Agree Realty And Realty Income Are My Top 2024 REIT Picks

seekingalpha04-20

The author recommends Realty Income (O) and Agree Realty as top-tier REIT picks for near-term outperformance.Realty Income is a large US-based REIT with stable fundamentals and a potential for over ...

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Dragon ClawsDear subscribers, The time has come for me to show you my top-tier REIT picks for this year. The companies that I invest in, and expect to outperform for the next few years, all the while paying me a solid level of dividends during the time of generating that outperformance. We've seen instability lately across the REIT space, and this instability has also and continues to include companies that I have been beating the drum for some time - almost a year. Many REITs are in a position where, while still cheap and with an upside, much of the initial upward momentum might be over, at least in the shorter term. We're in a place where most of my REIT position is not just in the green/black, but firmly at a profitable return even including FX and not including dividends (given that FX for me has normalized in a negative context in the last month). Overall, I'm very happy with the ongoing REIT exposure, over 15.5%, that I managed to carve out for the last year when everything was cheap. While I do look at combined investment coverage in the several hundred companies with price targets and have \"BUY\" ratings still on over two dozen companies, I also say that there are still REITs that fulfill your investment ambitions, if those investment ambitions include a double-digit growth per year and a solid, competitive yield. In this article, I'll show you some of my favorite current overall REIT investments that have great potential, as I see it, for a near-term outperformance. In this context, near-term means around in the next 2-3 years. Here are some of my current investment criteria.  Fundamental quality (at least BBB or equivalent safety, decent market cap, good management) Portfolio diversification in terms of both square footage and ABR. Good history in terms of FFO growth, and growing their dividend. Around 4%, or more than 4% dividend yield, beating current CDs/savings accounts A realistic, conservative upside of around double digits or higher  Provided you get this, I believe you have a chance at beating inflation, while also getting competitive dividends - and this is where my current goal is. 1. Realty Income (O) Realty Income did try to \"claw back\" some of that valuation in the last few months and managed to climb up above 15x P/AFFO for a short while - only to then plunge back down. While it's not yet again at 6% yield as is my current yield basis, it's nonetheless at a very attractive level of investment. At over $45B worth of enterprise value and a market cap of over $45B as well, this is one of the largest businesses in the space. (Source: Realty Income IR) It's heavily US-weighted, with only slight exposure to Europe, though that is growing as well. I've gone on record in one of my articles saying that I view Agree Realty as the more \"qualitative\" play, and this is true - however, Realty has the scale that the former lacks, and in this business, scale matters.    Realty Income IR (Realty Income IR)The company's weakness relates to its few risky tenants, and the company's diversification tendencies, which some investors view more along the avenue of \"diworsification\" - but this is not something I agree with. Why? Because of fundamentals and results. Take a look at this company's trends over the past few years. Realty Income Valuation (F.A.S.T graphs)It's completely natural that a REIT such as this isn't going to be trading high when interest rates are what they are. But I want you to look at the unerring stability of this company's AFFO, relative to the volatility of its share price and how it's being valued. This is one of the holdings in my portfolio is expect to hold for years and decades, and if fundamentals remain stellar - it's A-rated - I expect to add if it drops more. On the fundamental earnings side, there is no issue with Realty Income. Perhaps lower growth, but that's it. Those arguing against Realty Income and for a bearish case argue for a downtick in occupancy, even if only slight, and some systematic headwinds in the form of cap rates and property values - softening macro affecting the company's bottom lines somewhat. I don't argue against these things - where I have an issue is how they'd affect the company. I don't think it's outlandish here to expect lower valuations, given the lower annualized AFFO growth. That's fine. Let's expect that. The company's 10-20-year long-term premium is between 17.5-19.5x, making that 18.5x. That's the historical average. (Source: FactSet) How low do you want to go for an A-rating with over 5.5% yield that's well-covered? Below 16x? Realty Income Upside (F.A.S.T graphs)As you can see, even in that case, the company will deliver over 15% annualized return, dividends included. And that's even with the sub-3% growth rates the analysts are expecting here. We have 4Q23 highlights, and these trends more or less confirm the continued growth of Realty income. The company deployed almost $3B worth of capital at a cash yield of 7.6%, among this over $850m worth of investments at a cash yield of 8.7% such as preferred equity in several projects and loans, which the company (and I as well) view as attractive. (Source: Realty Income IR) Realty Income has also provided guidance. The company expects a 2024E growth of 4.3% for the year, with less M&A activity and no required moves in the public equity market. In short, the company seems likely to \"digest\" some of its moves here. (Source: Realty Income IR) The company expects to be able to grow going forward into fields like freestanding retail, industrial, data centers, and centric medical in the US, with gaming and data center development as emerging investment verticals with an addressable market of over $5T in the US alone. The size in Europe is more complex but even larger than in the US, and the company has already begun consolidating in nations of the UK, Spain, Italy, Germany, Portugal, France, and others. (Source: Realty Income IR) In the case that the premium in valuation is heeded to any extent and that 19x P/AFFO is upheld, you can easily make over 20% annualized RoR here. With this level of safety, that is a very solid investment. That's why Realty Income represents my single large US-based holding. The second-largest one is the next company I'm going to review. 2. Agree Realty (NYSE:ADC) There's a reason for my frequent and recurring ADC ratings and stances. Oftentimes I feel that I am pounding the table and nobody's listening. These times around I am going to continually state my stances for these stocks as I see them until I no longer view them as favorably valued - everything to be able to clearly state that, yes, indeed, I have been trying to make this clear. ADC is at a lower yield of 5.3% and at a lower IG rating - BBB at this time. (Source: Agree Realty IR) It does mean that it fulfills my criteria though, and I'm very curious to see what the market has made of what I view as a sector-leading in terms of quality, player that works in triple-net/retail. The company is currently expected to grow more than Realty, even if just by 0.7% per year, and has what I view to be a more attractive tenant quality profile.   ADC IR (ADC IR')This is also what forms the core of my thesis. It lacks the \"risk\" players, such as theaters, that Realty Income has. Boring strategies, like I would view Agree's strategy as being, are oftentimes some of the best strategies out there. The current price is, in fact, only a dollar above my cost basis - which means that I'm looking to increase my stake in Agree Realty whenever possible. The upside for ADC is not just the yield though - that is almost the smallest part, but it still provides you with a solid income. The argument for investing here is the combined quality and upside, which is something you don't get from a pure debt investment. (Source: Agree Realty IR) I say this because I often get the question of why I don't just put money in bonds or a savings account instead of this - and that is the answer. I firmly follow my overall stance, that every type of investment has its purpose and its goals. I invest in a lot of things - I invest in debt, in prefs, in common shares. I invest in different currencies.   ADC IR (ADC IR) Every investment has a purpose, a timeframe, and a realistic upside that I see, and try to get - and statistically, on a 5-10-year basis, I usually get what I want - more or less. I believe one of the reasons for this is that my one of my core tenets is \"patience\". Out of a total of 404 investments that I have made in the last 10 years, I have sold 4 with a loss (Source: Author's Data). This gives me a decent track record - at least, that's my belief, and is what I base my overall conviction on. Now, I still have investments that are at a loss at this time, but these are not realized. ADC is one of my highest convictions in REIT-dom because even in the case of complete AFFO multiple normalization, completely disregarding any premiumization and reverting to a 15x P/AFFO valuation profile, ADC still delivers over 11% annualized. At 16.2x, it delivers close to 15% annualized. ADC Upside (F.A.S.T graphs)For you to lose money on this particular investment, ADC would have to normalize to something to a 10x P/AFFO, which would generate about 1-2% negative annualized RoR and imply a $44/share price for 2026E. While theoretically possible, of course, I do not view it as likely given the quality, growth profile, and potential of this business. Agree Realty is the second-largest US investment in my portfolio, for these reasons, and I would view it as a \"BUY\" here. Let's wrap up for a bit. Wrapping up - Two companies with significant upsides Realty Income is a company I view as having a share price target of at least $65. I view it as a \"BUY\" here. I own a 2%+ stake in Realty Income in both my private and my corporate portfolio. Agree Realty is a company I view as having a share price target of at least $75. I view it as a \"BUY\" here. I own a 2%+ stake in Agree Realty Income in both my private and my corporate portfolio. My theses for both of these companies are of positive nature. I believe that when it comes to both of these REITs, they are likely to outperform over time - that is why I am allocating more capital whenever the possibility arises due to liquidity availability and the like. What about the risks to these companies? Like with any business, the larger you get the larger your volume of risk-adjusted acquisitions have to happen in order to generate a good return and above all, value growth for its stakeholders. This has already happened to Realty Income, as the company has been seen to expand to riskier areas to expand, as the traditional areas are seeing more and more competition. This needs to be priced in - but as I see it, it already is. Aside from this, I would also point to rising interest rates reducing cap rate spreads and financing costs, which affects management and its expertise in growing through external means - but this is already on the reversal, with interest rates likely going down again, which \"mutes\" this risk somewhat. Also, what we need to look at here is the company's ability to organically grow its rents higher than inflation, which is being put into question. Realty Income specifically is more susceptible to this, with its long-term leases having less built-in rent bumps over the long term, meaning potential risk for inflation impacts. Aside from those things though, relatively small risks, I would argue. Both of these companies clearly fulfill the requirements and demands that I have set out for what REITs I invest in. Over the past 24 months, I have become even more conservative about the companies where I go in, and I don't foresee that changing. Why is that? Because as far as things are considered, I've reached my goals. There is no \"push\" for me to reach a certain level of dividends on a monthly or annual basis. That goal is one I reached over 2.5 years ago, it now being a 6x monthly expense coverage ratio from dividends alone. I'm not going to be reckless - and these two companies are perfect examples of this, I believe. So, those are two REITs I'm currently viewing as my \"Top BUYs\" in the space, and that I believe are worth consideration here. These are certainly not all of the buys, but they are at the core of what I view as a positive outlook going forward.","kind":null,"is_publish_news":null,"is_publish_highlight":null,"is_publish_live":null,"is_publish_wemedia":null,"editions":null,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.22.4","shortVersion":"4.22.4","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2428677516"}