A Monopoly Of REIT Dividends – Seeking Alpha

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A Monopoly Of REIT Dividends – Seeking Alpha

Everyone (or almost everyone) knows the classic Hasbro board game of Monopoly.

It’s the one where you try to own as many well-placed properties as possible to charge your opponents into bankruptcy. There was even some personal satisfaction to be had if they quit out of frustration with how long it could go on.

Which it could. On and on and on.

Even so, I used to love that game so much.

And yes, I won a lot.

It was such a fun challenge going around the board, analyzing your funds with every move you made. In the beginning, it was all about selecting the best properties to buy: Vermont Avenue, St. James Place, Marvin Gardens, Park Place and Boardwalk… not to mention the utilities and railroads.

There was so much to snap up during those first few circuits.

After all the properties were purchased, then it was a matter of who would trade with who. Could you tempt any of your friends into making a business deal where you got the card you wanted and they got a card they wanted?

It was always worth a shot. That way, you could charge people extra rent every time they rolled right onto your property.

Oh, the rent you could charge! And, in most cases, you could even build houses or – even better – hotels on those assets, charging even more for the hassle.

But perhaps best yet, no laws were broken, jobs were lost, or laws crossed in the process. Oh, there might have been a few hard feelings along the way. But even those were short-lived: The mere product of a momentary sore loser.

In the end, it really was just fun and games.

Unlike, of course, the concept it’s based on. Now that isn’t quite such a care-free subject matter.

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The Definition of a Monopoly

Ask most people today, and they’ll flat-out tell you that monopolies are bad. And, considering what we learn in our history books growing up… not to mention the social media craziness going on right about now… we have good reason to say so.

A monopoly – any monopoly outside of Hasbro, anyway – can yield some very undesirable consequences, at least for consumers, if not the larger economy. That’s because, in its purest form, it means a business or individual owns every aspect of something, typically an industry.

While that might sound like every company’s complete Christmas list, many governments have determined it to be an economic nightmare, As such, they outlaw the practice of getting too big. (At least in theory.)

In the U.S., for example, the Sherman Act of 1890 kicked off a series of federal antitrust rules designed to prohibit such entities from forming… the rationale being that the more companies per industry there are, the more fair and balanced prices will be across any given sector.

In many cases, no doubt, these acts have worked out exactly as intended, protecting consumers from wolves in corporate clothing. In other cases, things don’t work out so well.

That’s because this solution to having human beings (i.e., business owners) affecting human beings (i.e., consumers) to that economic degree still ultimately puts human beings (i.e., government officials) over human beings (i.e., business owners) to an economic degree. Therefore, there’s always the possibility of corruption or less intentional flaws to come into play.

I suppose there’s just no perfect solution to the matter. Though, when it comes to building an intensely well-rounded, well-protected portfolio, I can try my best to get you close.

By that, I mean a set of stocks with the best track records when it comes to dividend growth.

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Just as Good as Landing on Free Parking

Stellar as these stocks are, I should probably start out with a disclaimer considering my previous comments.

I’m not necessarily recommending that you buy all them up for a complete “monopoly” in the matter. As always, I don’t know your personal investment situation and I’m not your financial advisor. I’m an analyst who can only assess either broad or specific market-related situations, and then offer my honest opinion about it.

Ultimately then, you’re going to have to choose for yourself one way or the other.

However, the following list is a great one to pick and choose from. If I do say so myself.

If this were the game of Monopoly, we’d be talking about Park Place and Boardwalk – plus all the orange properties everyone seems to land on instead of Free Parking.

Who knows? It might even be worth a get out of jail free card or two, courtesy of the Chance and Community Chest piles.

Don’t you just love this game?

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Put Down Your Money and Pick Up Your Card

In the US REIT sector, the board is much larger than the game of Monopoly, the sector has its very own classification (under the GICS) and is well over $2 trillion in enterprise value. These days, one can invest in practically every property category imaginable:

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Source: iREIT

The good thing about the REIT version of Monopoly is that the gamer (or investor) can pick and choose his of her holdings by carefully analyzing the businesses that generates the best growth. And in order to select the best growers, we decided to screen (from the intelligent REIT lab) for the optimal REITs based upon their historical, current, and future growth prospects. We ranked the top 20 below:

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Source: iREIT

Note: We filtered FFO/share by averaging three years of forecasts (2019-2021) and dividend/share be averaging three years of historical growth (2016-2019). Then we took companies that were in the top 20 for both categories.

Now, after screening for these 20 REITs, we want to make sure their dividend is safe, so we consider their payout ratio and balance sheet strength (using S&P ratings). Here’s how these top 20 companies stack up:

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Source: iREIT

Note: The investment grade-rated REITs (by S&P) are highlighted in light green.

Now, let’s take a closer look at valuation, recognizing that the true way to generate wealth is to make sure that we’re buying companies that are trading at a wide margin of safety.

So, in order to screen for value, look for these REITs based upon (1) their variance from price and fair value, (2) their historical P/FFO vs. norm P/FFO, and (3) dividend yield compared to peer group. First, let’s screen the list of 20 REITs based on “our” margin of safety (price and fair value as estimated by the author).

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Source: iREIT

You can see here that many of the REITs are expensive, based on our estimates, so to continue the screening process, I decided to filter out only the REITs that are trading at attractive valuation levels. This reduced the list of possibilities from 20 to six.



Source: iREIT

As you can see (above), these six REITs are all conceivable candidates buy based on their quality and valuation metrics: Ryman Hospitality (RHP), CyrusOne (CONE), Digital Realty (DLR), VICI (OTC:VICI), Simon Property Group (SPG) and Iron Mountain (IRM).

One last thing that I wanted to do is to compare the dividend yield with the peer group. This also provides us with some evidence that the shares can be purchased at a definitive margin of safety.



Source: iREIT

It’s important to recognize that yield alone should be no way to value a REIT, as referenced previously, these REITs have enhanced dividend growth potential and this means that companies like RHP and CONE have a lower payout (RHP is 54% and CONE is 56%) so they could easily boost their payouts to make the yields more attractive.

Alternatively, IRM has no direct peer group, so we use the industrial peers since that’s the closest property sector to analyze (we recently wrote an article on the marketplace that provides a secret tool that IRM has that could unlock a lot of value).

So in conclusion, after carefully screening for more than 150 REITs within our iREIT Lab (found on our Ratings Tracker on the marketplace) we conclude that we believe the top REITs to buy based upon our tactical screening process are (in order of cheapness, starting with the deepest discounts) Iron Mountain, Simon Property, Vici Gaming, Ryman Hospitality, CyrusOne, and Digital Realty (we would recommend waiting on a pullback for DLR).

When I was a kid, I always won playing Monopoly and now I’m providing you with some of my secrets in order for you to win big. And by that, I am not suggesting that you “bet the farm” on one REIT and pretend that’s your allocation to real estate.

The game is all about finding the right balance between research, capital allocation, and happiness. The last one – happiness – is important and I hope you find my articles useful and productive. And to continue spreading the love (happiness), I plan to commence a new series on Seeking Alpha called “Monopoly Man’s Monthly Strong Buy REIT Pick.

The goal is to help you, so I will be doing all of the heavy lifting and letting you know that you can buy Boardwalk for the price of Baltic Avenue (marketplace members get the picks 48-hours in advance). So ladies and gentlemen, I gotta ask you one thing…. are you ready to roll the dice?



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Author’s note: Brad Thomas is a Wall Street writer, and that means he’s not always right with his predictions or recommendations. Since that also applies to his grammar, please excuse any typos you may find. Also, this article is free, and the sole purpose for writing it is to assist with research, while also providing a forum for second-level thinking.

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Disclosure: I am/we are long CONE, DLR, IRM, RHP, SPG, VICI. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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