I’m anchoring my SWAN portfolio with these two REITs

As many of you know, I’m a big proponent of stocks that pay a monthly dividend.

Maybe because over the years, as a real estate investor, I’ve collected hundreds of rent checks.

I remember about thirty years ago In the past, when I was starting out buying rental properties, I would take one Saturday every month to go and collect the rent.

I owned over a dozen duplexes that were all on the same street, and I remember how content I was to put about $5,000 a month in my pocket.

Of course, I couldn’t keep the money because I had a mortgage, and I also had to set aside money for taxes and insurance.

In addition, there were always ongoing expenses, such as toilet repairs and roof leaks.

I preferred to collect rent checks from tenants such as Advance Auto (AAP), O’Reilly Auto Spare Parts (Orly), Sherwin Williams (what), and the general dollar (General Director).

These rent checks are computer generated and more reliable, I usually receive them on the 1st of the month, and there have been no ongoing expenses.

Over the years, I have built over 100 independent buildings that have generated over $4 million in revenue annually.

I sold most of these properties to a close friend of mine, and he now owns over $200 million in net rental properties, and needless to say, he “sleeps well at night” (no debt).

I spoke to him the other day and told him I learned from his success, and said I now have over 17,500 monthly rent checks that help me sleep well at night.

He said to me, “How did you go from 100 rent checks a month to over 17,000 as a financial clerk?”

I told him that two of my largest stock positions are Realty Income (O) and Agree Realty (ADC). I explained to him that I had been gobbling up stocks this year and that I was excited to build a dominant position in these two net lease real estate investment companies.

Oh, oh, oh, it’s magic you know

Realty Income is a net lease REIT that owns over 15,000 properties in all 50 states and Europe (459 assets). With a portfolio of more than 334 million square feet, 1,552 clients, and 89 industries, Realty Income is one of the most diversified REITs in the world.

The company is a member of the S&P 500 Index and boasts a market capitalization of $73 billion and more than $4.8 billion in annual base rent.

About 90% of total rental is resilient to economic downturns and/or insulated from e-commerce pressures. I’m excited to see the company entering new verticals including gaming and data centres, which has demonstrated the potential for increased consolidation within the broader global net lease universe.

Of course, as a landlord, you want to see strong leadership, and we rate Realty Income as a leader in this sector, primarily due to its A-rated credit rating (from Moody’s & S&P) and strong reputation as a dividend grower – 30 consecutive years of annual dividend increases (And over 50 years respectively based on private and public time frames).

Now, as I told my wealthy investor friend, I’m increasing my exposure to Realty Income not only because of the strong fundamentals but also because of the valuation.

As shown below, shares now trade at $53.06 per share, with a P/AFFO multiple of 13.0x. This is what I call cheap, as the company’s “normal” valuation is roughly 19.x0. Even if you take the period immediately before Covid into account, the stock would trade about 18 times.

Real estate income now yields a staggering 5.9%, which includes a very healthy payout ratio of just 74%.

Agreed growth estimates in 2024 and 2025 are 4%. With a modest reduction in interest rates in 2024, we believe stocks will begin to return to normal valuation levels, suggesting a total return potential of 25% per year.

do you agree with me?

Agree Realty (ADC) is a net lease REIT that owns over 2,100 properties, of which 69% of the portfolio is investment grade rental.

I have been building and re-leasing stores to various Agree tenants such as Walmart, Sherwin Williams, O’Reilly, Dollar General, and Dollar Tree.

I’m also impressed with Agree’s ground lease portfolio which includes 224 leases (11.6% of the total portfolio) with a weighted average lease term of 10.3 years. About 88% of the ground rent portfolio is leased to investment grade tenants.

Another strength of Agree is a balance sheet that has strong credit ratings (Baa1/BBB) with very low leverage (at or below 4.5x net pro forma debt to recurring EBITDA since 2018).

Although Agree cut its dividend again in 2011, the company has done an excellent job of restoring confidence with a CAGR of 6% since 2013. Its current payout ratio is a very strong 73%.

Just like Realty Income, I find Agree shares attractive – they are now trading at $60.76 with a P/AFFO multiple of 15.1x (compared to the normal valuation of 17.6x).

Analysts estimate growth of 4% (AFFO per share) in 2014 and 3% in 2025, and the current dividend yield is 4.9%.

As I told my wealthy friend, I bought Agree “fisted” due to its strong operating fundamentals and attractive valuation. As shown below (using quick charts) we see OK returning 25% or so over the next 12 months.

in conclusion

My over three decades of experience in commercial real estate makes me somewhat of an expert when it comes to net lease properties.

Given the current prices of Realty Income and Agree Realty, I decided to build these two pillars of REIT in my SWAN portfolio.

On the strength of about 17,500 monthly rent checks supporting a 5.4% dividend (paid monthly), I sleep well these days.

What about you?

Author’s Note: Brad Thomas is a Wall Street writer, which means he’s not always right with his forecasts or recommendations. Since this also applies to its grammar, please excuse any typos you may find. This article is also free: written and distributed solely to aid research and provide a forum for second-level reflection.