight to quality” names that retirees can enjoy for their stress-free lifestyle.

4 ‘Sleep Well At Night’ REITs For Retirement

SWAN #1: Simon Property Group (SPG) is a mall REIT that owns 235“class A” malls and outlet centers in North America, Europe, and Asia totaling over 190 million square feet. About 80% of the REIT’s net operating income comes from its traditional US malls, which are highly diversified, but nearly all located in dense, thriving, and affluent cities, mostly in Florida, California, and Texas. 20% of its NOI is from its super premium Mills locations and international properties, providing US investors with some nice but safe foreign diversification.

One of the reasons that I considered Simon a SWAN (“sleep well at night” REIT) is because the company has a highly attractive cost of capital of just 3.5%, courtesy of one of just 2 “A” credit ratings in REITdom that allows the coompany to borrow massive amounts of money at very low interest rates. Around 95.5% of Simon’s debt is long-term bonds with an average interest rate of 3.5%.

When you combine these diversification attributes along with the fortress balance sheet (cost of capital advantage), Simon is able to generate very stable and predictable earnings and dividend growth. And of course  the biggest safety is in the current share price, Simon is trading at a 25% discount (current P/FFO is 14.6x) and we believe that this provides an attractive “sleep well at night” recipe for investors to generate stable dividend income (yield is ~ 4.5%) and above average price appreciation (we target 15% in 2019). We maintain a Strong Buy.

SWAN #2: Ventas, Inc. (VTR) is a diversified healthcare REIT that owns a diversified portfolio of around 1,200 properties in the following sectors: Senior Housing Operating (31%), Office (26%), Triple-Net (24%), Acute Care (8%), and Loans (4%). Similar to Simon, Ventas is able to generate scale advantages that provides meaningful cost benefits by leveraging its superior size.  :

Ventas has approximately 31% exposure in senior housing operating, a majority of the properties are purposely located in high barrier-to-entry coastal markets (median home values are 2.0x the national average (and median household income is 1.4x national average). Ventas also has 26% exposure in the ‘office’ sector, that consists of medical office buildings (19%) and life science buildings (7%).

Ventas also has around 39% exposure in the Net Lease senior housing sector (less risk than the operating sector) and the segment grew overall same-store cash NOI by 3% in Q3-18, where in-place lease escalations were the primary driver of this increase. Ventas also has around 6% exposure to health systems (i.e. hospitals) that generate very reliable rental income.

Ventas has sector-leading financial strength and flexibility, that includes fixed charge coverage of 4.6x, net-debt-to-EBITDA of 5.4x, and less than 12% of total debt that matures in the next three years. Ventas has an attractive well-covered dividend ands shares now yield 5.1%. The company’s scale and cost of capital advantages provide the company with sustainable growth in which we shares could generate around 15% returns in 2019. We maintain a Strong Buy.

SWAN #3: Kimco Realty (KIM) is a best-in-class chopping center REIT that owns 450 shopping centers comprised of 78 million sq. ft. of leasable space primarily concentrated in the top major metropolitan markets. The portfolio is focused geographically in the top 20 markets in the U.S. Kimco has completes its disposition initiatives and today the portfolio generates 80% of ABR (annual base rent) from these major metro markets (76% are coastal and sunbelt markets). Most of these centers are located in coastal markets where growth of 6.3 million is projected in these 20 markets within the next 5 years.

Kimco also has a strong balance sheet, its consolidated weighted average debt maturity profile is now 10.7 years, one of the longest in the REIT industry. The company has no unsecured debt maturing until May of 2021, and only $120 million of mortgage debt maturing during the same time frame. It has over $2 billion available on its unsecured revolving credit facility, which provides a significant liquidity for any opportunistic funding refinements.

With dispositions winding down, Kimco is forecasted to begin positive FFO/share in 2019 as the company begins to put proceeds to work through acquisitions, redevelopment, and development. Kimco has ample cushion with its ongoing development and Albertsons’ likely monetization (KIM owns 9.74% of Albertsons). By 2020 we suspect Kimco’s payout ratio could be closer to 72%.

Kimco is also trading at a wide discount (P/FFO is 11.4x) with an attractive dividend yield of 6.7%. We maintain a Strong Buy recognizing that Kimco could generate in excess of 25% total returns in 2019.

SWAN #4: W.P. Carey (WPC) is a Net Lease REIT that invests in industrial, office, retail, warehouse, and self-storage properties in the U.S. and Europe (mainly Germany, the U.K., Spain and The Netherlands). The company has 1,186 properties leased to 304 tenants that covers 133 million square feet of space, with a current market cap of $11 billion.

One attraction with W.P Carey s that around two-thirds of the company’s lease agreements are tied to the Consumer Price Index, or CPI. As inflation increases, so will the rent on the REIT’s properties tied to this index. This is an important differentiator because these lease contracts will allow W.P. Carey to grow its earnings through good times or bad. Also, in June 2018 W.P. Carey announced a merger pact with CPA:17, an affiliated non-traded REIT, and by doing so, the REIT has removed conflicts of interest (not competing directly with affiliated companies owned by WPC).

In addition to maintaining a disciplined balance sheet, W.P. Carey has been able to deliver consistent dividend growth, the company has increased the dividend for the past 21 years, one of the longest growth streaks in the REIT sector (and there are just around a dozen REITs that increased the dividend during 2009).

W.P. Carey provides investors with an attractive dividend yield (of 5.7%) combined with predictable growth benefits. Shares are reasonable valued (15.0x P/FFO) providing solid total return prospects (we anticipate 15% total returns in 2019). We maintain a BUY.

I own shares in SPG, VTR, KIM, and WPC.

This post first appeared on Forbes.com. To see the original, click here.