Great Opportunities In REITs | The Acquirer's Multiple®

During their recent episode, Taylor, Carlisle, and Tim Travis discussed Great Opportunities In REITs. Here’s an excerpt from the episode:

Tobias: In other areas, you were talking about REITs a little bit before we came on. Do you want to give us your thoughts on REITs?

Tim: Yeah. So, REITs have been a successful investment for us. With the high-interest rate environment, a lot of these real estate investment trusts and real estate related companies, they saw their stocks decline by 50%, 40%, 60%. Valuations got quite interesting with dividend yields between 5% to even 8% on high-quality names that should be growing their dividends just about every year.

Most years, they should. You can look at the refinance risk. That’s one of the areas of uncertainty, how much debt do you have to refinance over the next year or two. And then, when interest rates started going down, they had big runs. A lot of these ran 40%, 50%. And now, with the interest rate volatility picking back up, some of these stocks are selling off a little bit again.

And so, you can lock in a 6% or even a 7% dividend that is likely to grow, and you’re paying maybe two-thirds of the normalized valuation on some of these. And so, for investors that are reasonably conservative are worried that the market might be in a little bit of a bubble. If there is a bubble and we get a recession, interest rates might go down. That’s going to be really good for some of these REITs. So, I do think there’s opportunity there.

Jake: I think one of the guys from Marathon who are famous for their capital cycle theory work said, I think that– I don’t know if he said commercial specifically, but basically the bottom was in the operations for a lot of these things that have been facing problems the last couple years.

Tim: Yeah. If you separate office, office is its own world. Even those stocks, if you look at them, if you look at like Vornado, or SL Green or whatever that one’s called, the New York SLG, if you look at them, the stocks have actually done quite well lately. So, they’ve definitely bottomed. But I still don’t want to play in that space. But the net lease area is really interesting. Cell towers, I think there’s opportunity. So, a few of the ones we like, we like Crown Castle. That one’s trading just above a $100. It’s got a dividend yield of about 6%. That was a $200 stock not that long ago.

There was a headwind from the Sprint merger. And so, there was some redundancy in the towers, and so they lost a little bit of their revenue there. But long-term, they should grow double digits organically. You’ve already got a 6% dividend that looks reasonably safe, barring if they divest a portion of their business, which is a potential outcome. Yeah, something like that.

Or, VICI Properties, the casino owner and entertainment property owner, that pays about 5.5% and still trades at a pretty low valuation. They have 100% occupancy, 100% rental payments even during COVID.

And then, another one we like is W. P. Carey. They are a triple net lease operator in America and Europe. They divested their offices. That was controversial. It reduced earnings in the short-term and reduced the dividend. It wasn’t well forecasted to investors. So, a lot of investors got burnt. They hate it. And so, now, it’s like, “All right, well, all these people hate it.” If you just look at it now, it’s a lot cleaner company trading at a really low valuation for the quality of its assets and it pays, I believe, a 7%, 7.5% dividend, somewhere around there.

Tobias: Do you follow what’s going on in office at all?

Tim: Yeah.

Tobias: You think that’s turning around?

Tim: No.

Tobias: You think the stock is turning–

[laughter]

Tim: No, I don’t. I just think like anything, it just gets priced to oblivion.

Tobias: Yeah.

Tim: The big money people, like the really big– I saw an article in the Wall Street Journal today that some of the old family money in New York, they’re finally selling some of their stuff. But if you have really deep pockets and you can convert some of these things to condos or really upgrade the amenities– If you think more nefariously, let’s say you have connections in politics that might change an area like San Francisco, think of what you could do there if you just have a little bit of better policy out there with how cheap those assets are in San Francisco. I wouldn’t be surprised to see a renaissance, but you got to have deep pockets and political connections.

Tobias: Yeah. I think San Francisco turns around eventually. It has to get really bombed out first. It has to get really, really cheap. Some of those office buildings have been trading for just like– It’s just jaw dropping the distance some of those have taken.

Jake: Yeah. One dollar, take the debt.

Tim: Would you park your car up there?

Tobias: No. At some point, [Tim laughs] you can hold that. You could sit in that building– [crosstalk]

Tim: No, for sure. I agree. If I had that type of capital and connections, I think that would be one of the great turnaround potential opportunities out there.

Tobias: I think the tech rises again. But tech hasn’t fallen over yet.

Tim: Right.

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