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Does Your Portfolio Have Too Many Good Things?

It's possible to have too much of a good thing.

Too much sugar.

Too much exercise.

Too much sleep.

Too much vacation.

These are facts of life, yet we humans have a bad tendency to get lost in the moment, to jump on the bandwagon, and every other cliché line out there that means we think we’ve found the end-all be-all of “goodness” in a single entity.

This is evident in almost every aspect of our lives, but let’s pick on just a few specific categories to further my point.

No offense to Dr. Oz or coconut oil intended.

An Advertisement-Driven Euphoria

When it comes to runaway trends, the health and wellness industry comes to mind fairly quickly.

If Dr. Oz touts the benefits of, say, coconut oil and then other experts weigh in, proclaiming it can treat Alzheimer’s, prevent heart disease, boost your immune system, improve your memory, prevent cancer and bestow the gift of leprechauns holding pots of gold…

All of a sudden coconut oil is flying off the shelves in every form possible.

It’s intense.

The fashion industry, of course, is another big pile-on area. Some household-name designer brand says that skinny jeans or the color yellow or burlap sacks are everything we should aspire to wear, and suddenly the fashion conscious just have to have it.

All of it! Now, if not sooner.

Or – one last example before we get to the very important REIT-related point below – celebrities. Our culture is obsessed with Hollywood. All we have to do is hear that someone is the new “It” guy or gal, and we’re all over them, needing to know every single detail down to the exact number of hairs on their head.

What were they wearing yesterday?

What did they tweet out on Tuesday?

Who were they seen with over the weekend?

It’s insane how far we can dig into these people’s lives, as if our very existence depends on knowing their height, weight and even more intimidate details about them.

That might actually be the pinnacle of how overboard we can go with a “good thing” (or what we perceive to be a good thing). And if you don’t fall into that trap, then good for you.

But before you scoff too much about health nuts, fashionistas or the gossip-obsessed, consider this question…

Are you doing something similar when it comes to your investments?

Diversification. Diversification. Diversification.

We’ve discussed this before and, no doubt, we’ll discuss it again: The desperate investment need to diversify.

Just because something looks good – and even if it is good – doesn’t mean we should buy it and only it. This applies to precious metals, to large-cap stocks, to startups… and to real estate investment trusts as well.

If you know anything about me whatsoever, you’ll know I like REITs. They’re a wonderful kind of stock that benefits from real estate trends without taking on all of the very real real estate risk.

That’s where we need to pause though. Right on that last sentence. The 15th word to be precise.

“All.”

It’s true that REITs are designed to be less risky assets, but that doesn’t mean they’re perfect. They can suffer downturns as a sector, be mismanaged individually, or lose out under location-specific trends rather out of their control.

That’s why it’s so important to diversify. And if you can’t diversify on your own, then your portfolio is probably better off in other hands.

Diversification-Minded Do-It-Yourself REIT Investing

Following the do it yourself model by managing your own investments – for REITs or any other category – is an awesome option under two conditions:

  1. You have the knowledge necessary to do it.
  2. You have the wisdom necessary to do it.

You’ll need to diversify your larger portfolio, yes, but also within each separate category. That way, you always have an optimal long-term balance of stocks, bonds, precious metals, treasuries and real estate… always making sure to have an adequate amount of cash on the side.

As such, you don’t just want to buy up healthcare REITs, no matter how stable they might be. You’ll also want to sample from subcategories such as retail REITs, residential REITs and maybe even mortgage REITs.

Of course, this brings up a whole new kind of diversification issue: Which ones do you invest in?

Right now, there are more than 200 REITs listed on publicly-traded U.S. exchanges. That figure could be higher, obviously, but 200 is still a lot to sift through.

And what about after you sift through them? Using healthcare REITs as an example again, there are a lot that look really good. Yet remember: You’re not supposed to overload on any one category or subcategory.

So what do you do?

One great option here is to invest in REIT exchange-traded funds. ETFs themselves capitalize on a specific category of investments, whether an entire index or something exceptionally specific such as business assets from Qatar.

In the world of REIT ETFs, you can therefore find those that sample from every publicly-listed real estate investment trust on the books – and others that narrow that number down to only mortgage REITs or residential REITs.

Take your well-researched pick.

It’s true that your profits and dividends might not be as high this way. But the tradeoff is that your portfolio will be much more diversified.

Finally, if REIT ETFs seem too daunting or prove too problematic for you, then DIY investing might not be your best option. There’s no shame in this whatsoever, only the potential to assess your particular situation and maximize your profits as a result.

With that said, here are some blue-chip recommendations...to help you sleep well at night.

3 REITs To Help You Sleep Well At Night

Federal Realty (FRT) is a blue-chip “dividend king” that helps me sleep well at night. This shopping center REIT is an industry leader with a high-quality retail portfolio located primarily in major coastal markets from Washington D.C. to Boston as well as San Francisco and Los Angeles. The company’s expertise includes creating urban, mixed-use neighborhoods like Santana Row in San Jose, California, Pike & Rose in North Bethesda, Maryland, and Assembly Row in Somerville, Massachusetts.

Federal Realty owns 105 flexible retail-based properties located in eight strategically selected major markets – transit-oriented, and located within the first ring suburban locations. Although the company maintains a diverse revenue stream, it also has the greatest concentration (77.1%) of assets in the nation's top 20 markets, which comprise 37% of US retail expenditures.

Federal Realty has a highly diversified portfolio with no one tenant that represents more than 2.7% of ABR (average base rent). The company has 2,933 total tenants and the top 25 tenants only account for 27% of ABR. The company owns flexible real estate purposefully positioned to be the real estate of choice for the widest selection of tenants. No single retail category accounts for greater than 9% and “Other” represents 18 additional categories with no category larger than ~4%.

Federal Realty is listed with an A- rating from the S&P. Of the 25 "dividend kings" there are only 12 companies with a rating of A- or better. The balance sheet continues to improve and is very well positioned from a capital perspective as they head into the next phases of new development in the coming years.

In short, Federal Realty is “cycle tested” - the stalwart REIT has maintained a best-in-class track record of delivering consistent earnings growth and is the ONLY publicly-traded shopping center REIT to grow NAREIT FFO per share every year since 2010. Shares trade at $131.70 with a P/FFO multiple of 21.0x. The dividend yield is 3.1% and well covered.

Healthcare Trust of America (HTA) is a leading healthcare REIT that focuses on acquiring, owning, and operating high-quality MOBs (medical office buildings) that are located on the campuses of nationally recognized healthcare systems. HTA is the largest MOB owner with a portfolio of 434 buildings and over 23.2 million square feet in 32 states.

HTA’s investments are targeted to build critical mass in 20 to 25 leading gateway markets that generally have leading university and medical institutions, which translate to superior demographics, high-quality graduates, intellectual talent and job growth. The strategic markets HTA invests in support a strong, long-term demand for quality medical office space.

HTA is rated BBB by S&P and the REIT has the lowest leverage that's seen in over the last two years. In 2018 the company took steps to lower leverage and increase liquidity by selling more than $300 million of non-core assets. HTA utilized the majority of this capital to repay more than $240 million of mortgage debt, allowing the company reduce leverage (5.4x net debt to EBITDA) and maintain over $125 million of cash on the balance sheet.

Over the next three to five years HTA believes it has a steady and dependable earnings model of between 4% to 6%, driven by same-store growth of 2% - 3%, which translates to 3% - 4% earnings growth given operating leverage. HTA shares are now trading at $28.29 per share with a P/FFO multiple of 17.4x (historical is 18.1x). The dividend yield is 4.4% and we believe investors can expect total returns in the high double-digit range over the next 12 months.

Kimco Realty (KIM) is a shopping center REIT that owns 437 shopping centers comprised of 76 million sq. feet of leasable space primarily concentrated in the top major metropolitan markets. The company is headquartered in New Hyde Park, N.Y., and is one of North America's largest publicly-traded owners and operators of open-air shopping centers.

There are three key elements of Kimco's business model that will enable the company to thrive amidst rapid change in the years to come: (1) The quality and location of the portfolio, (2) the many sources of untapped value creation embedded in the portfolio, (3) and the strength and security of the balance sheet.

Kimco's portfolio generates 80% of ABR (annual base rent) from these major metro markets (76% are coastal and sunbelt markets). Most of these centers are located in coastal markets (represented in the shaded light blue area below). Population growth of 6.3 million is projected in these 20 markets within the next five years.

In 2018 Kimco completed several development and redevelopment projects, including its first large-scale Signature Series mixed-use development and exceeded goals for dispositions, enabling the company to end the year with a much stronger and better-positioned portfolio. Kimco’s development business will be a key driver of growth as the current projects are completed and the pipeline with new carefully selected redevelopment opportunities sell out.

Kimco’s balance sheet is in excellent shape. The company finished 2018 with consolidated net debt to recurring EBITDA of 6x. The total consolidated debt stands was $4.87 billion (~$605 million lower than 2-17) and no debt maturities in 2019. Also, the liquidity position is in excellent shape with over $2.1 Billion of availability from the revolving credit facility and cash on hand.

Kimco shares trade at $17.70 with a P/FFO multiple of 12.1x (historical four-year average is 14.0x). The dividend yield is 6.3% and we consider it safe based upon the healthy balance sheet (BBB+) and optimized portfolio of high-quality shopping centers. In our view, management is delivering on its promise and we expect Kimco 2.0 to deliver strong returns (high double digits in 2019 and 2020).