4 Fortress REITs Yielding 5% Plus

In this low rate environment, it’s becoming increasingly difficult to find high-quality dividend paying stocks on sale, especially the companies that have the strongest competitive advantages.

In the REIT sector, we pay very close attention to these primary advantages – cost of capital and scale – because they are the true drivers for earnings and dividend growth.

Long-term competitive advantage in a stable industry is what Warren Buffett and Charlie Munger seek in a good business. It is the economic moat around each business castle. Charlie Munger said,

“We’ve really made the money out of high-quality businesses. In some cases, we bought the whole business. And in some cases, we just bought a big block of stock. But when you analyze what happened, the big money has been made in the high-quality businesses. And most of the other people who’ve made a lot of money have done so in high quality businesses.”

So far in 2019 REITs have delivered exceptional results, just taking one of Buffett’s picks (actually Berkshire Hathaway), Store Capital (STOR) as an example. Since Berkshire purchased a $377 million stake in this Net Lease REIT in June 2017, shares have increased almost 80 percent (46 percent in 2019 alone).

The problem is that many of the high-quality names, like Store Capital, have become expensive, in Buffett terms, they have very little margin of safety. In the quest for yield, most REITs have become richly valued and this means there are very few bargains left.

Don’t worry, and I’m glad you’re reading this article because I decided to put together a quick stocking stuffer list. While I can’t guarantee the same results that Store has delivered, I can provide you with four of our strongest conviction buys, all of which are high-quality REITs with powerful economic moats.

4 Fortress REITs Yielding 5% Plus

Kimco Realty (KIM) shares have made an impressive run so far this year returning over 50 percent; however, we maintain a Buy given the company’s healthy balance sheet (cost of capital) and forecasted growth (of 5 percent) in 2020. The company is hitting all-cylinders with record occupancy of 98.7 percent and over $2 billion of liquidity available. Shares are yielding 5.3 percent and we believe the company can still drive growth that results in a targeted total return in the low double-digits.

Tanger Outlets (SKT) shares have returned -19 percent year-to-date and that makes the 9.4 percent dividend yield even more juicier. We maintain a Strong Buy based upon the company’s disciplined risk management practices that includes a best in class payout ratio (~60 percent) and healthy occupancy (95.9 percent in Q3-19). Tanger has managed to increase its dividend for over 25 years in a row and we see no signs of that record gong away anytime soon.

Simon Property Group (SPG) has an A-rated balance sheet and has maintained an impressive balance sheet, with over $6.8 billion of low-cost liquidity. The company has exceptional financial flexibility such that it can retain around $1.5 billion in capital after dividends are paid. Shares trade at a discount (12.3x P/FFO) and an attractive dividend yield of 5.7 percent.

Ventas, Inc. (VTR) shares have fallen by over 21 percent since the company announced Q3-19 earnings. This means that shares in this S&P 500 healthcare REIT now yield 5.5 percent. We recently scooped up more shares as a result of the pullback that was triggered by a disappointing earnings report in which its senior housing operating segment saw 5 percent SS NOI declines. Ventas likely just needs enough time to improve its asset base, which includes potential asset sales for some of its weakest US SHOP facilities in struggling secondary markets. The dividend appears safe and we are maintaining a Buy with shares expected to return in the low to mid double digits over the next twelve months.

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