Put REITs In Retirement

Dragon Claws I’ve been a writer on Seeking Alpha for around 14 years, and during that time I’ve interacted with tens of thousands of investors. With over 4,000 articles to my credit and over 80,000 comments, I suppose you could say that I’m an experienced stock analyst. Of course, prior to writing on Seeking Alpha, I was a real estate developer and investor in which I learned the intricacies of capital markets and financial analysis. I had plans to retire early. Prior to 2008, I had accumulated a solid net worth – close to $30 million, which consisted of around $20 million in a real estate partnership and the remaining $10 million in two multi-unit franchises as well as my personal investments. When I started making money, I had no silver spoon. I was raised by a single mother, and I took out student loans to go to college. I played basketball (in college) but I was not a star athlete (I was a walk on) and I paid for all of my living expenses (worked at the hardware store and had a small stipend from ROTC). The biggest motivator for me to become financially independent was taking out student loans in college. Then later, when I was married, my motivation turned to my family (I have 5 children). My first big loan (at least it was big to me) was for a net lease deal – a freestanding Advance Auto Store in Laurens, SC. I borrowed around $500,000 to acquire the land (just $100,000) and construct the 6,000-square-foot project. I was able to flip that deal quickly to a 1031 exchange investor, and my partner and I pocked around $100,000. That fueled my real estate career. I kept building stores for Advance Auto Parts and eventually, I became one of the company’s largest developers with around 40 projects to my credit. I began adding more arrows (tenants) to my development quiver, and over the course of two decades, I had accumulated a REIT-like portfolio that consisted of properties leased to O’Reilly Automotive (ORLY), Dollar General (DG), Lowe’s Food, Bi-Lo (guarantor was Ahold), Eckerd Drug (acquired by Rite Aid), PetSmart, and others. During these two decades, I learned a lot about the investing process, and I have always enjoyed writing “lessons learned” articles for readers here on Seeking Alpha. As most of my readers (and followers) know, I began writing on Seeking Alpha (in 2010) as a hobby. At the time, I was working for a developer in Texas (still living in South Carolina) and I landed on Seeking Alpha simply to help me unlock my creative juices for writing. I remember telling my bosses at dinner that I was writing on Seeking Alpha, and they thought it was cool. Little did I know that I would be fired in a few weeks. That’s right, I began my new career on Seeking Alpha as a result of being terminated for writing Seeking Alpha articles. As my mother always told me, “When one door closes, another one opens.” So I jumped right in and began pumping out articles… And now, 14 years later, I’ve penned over 4,000 articles with the most followers of any other writer. I want to thank all of my followers for inspiring me to keep going. Retirement 2.0 So, when I began writing on Seeking Alpha I wanted to focus on a specific niche, real estate investment trusts (or REITs). Having a background offered me a competitive advantage that other stock analysts didn’t have. I remember speaking with former Realty Income (O) CEO, Tom Lewis, who told me that I should keep writing. He told me that I was a good writer and that I should start a publishing career aimed at retail investors. So, I did it! It took me a few years to build a loyal follower base and I also published content on The Street, Forbes, Motley Fool, and other sites. Soon I was able to generate enough income from publishing and outside real estate to start investing in REITs. Nothing like having skin in the game, right? So today I wanted to provide you with three of my favorite retirement picks. I’m not ready to retire yet but edging closer and closer every day. While income is important, I’m also looking for growth… And these two REITs appear to be perfect… Americold (COLD): A Wide Moat Pick Americold is a unique REIT. We categorize COLD within the industrial sector; however, this company is the only publicly traded company in the temperature-controlled segment. In fact, COLD is a global leader in temperature-controlled logistics real estate and value-added services. COLD owns and/or operates 241 temperature-controlled warehouses, with approximately 1.5 billion refrigerated cubic feet of storage, in North America, Europe, Asia-Pacific, and South America. These facilities are an integral component of the supply chain connecting food producers, processors, distributors and retailers to consumers. COLD website As you can see below, COLD generates around 90% of revenue from warehouses and the balance in transportation (9%) and third-party management (1%). The warehouse properties are deemed “mission-critical” and they’re located in very strategic locations with best-in-class customer IT interface (this is a wide moat advantage). COLD Investor Deck The transportation category is asset-light and compliments the warehouse segment while also enhancing customer retention (which in turn drives occupancy). This supplementary offering also improves the supply chain efficiency and reduces cost by leveraging scale (this is a wide moat advantage). COLD Investor Deck Speaking of scale, COLD’s diversification helps reduce revenue volatility associated with seasonality and changing commodity trends. ~77% of Revenue from Food Manufacturers and ~20% from Retailers. The top 25 customers enjoy: Average tenure of 37 years 15 customers are investment grade 100% utilize multiple facilities 100% utilize technology integration 88% utilize value-add services. At the end of Q1-24, COLD had total net debt outstanding of $3.2 billion and total liquidity of $732.5 million. Net debt to pro forma core EBITDA was approximately 5.4x. These are healthy stats deserving of the BBB rating (with Fitch / DBRS Morningstar) and Baa3 (Moody’s). The REIT has done an excellent job of transitioning its balance sheet to 93% unsecured and 86% fixed rate, with a remaining weighted average term of 4.9 years (no material debt maturities until 2026). COLD Investor Deck In the latest quarter (Q1-24) COLD generated AFFO of $104.9 million or $0.37 per share, an increase of over 28% on a per-share basis year-over-year. This solid performance was driven by significant improvements in same-store services margins, where COLD delivered a record first quarter of 10.7%. This was a 671-bps improvement year-over-year, which resulted in an incremental $22 million of NOI, or roughly $0.08 a share in Q1. As a result, COLD raised its full-year 2024 AFFO per share guidance to a new range of $1.38 to $1.46 with a midpoint of $1.42, an increase of $0.05 per share (represents an approximately 12% increase from 2023 and an approximately 28% increase from 2022). iREIT® This is what excites me the most… 12% growth in 2024… And analysts forecast growth of 13% in 2025 and 12% in 2026. Now the dividend history is lackluster, as shown below: iREIT® However, the future looks bright as analysts estimate dividend growth of 9% in 2025 and 10% in 2026. iREIT® Valuation is also appealing. As shown below, COLD is now trading at $25.35 with a P/AFFO multiple of 18.7x versus a normal multiple of 26.7x. I find that especially interesting if you consider Prologis (PLD) which trades at 24.5x or Terreno (TRNO) which trades at 31.4x. COLD’s dividend yield is 3.5% and well-covered at around 65%. FAST Graphs In the forecast below, I’ll be conservative and target COLD to move closer to a 21x multiple at the end of 2025. Including this multiple expansion, dividend, and growth forecast, COLD could return (conservatively) 25% annually. FAST Graphs Essential Properties (EPRT): Another Wide Moat Pick Essential Properties is one of over 15 net lease REITs, but I’ll highlight what I like about this one. EPRT began trading in June 2018 and since that time the company has assembled a diversified portfolio using an investment strategy that focuses on properties leased to tenants such as restaurants (including quick service, casual and family dining), car washes, automotive services, medical services, convenience stores, entertainment, health & fitness and early childhood education. EPRT has the longest duration lease term (14.1 Years WALT) in the net lease sector with the lowest rent expirations in 2026 (as shown below) – a wide moat advantage: EPRT Investor Deck EPRT’s newly assembled portfolio of Net Lease properties have strong unit-level rent coverage of 3.9x. Notably, 99% of EPRT’s tenants provide unit-level financial reporting (another wide moat advantage). EPRT Investor Deck EPRT has maintained steady portfolio operating performance, as evidenced by healthy occupancy trends (since inception) and very strong recovery rates (average recapture in excess of 100% upon re-leasing). EPRT Investor Deck In Q1-24, 100% of EPRT’s investments were originated through direct sale leasebacks and subject to EPRT’s lease form with ongoing financial reporting requirements. Sale-leasebacks are another wide moat advantage for EPRT: 82% contain master lease provisions and 87% were generated from existing relationships. EPRT also has a healthy balance sheet, with pro forma net debt to annualized adjusted EBITDAre of 3.6x at the end of Q1-24. Also, total liquidity was over $850 million, highlighting significant liquidity to fund growth plans for 2024. EPRT Investor Deck Since the IPO, EPRT has generates solid earnings (AFFO/sh) growth – averaging around 15% per year since 2020 (as shown below). Analysts estimated 7% growth (AFFO/sh) in 2025 and 2026 (best in class for the net lease sector). iREIT® EPRT has also generated steady dividend growth while maintaining a conservative payout ratio of around 65% (lowest in the sector) – another wide moat advantage. iREIT® At the end of Q1-24, the company refined its 2024 AFFO per share guidance range of $1.72 to $1.75, implying an over 5% growth rate at the midpoint. EPRT’s valuation is also compelling. As shown below (FAST Graphs) shares trade at $26.85 with a P/AFFO multiple of 15.9x (normal is 18.5x). The dividend yield is 4.3% – not the lowest in the net lease sector – but the low payout ratio and best-in-class growth helps me sleep well at night. FAST Graphs We forecast EPRT to generate annual returns of 20% to 25% (as shown below). FAST Graphs Put REITs in Retirement I hope you enjoyed reading this article, and I look forward to your comments below. I’m also looking forward to a special announcement this week. As always, thank you for the opportunity to be of service. Adversity is bitter, but its uses may be sweet. Our loss was great, but in the end, we could count great compensations.” – Benjamin Graham Happy REIT Investing!

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