Take Charge Of These A-Rated REITs

This article appeared in the March edition of the Forbes Real Estate Investor.

There are thousands of investment options today and, as many have learned, the riskier alternatives appear to be those with unsound capitalization and poorly managed leverage controls.

Many publicly traded REITs have managed to survive and thrive for decades using risk-aligned practices distinguished by sound balance sheet fundamentals and strong dividend performance.

That’s one of the reasons we use these defensively-tough standards for our scoring model known as Rhino Ratings. While many public U.S. stocks are paying out modest dividend yields, high-quality REITs, characterized as rhino-like alternatives, seem to be resonating with income-oriented investors.

The Rhino Principle is characterized by disciplined , single-mindedness in which survival is predicated on taking charge of what is in your path. Similarly, public REITs are differentiated by rhino-like defensive investment strategies in which leverage is essential to long-term profitability.

As explained by Charlie Keenan in REIT magazine: “Overall, public REITs are in good standing in terms of leverage, having cleaned up balance sheets since the financial crisis. This gives them a competitive advantage versus their private counterparts, especially at a time when banks have retrenched in lending and the commercial mortgage backed securities market has faltered.”

For those income-oriented investors looking for stability, a REIT’s credit rating is a good place to start. A credit rating is an assessment of the riskiness of a REIT’s debt—issued and provided by one of three primary rating agencies: Moody’s Investor Services, Standard and Poor’s and Fitch Rating Services.

While it is not a perfect measurement of risk for equity investors, I have found it to be a good indicator of a REIT’s risk, providing greater clarity about a REIT’s ability to grow value through access to low-cost capital.

The rating agencies evaluate a REIT’s credit based on two primary criteria: business risk of its operations— basically how risky is the income from its properties—and financial strength—a REIT’s balance sheet strength including its leverage and liquidity.

The rating agencies then assign each issuer with a rating that falls into two general categories: investment grade or sub-investment grade (historically, “junk”).

Within these categories, there are specific alphabetic ratings, with investment grade falling between AAA and BBB- (S&P’s rating scale) and sub-investment grade being anything rated BB+ or below.

It is important to remember that the rating agencies rate both a REIT’s corporate credit as well as specific debt instruments, which may have features that make it more attractive to lenders such as mortgage interests in property or certain cash reserve features. From a REIT equity shareholder’s perspective, the corporate credit rating is the most appropriate to evaluate.

TEN A-RATED REITS

Within our coverage universe, there are ten REITs rated A or higher by S&P, shown below. As you can see, the dividend yields for these REITs range from 2.8% to 4.6%. The highest growth REITs include Boston Properties (BXP) at 10.2%, Camden Property(CPT) at 6.4% and AvalonBay Communities (AVB) at 5.7%.

Many of these A-rated REITs have “taken charge” in 2019, namely Prologis (PLD) (+21.6%), Boston Properties (+19.6%) and Federal Realty (FRT)(+14.6%). We’ve included a price to NAV column that illustrates how these REITs are trading compared to their net asset value.

Our top picks based on valuation are Federal Realty and Simon Property Group. These retail REITs are exposed to higher store closure risk, but they are well capitalized and should be able to generate growth through redevelopment and new development. If we were to buy just one A-rated REIT it would be SPG. This blue-chip strong buy is a true rhino worth holding…maybe it’s time to take charge.

I own SPG, O, FRT, and PSB.

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