If I Could Only Hold 5 REITs Over The Next Decade

seekingalpha09-14

I often hold my REITs for just 1-2 years.But there are some exceptions that we expect to hold for the long run.Here 5 REITs that I will hold for the next decade. hometowncd Generally speaking, I am ...

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What I mean by this is that I won't hesitate to sell positions as they reach fair value to reinvest elsewhere. I am still long-term oriented, but if my thesis has already played out, and the future upside is limited, then I would rather switch to something else with more potential. This explains why I often end up holding specific REITs for just a year or two. But that is not always the case. There are some specific REITs that I expect to hold in my portfolio for a very long time to come because I expect them to create significant shareholder value over time. With that in mind, if I could only hold 5 REITs for the next decade, it would be these: First Industrial Realty Trust, Inc. (FR)  FR is probably my single favorite industrial REIT today. It owns mostly Class A distribution centers properties in infill locations of supply constrained coastal markets.   First Industrial   First Industrial The demand for these properties is growing at a rapid pace as a result of the growing trends of onshoring and e-commerce, but their supply is limited since the best locations in these markets are built out already. I think that this will lead to a supply / demand imbalance over the long run, leading to strong rent growth. But there are two other reasons why I expect FR to create significant value over the long run: Firstly, its current lease rates are deeply below market level right now, and this provides it with an opportunity to hike rents by 40-50% as its leases gradually expire. It is a “bank of growth” for future years as its leases gradually expire. Today, their average remaining lease term is only about 4 years, so it won't take long for FR to capture all of this upside. Secondly, the REIT also owns a huge land bank. The land itself is estimated to be valued at nearly $1 billion, which is very significant for a REIT with a $7 billion market cap. This is a big opportunity because it allows the REIT to develop a lot more properties over the coming decade, creating further value for shareholders. All in all, I expect the REIT to grow its cash flow at a high-single digit growth rate, which combined with its 3% dividend yield should lead to double-digit annual total returns. But now comes the kicker: I also expect its valuation multiple to expand as REITs recover from this bear market, resulting in another 30% upside from here. Add all of this together, and FR could realistically deliver 15%+ annual total returns over the coming decade. That's very attractive coming from a blue-chip type REIT with low leverage, Class A properties, and a great long-term track record. RCI Hospitality Holdings, Inc. (RICK) RICK is not officially structured as a REIT, but it essentially functions as one. It focuses on nightclub property investments, and the thesis here is pretty simple. There are very few buyers, but many sellers of these assets. Few buyers because it requires unique expertise and there is the social stigma of investing in nightclubs, especially the kind that RICK is targeting. Many sellers because most owners are approaching retirement age and this is not the type of asset that you typically pass on as a legacy to the next generation. As a result, the valuation multiples of these assets are typically quite low, at just around 3-5x EBITDA. Despite the low multiples, these are high-margin businesses that enjoy a quasi-monopoly in their local markets due to the limited number of licenses.   RCI Hospitality RICK is the only buyer in this space with significant scale and access to public capital, putting it in a strong position to consolidate this space, earning considerable spreads over its cost of capital. Typically, REITs are happy if they can earn a 150 basis point spread. Well, RICK puts this model on steroids, commonly earning 10x greater spreads due to the lack of competition for these assets:     REITs RICK   Acquisition yield 5-7% 25-33%   Value-add potential Limited Significant   Spread over the cost of capital 100-200 bps 1,000-2000 bps   Click to enlarge These acquisitions have allowed the company to grow its FCF per share by 20%+ annually ever since it started pursuing this strategy in 2016, and it has resulted in massive returns to shareholders until the recent crash in its share price:   RCI Hospitality But right now, the stock is cheap. It has crashed because its clubs suffered in the post-pandemic normalization period. Its clubs were doing unsustainable good numbers in 2021 and 2022 following the reopening, and this caused comps to suffer in 2023 and 2024. But now the club performance is stabilizing, and the company expects to return to club acquisitions. Trading at just 7x FCF, I think that this bodes very well for the coming decade. Corporación Inmobiliaria Vesta, S.A.B. de C.V. (VTMX) Vesta REIT is also a spread investment. It is the only NYSE-listed Mexican industrial REIT and this gives it access to significant capital at a lower cost to develop new properties, earning large spreads over its cost of capital. The growing trend of nearshoring is leading to substantial demand for space, and Vesta is here to deliver it.   Vesta REIT Historically, it has managed to earn a 10.1% average initial yield on its new development projects, which is remarkable for an industrial REIT. Similar REITs in the US only manage to reach a 6-7% initial yield.   Vesta REIT Despite earning these huge initial yields, Vesta can still access American capital at a reasonable cost. Its debt only has a 4.5% interest rate. Even if that expanded to 6%, the spreads would remain substantial. I don't see the trend of nearshoring ending any time soon because it just makes a lot of sense for American, Canadian, and European companies to move supply chains from China to Mexico since:  It is far closer. Labor cost is a lot cheaper. China is a dictatorship that's supporting Russia's brutal war on Ukraine, working hand in hand with North Korea, and threatening to invade Taiwan.  The growing demand for industrial space in Mexico will lead to solid rent growth and offer many development opportunities for Vesta. This year, it has guided to grow its FFO per share by about 10%. I believe that it can keep this going for a long time to come, making it an ideal investment to hold over the coming decade.   Vesta REIT Add the dividend yield and some multiple expansion, and you could potentially earn up to 15%+ annual total returns over the coming decade. W. P. Carey Inc. (WPC) W.P. Carey's investment thesis is about its coming transformation, which we expect to eventually be rewarded with a materially higher valuation. Until recently, W.P. Carey was a diversified net lease REIT with relatively high leverage, significant exposure to office properties, a fee-earning asset management business, and a very high payout ratio. It had been struggling to grow for years because it was gradually exiting the office property sector and its asset management business. It also wasn't retaining enough to reinvest in growth. This caused its market sentiment to suffer for years, depressing its valuation multiple, and preventing it from raising capital to grow. The management finally had enough and decided to rip off the band-aid. It spun off its office properties into a separate REIT, paid off some debt, reduced its payout ratio, exited the asset management business, and has decided to refocus primarily on industrial net lease properties:   W.P Carey Cutting the dividend was not a popular move and led to a lot of selling pressure over the short run. But if you can think long term, I think that this is a great opportunity. The company is now stronger than it has ever been and yet, it is temporarily priced at a discounted valuation due to this unpopular decision. But if you look back, we have seen this before. Agree Realty (ADC) cut its dividend in 2011. This was very unpopular and its stock suffered. However, then in the next decade, it was the most rewarding net lease REITs, much more than its peers like Realty Income (O), as it rebuilt from its low valuation and was eventually rewarded with a higher multiple. I expect the same to happen here, and the potential is significant given how low its valuation has gotten:     W.P Carey Industrial Net Lease REITs   FFO Multiple 12x 17x   Click to enlarge Over the long run, it should be in a position to grow its cash flow by ~4% annually and you earn a near 6% yield while you wait for the market to eventually reward it with a higher multiple. Repricing at just 16x FFO would result in 30% upside from here. NewLake Capital Partners, Inc. (OTCQX:NLCP)  NLCP is a riskier pick for this list because of its tiny size and specific focus on cannabis cultivation facilities.   NewLake Capital Partners But with higher risk comes the potential for large returns, and I think that NLCP could be one of the most rewarding REITs over the coming decade. That's because it is in a unique position to deliver:  A high yield A rapid growth rate Some multiple expansion.  Currently, the dividend yield is 9%, and it is well covered with an 82% payout ratio. Secondly, the REIT should be able to grow its cash flow by 5-10% annually because its leases enjoy ~3% annual escalations, and it currently has zero debt, leaving it a significant capacity to acquire new properties. The cap rates in its property sector are 12%+, far higher than the interest rates on any new debt that it would take. Finally, the REIT is today priced at just 9x FFO despite growing at a rapid pace and having zero debt. In comparison, its close peer, Innovative Industrial Properties (IIPR), which has a weaker balance sheet, it priced at 15x FFO, and this is entirely because NLCP has a worse listing than IIPR. NLCP is just traded on the OTC market, but IIPR is listed on the NYSE. NLCP would like to upgrade its listing, but it cannot because the rules changed, and they are not listing cannabis companies anymore. But rules will likely change again in the future and this could eventually lead to a lot more capital coming to this space, allowing NLCP to reach a much higher valuation multiple. Between the high yield, the rapid growth, and some multiple expansion, the returns could be truly exceptional over the coming decade.  Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. 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