Now that earnings season is among us, we are starting to see the dire economic news and the list of companies continuing to furlough or lay off employees continues to grow. In the past month, the financial markets have rebounded strongly off the March lows, which have mostly been fueled by the latest stimulus packages. This optimism we have seen from investors has largely been related to help from the Federal Reserve and federal government looking to keep the economy afloat.
Based on the latest Fed Survey, conducted by CNBC, respondents are expecting the Fed to add an additional $3.4 trillion and congress to contribute another $2.0 trillion by the end of the second quarter. This is in addition to the $2.5 trillion we have already seen Congress commit.
Regardless of the amount of money the Fed or Congress continue to flood into the markets, the economic damage continues to be done and this money will only raise an already extremely low floor. In terms of unemployment, the number of unemployed workers has surpassed 22 million in four weeks, which as I pointed out in my recent market outlook article, this is more jobs lost in the last four weeks than we have gained in the last decade.
This number is expected to rise in the coming weeks, with unemployment expected to reach 20% in the second quarter here in the US.
With that being said, there seems to be a large disconnect between the economy and share prices. We have seen this large rebound over the last month, yet we will just begin hearing from executives regarding the actual impact. As such, I believe much of this rebound is unwarranted and investors should tread carefully. Ensure the companies you are looking to invest in maintain strong balance sheets and how they are impacted by the pandemic.
Last week I provided you with "10 Dividend Stocks On My Buy List When The Market Turns Negative," but now I am going to focus in on my favorite sector, Real Estate. Therefore, I am going to briefly discuss 5 REITs I have on my buy list when the market dips, as I expect.
5 REITs To Have On Your Watch List
#1 Realty Income (O) - Let's begin with the gold standard of REITs and self-proclaimed "The Monthly Dividend Company," and that is none other than Realty Income. Realty Income has long been a popular income play for dividend and retirement investors alike as they have consistently paid a dividend for almost 600 consecutive months, which amounts to roughly 50 years.
Shares of Realty Income fell 52% to the lowest levels in March, but have since gained 34% since then. Since bottoming out at $40 on March 18th, shares retested those levels again a week later and again trading in the low $40 range in early April. These were three tremendous opportunities for investors to add shares of O to their portfolio.
Right now, REITs have gone out of favor to some point as investors fear increased bankruptcies and missed rent checks from their tenants coming in the near future. It will be important to follow upcoming earnings calls from landlords to get further insight. The REITs that have put out updates thus far, have referenced rent deferrals more than missed rent checks, and I believe that is what we will see for the most part. Realty Income maintains a strong portfolio of tenants, with some areas of concern, such as exposure to theaters, but nonetheless the top 20 tenants are strong and should be able to withstand this pandemic.
Shares of O currently trade at a P/FFO of 16.2x, which is well below their five-year average of 19.8x. The company yields a dividend of 5.26%, which is 100 basis points above their five-year average yield of 4.26%. Shares have been trading at an attractive point the past couple of weeks. Buying in tranches during these uncertain times is a sound buying strategy.
Source: FAST Graphs
#2 National Retail Properties (NNN) - Another net-lease REIT I have liked for a while now is National Retail Properties. The company maintains a very strong portfolio of tenants, with roughly 10% of revenues coming from 7-eleven and Mister Car Wash. Both of these tenants are recession-proof.
Here is a look at the company's top 20 tenant list.
Source: NNN Investor Relations
Thinking about the current pandemic we are going through, of the top 20 tenants, the ones that worry me include: AMC Theatres (3%) and Chuck E. Cheese's (2.1%). I believe theatres will come around, but could be one of the last industries to return to a sense of normalcy. Chuck E. Cheese's is not a place that will do well post-COVID as it is a germ bomb for young kids combined with hand food, not a great combination.
Outside of these, I feel like the portfolio should return due to the high-quality tenants within the portfolio. In addition to quality tenants, the company maintains a strong balance sheet, which is key in surviving a pandemic like this. The company currently maintains a BBB+ credit rating.
Shares currently trade at a P/FFO multiple of only 11.6x compared to their five-year average of 18.2x. As you can see, shares have NNN have traded at a valuation slightly below that of O, yet the fall has been much harder for NNN. These shares offer a much better valuation than the premium O commands, yet you maintain a similar portfolio.
Source: FAST Graphs
#3 Iron Mountain Incorporated (IRM) - Iron Mountain is best known for their recycling and storage business due to the IRM boxes employees have seen throughout various companies. However, IRM has been transforming into much more of a diversified company over the years, and one key area of expansion has been data centers.
There are not many sectors that can claim to be a "COVID-19" or any economic environment sector like data centers can. IRM's data center business is primed to continue the growth trajectory more so than ever as companies rethink their business plans and work from home options, which require renting space from data centers.
The company assists other organizations around the world in protecting their information, reduce storage rental costs, comply with regulations, facilitate corporate disaster recovery, and better use their information and IT infrastructure for business advantages, regardless of its format, location or life cycle stage. Due to the company having their hands in various areas of business, the REIT is labeled more as a "Specialty" REIT.
In 2019, the company's data sector segment accounted for only 6% of revenues while records management was the bulk of the business at 70% of total revenues. Here is a look at the data center segment and its future potential, according to management
Source: IRM Investor Relations
IRM shares currently trade a P/FFO multiple of 10.8x, which is well below their five-year average of 15.5x. The company currently yields a dividend of 9.96% compared to their five-year average of 6.11%. At these levels, shares of IRM are certainly intriguing as the company's transitions to more digitally focused.
Source: FAST Graphs
#4 STAG Industrial (STAG) - I thought I would add a second monthly dividend paying company, since you probably enjoyed that with Realty income. Nothing like receiving a dividend check on a monthly basis.
For those of you unaware, STAG is considered an industrial REIT that maintains a very diverse tenant base with the top 20 tenants accounting for less than 20% of annual base revenues. Here is a look at the company's top 10 tenants.
Source: STAG Investor Relations
Based on the boom we continue to see in e-commerce sales, STAG has proven to be a safe and reliable REIT. In addition, the company maintains a strong balance sheet, which has been a common theme amongst the names I am giving you today.
As of the end of March, management provided investors with a COVID-19 update, in which they stated that less than 5% of tenants had requested rent relief, equal to 1% of ABR. In fact, NAREIT conducted a survey across various REIT industries and found industrial landlords to be among the strongest. In the survey, industrial landlords saw the strongest collection of April rents, receiving an average of 99% of expected rents for the month, which is a great sign for STAG.
Shares of STAG are not trading at quite the discount as a few of the other names on my buy list, but trading at a discount nonetheless. I am a long-term investor and not a trader looking to pick the perfect bottom. Instead, I want to buy shares at reasonable values for the long-term.
Currently, shares of STAG trade at a P/FFO multiple of 14.6x compared to their five-year average of 15.0x, so slightly under recent trading history. In terms of the dividend yield, the company currently offers a dividend yield of 5.4% compared to their five-year average of 5.7%. This is certainly a name to watch and buy on the dip.
Source: FAST Graphs
#5 Kimco Realty (KIM) - The last name I will leave you with today is the highest risk option, and that is Kimco Realty. KIM is a shopping center REIT with over 400 properties located in the top major metro markets.
Over the last decade, company management has divested from many underperforming properties to improve the quality and performance of the portfolio. The trimming of their portfolio now has management focused primarily on coastal and high-barrier of entry locations, which tend to be the best performing properties for many in the shopping center industry.
KIM has increased their exposure to higher quality properties, primarily ones anchored by a grocery store tenant. In today's COVID-19 days, we know that grocery stores are still performing quite well and are the place to be, with lines out the door due to the current social distancing rules.
Source: KIM Investor Relations
Shares of Kimco have been hammered in 2020, with investors down over 50% on the year. Investors are worried about the retail tenants, and rightfully so, as I believe post-COVID-19 life will be much different than before. Retail is one sector that will have to adapt to the new life, but many of these tenants will not have time on their side to adapt, and that is why I mentioned at the start that KIM is by far the riskiest on my list.
I am optimistic in the fact KIM has weathered storms in the past and will properly navigate through this one as well, even though it is unlike anything we have seen. Company management has a fortress balance sheet at their disposal, something they will need to lean on until things turn around.
Mall and Shopping Center REITs have taken it on the chin during this pandemic, and rightfully so. As of writing this, shares of KIM currently trade at a P/FFO multiple of only 6.9x compared to their five-year average of 15.1x. Valuations have been cut more than half, but if you are willing to wait it out and looking for a cheap stock combined with a strong balance sheet, look no further than Kimco Realty.
Source: FAST Graphs
Investor Takeaway
The REITs above are a well-rounded mix of risk, yet one thing they all have in common is a strong balance sheet, which is something that is greatly needed during times like this. As I have touched an above, I think we are in for some selling pressures in the near-term as investors have seem to lost track of the impact this virus has taken on our economy and the global economy.
I hope you enjoyed this list as much as I did, and I will continue to provide subsequent articles with other REITs I have my eye on during this state of crisis.
Note: I hope you all enjoyed the article and found it informative. As always, I look forward to reading and responding to your comments below and feel free to leave any feedback. Happy Investing!
Author's Disclaimer: This article is intended to provide information to interested parties. I have no knowledge of your individual goals as an investor, and I ask that you complete your own due diligence before purchasing any stocks mentioned or recommended.
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