3 Top Blue-Chip REITs For 2023

Dozens of articles have been published in recent months warning about the threat of an oncoming recession. See, for example, this example:

News headlines are designed to evoke panic and fear. That’s what gets clicks and captures eyeballs. It’s also what gets investors nervous and inclined to sell their stocks, even at a loss, in order to prevent further losses.

This is especially true for real estate investment trusts (“REITs”), which have disproportionately high ownership among individual investors, rather than the institutional investors that tend to be long-term holders and don’t sell as readily on negative headlines.

The confluence of recession fears, rising interest rates, and high inflation has driven REITs (VNQ) substantially lower this year than the broader stock market (SPY):

REITs have shed nearly 1/3rd of their value, while the stock market is down only ~19%.

Right now, bearishness reigns across the REIT sector as investors can’t seem to see anything but the negatives. But here is a useful reminder: REITs on the whole have historically weathered economic shocks and recessions and come out the other side stronger than before. That has led to outperformance during recessions and coming out of those recessionary periods.

Take, for instance, REITs’ massive and market-beating resurgence coming out of the Great Financial Crisis of 2008-2009:

And this is based on price alone! Adding in REITs’ higher dividend yields would result in even greater outperformance against the market.

Given the degree to which REITs have been punished this year and the low valuations many of them now sport, it certainly appears as though REITs are positioned to enjoy another massive rally coming out of the oncoming (or, perhaps, current) recession.

That said, investors would do well to choose their REITs wisely, focusing on the strongest names with the best growth prospects. It is these REITs that most rarely go on discount, and they are likely to see the quickest and biggest rebound when the dark clouds over the economy dissipate.

Let’s take a look at three of our favorite blue-chip REITs on sale today.

1. Agree Realty (ADC)

ADC owns 1,607 single-tenant net lease properties in the retail space. The overwhelming majority of ADC’s tenant base consists of what it deems the 20-30 largest and strongest retailers in the nation. These are high-credit quality companies with the financial wherewithal both to withstand the pressures of a recession and to invest in omnichannel platforms to remain competitive in an increasingly e-commerce-dominated environment.

Two-thirds (67.5%) of ADC’s rent derives from investment-grade tenants, most of which are either recession-resistant or even mildly countercyclical:

Take Walmart (WMT), as an example. During the average recession, Walmart’s sales actually increase, as shoppers opt for less expensive options for groceries and other everyday goods. The same could be said for Dollar General (DG), which is still opening new stores aggressively across the country.

ADC currently has a dividend yield of about 4.2%, which may not be the highest you can find out there. But the REIT has been growing very rapidly, illustrated by its dividend growth in the high single digits in recent years.

This strong dividend growth is based on high property acquisition volume, which ADC has been privileged to enjoy because of its strong cost of capital. ADC has grown its investment volume every year since 2015, and it expects to bump up investments again this year after a strong 2022:

After a recent forward equity deal, the REIT significantly increased its buying power to pursue any attractive properties available, especially considering the fact that other buyers are seeing their ability to finance acquisitions dry up amid soaring interest rates.

What about the balance sheet? Here again, ADC shows its quality with a BBB credit rating, weighted average remaining debt maturity of 8 years, and very little debt maturing until 2028.

Only $132 million of ADC’s $2.2 billion in debt matures through 2027, making ADC well-insulated from the current spike in interest rates.

If you want to sleep well at night while watching your monthly dividend income grow (ADC pays a monthly dividend), look no further than ADC.

Between its 4.2% dividend yield and ~6% growth prospects, the REITs should keep delivering 10%+ annual total returns in the years ahead.

2. Crown Castle (CCI)

CCI is the nation’s largest provider of telecommunications infrastructure, which includes over 40,000 cell towers, 115,000 small cell nodes, and 85,000 route miles of fiber.

In its core towers segment, CCI enjoys long remaining contract terms, with an average remaining term of 7 years. These contracts with the major telecommunications providers like AT&T (T), Verizon (VZ), and T-Mobile (TMUS) also come with average annual escalators of 3%, providing some organic growth as well.

The REIT’s small cell portfolio is particularly compelling as a piece of the investment thesis. Small cell nodes are smaller telecommunications structures that can be mounted on telephone poles, billboards, or on the sides of buildings, and they are used to densify networks and add capacity in areas of high usage, namely urban areas. This becomes especially useful in the rollout of 5G technology.

CCI’s initial investment yield for these small cells is around 6-7%, but as more tenants are added to each cell over time, that adds incrementally to ROI without incurring any additional costs. This was also the case with its towers, which featured cash yields in the low single-digits in the mid-2000s and now have an effective cash yield of 11.5%, because these towers average 2.4 tenants per site.

CCI also enjoys a strong, investment-grade balance sheet with a weighted average debt maturity of 8.7 years and a low weighted average interest rate of 3.2%.

The REIT’s variable rate debt has surely risen in cost, but CCI is by no means in serious danger from rising interest rates.

Lastly, consider CCI’s stellar dividend growth record. Since converting into a REIT in 2014, CCI has raised its dividend at an average annual pace of 9%.

In recent years, CCI’s dividend growth has come in at around 11%, which is higher than its stated target annual growth rate of 7-8%.

Even if CCI’s dividend growth slows back down for a year or two, total returns should still be at least 10%, considering the dividend yield of 4.6%. By the way, this is the highest CCI’s dividend yield has ever been.

3. EastGroup Properties (EGP)

EGP is an industrial REIT that owns, operates, and develops multi-tenant, multi-building industrial sites in Sunbelt states, primarily Texas, Florida, California, Arizona, and North Carolina. That positions EGP in some of the fastest growing markets in the country.

The REIT focuses specifically on urban locations to be used for distribution and logistics. These are highly supply-constrained areas, which increases the demand for EGP’s facilities as last-mile distribution hubs. Occupancy currently sits at 99.1%, while same-property cash NOI surged 9.5% in the second quarter.

These are not the giant, single-tenant, single-use facilities located outside city limits that often characterize industrial properties. Tenants typically lease between 15,000 and 70,000 square feet of space, and EGP’s properties are typically large complexes with multiple buildings reminiscent of an industrial park. This diversifies EGP’s tenant base.

This year has been one of massive growth for EGP. In the first half of 2022 alone, EGP acquired $359 million of properties in two cities. That acquisition volume is roughly equal to the previous five years’ worth of acquisitions combined (~$368 million).

Likewise, EGP has an ultra-strong balance sheet with only 19% of total capitalization in debt, and only 2% of the total as variable rate debt. With a payout ratio of only about 60%, EGP could easily pay off any upcoming debt maturities with free cash flow if it so chose.

Combining the 3.5% dividend yield with the REIT’s 13-14% dividend growth rate of recent years renders a total return of around 17-18%.

Bottom Line

At High Yield Landlord, we value consistency and quality. Those two characteristics are what buoy an investment portfolio through recessions. And we believe investors should focus on those traits in their capital allocation decisions as the global economy heads down the dark and treacherous road it is on right now.

These three REITs are some of our favorite picks for long-term, steadily compounding returns. They are the babies that have been thrown out with the bathwater as the market sells indiscriminately. Ultimately, that indiscriminate selling will be to our benefit, as it allows us to buy up discounted shares today and wait for the market to come back to its senses.