Office and residential skyscrapers against bright sun and clear blue sky. Commercial real estate. … [+]
Getty
Historically low interest rates have helped boost interest in real estate investment trusts. In MoneyShow’s Top Picks 2020 report, four experts chose REITs as their favorite ideas for the coming year. Here’s a look at REITs focused on varied markets such as cold storage facilities, business lending, commercial mortgages and property management.
Eddy Elfenbein, Growth Stock Advisor
Americold Realty Trust (COLD) — our top conservative idea for the coming year — is a real estate investment trust that successfully completed its $834 million IPO in January of 2018.
Americold is the largest global and U.S.-based REIT focused on the ownership, operation, development and acquisition of temperature-controlled warehouses, which are an indispensable component of the food industry infrastructure.
The company owns and operates 176 temperature-controlled warehouses, with over one billion refrigerated cubic feet of storage, in the United States, Australia, New Zealand, Canada and Argentina.
Led by the millennial generation’s love of online shopping, research suggests that 70% of U.S. consumers will shop for at least part of their groceries through the Internet in the next seven years.
Click here for access to MoneyShow’s 100+ page Top Picks Report featuring the nation’s most respected and well-known newsletter advisors favorite investment ideas for 2020.
With consumers embracing online grocery shopping, demand for cold storage facilities for storing frozen goods is rising. That is forecast to lead to a need for greater U.S. cold storage space by perhaps in excess of 35 million square feet, according to research from the industrial real estate firm CBRE.
This number may turn out to be a lot higher when you consider the steady rise in the number of consumers dining out goes hand in hand with additional demand for fresh produce, meat, poultry and fish.
That in turn also increases the need for refrigerated warehouses in cities across the U.S. Couple that with the demographic shift to more urban locations and the ever-increasing U.S. population, and the need for more cold storage buildings becomes obvious.
Refrigerated warehouses account for most of the company’s revenues (74%) and its customer list is a who’s who of the food industry including the likes of Unilever (UL), Conagra (CAG), Danone (DANOY), Lamb Weston (LW) and Kraft Heinz (KHC). And among the food distributors, its list of clients includes Kroger (KR), Safeway, Trader Joe’s and Whole Foods.
I want to emphasize to you again the uniqueness of its business. Americold owns temperature-controlled, mission critical infrastructure and leases it to more than 2,400 different food manufacturers and grocers.
The company also provides the customary services necessary to properly preserve their goods and facilitate the movement from the point of manufacture through the supply chain to the point of consumer acquisition.
Here’s an important stat: 96% of all the frozen food that you find in the grocery store comes through some company like Americold. The food manufacturers don’t do this themselves, nor do they invest in that infrastructure. It’s left to specialists like Americold.
I expect Americold to even build on its lead as number one in the sector. That will be good news for investors because of the growth in the refrigerated warehouse sector.
Brett Owens, Contrarian Income Report
Ladder Capital (LADR) has a nuanced business model that confuses many investors and money managers. But at heart, it’s a commercial mortgage lender structured as a real estate investment trust.
The more loans it writes, the more money it makes. Its weighted average loan-to-value (LTV) ratio is a conservative 67%, which means they have a sizable 33% equity cushion again real estate price declines.
Contrast this with your average homebuyer who has, at most, a 20% equity cushion via his or her down payment. And in most cases, as we saw during the housing crisis, it’s much less! This is A-1 credit quality.
Ladder’s dividend is well covered by profits, too. The firm’s primary asset is the expertise of its senior management team, which averages over 28 years of industry experience. Their interests are well aligned with shareholders, thanks to their significant skin in the game. Insiders own $199 million of equity — about 12% of the firm’s $1.5 billion market cap.
Since our 2016 purchase of Ladder Capital, we’ve enjoyed 69% total returns (including dividends), a 24% raise on our quarterly payout, plus two special dividends. Business is still humming along. The firm generated core earnings per share of $0.38 in the most recent quarter and paid a $0.34 per share dividend.
Its payout is well covered and this payout ratio is plenty comfortable for Ladder, which must pay most of its profits to shareholders to maintain its tax-advantaged REIT status.
Remember, REITs don’t need to retain earnings to grow their businesses provided they use debt sensibly. Even with Ladder’s price appreciation, shares still pay 7.9% today thanks to its dividend raises. Don’t overthink it. Buy it.
Tim Plaehn, The Dividend Hunter
Starwood Property Trust (STWD) — a top pick for conservative investors — is a finance REIT whose primary business is the origination of commercial property mortgages. As one of the largest players in the field, Starwood Property Trust focuses on making large loans with specialized terms. This gives them a competitive advantage over banks and smaller commercial finance REITs.
Over the last several years, the company has diversified its business, branching into commercial mortgage servicing, acquiring real equity properties with long term revenue stability, and recently a portfolio of energy project financing debt. This diversification will allow Starwood Property Trust to thrive and continue to pay a big dividend in any financial environment.
In the commercial loan business, over 95% of the commercial mortgage portfolio has adjustable interest rates. This means that as the Fed increases interest rates, Starwood’s net income per share will grow. This REIT provides an excellent hedge against rising rates.
In recent years, the company has acquired what is now the largest commercial mortgage servicing firm. That arm of the business handles servicing, foreclosure workouts (for fees) and the packaging of smaller commercial mortgages into mortgage backed securities.
This business segment would see the fees increase exponentially in the event of a recession where commercial property owners were forced to let go back to the lenders.
In addition to the finance side of the company, Starwood has acquired selected real properties, including apartments, regular office buildings, and medical office campuses. According to STWD’s CEO, “All of the wholly owned assets in this segment continues to perform well with blended cash-on-cash yields increasing to 11.4% and weighted average occupancy remain steady at 98%.”
The property segment provides assets with long-life revenue streams to offset the shorter term rollover schedule of the commercial mortgage portfolio. Real assets also add depreciation to the income statement, shielding cash flow.
In mid-2018 the company acquired a $2.5 billion energy finance business from General Electric. The loan book is non-recourse to Starwood Property Trust. Starwood Capital, the private equity manager of STWD, already had energy finance experts in house. This business segment has significant potential for growth.
This diversification of business segments by Starwood Property Trust is what separates this commercial finance REIT from its more narrowly focused peers. STWD has paid a $0.48 per share quarterly dividend since the 2014 first quarter. My investment expectation is that the dividend is secure, and I want to earn the 7.5% to 8.0% dividend year-after-year.
STWD was one of my top picks for 2019. Through December 15, 2019 the stock produced a year-to-date total return of 33.8%. Going forward, I would not be surprised for the share price to continue to appreciate, pushing the yield down from the current 7.8%.
Doug Gerlach, SmallCap Informer
Founded in 2011, Preferred Apartment Communities (APTS) is a REIT focused on multi-family properties, student housing properties, office buildings, and grocery-anchored retail in growth markets throughout the United States.
The current yield is around 7.6%, but with funds from operations (FFO) expected to grow in the high single digits and a price to FFO ratio below 10, the combination for an attractive total return looks to be in place with the concerns of investors being quite overblown.
The performance of residential REITs is typically aligned with the economic cycle. During a recession, occupancy rates decline, taking profits down with them. Recent chatter about an impending recession has sent investors scurrying away from economically sensitive industries, and this has contributed to Preferred Apartment’s lower current valuation.
This is where the REIT’s diversification could be an asset — its retail properties are primarily grocery-anchored plazas, and grocery stores are cyclically defensive.
Revenues have grown rapidly since the REIT was founded in 2011. Since 2012, revenues have grown at an annualized 79% to reach $397.3 million in 2018. Funds from operations per share (FFO/S) have also grown well, averaging 18.8% a year since 2012.
We see the potential for the REIT to support a high P/FFO of 12, thus providing a future high price of $26.20. On the downside, a low P/FFO of 8 times trailing 12-month FFO/S provides a low price of $11.90. The current reward/risk ratio is 8.2:1, better than our minimum desired 3:1 ratio, and the REIT is a buy up to $15.50. From the current price, the projected total annual return is 20.5% including an average 6.2% yield.
Click here for access to MoneyShow’s 100+ page Top Picks Report featuring the nation’s most respected and well-known newsletter advisors favorite investment ideas for 2020.