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REITs That Help You Sleep Well At Night

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In a recent Forbes article I explained that “on most occasions the fluctuations in the price of a security is influenced by external factors that have very little to do with the actual fundamentals of the company”.

While these external forces can reap havoc on short-term portfolio performance it’s important to remember that “the market price of a stock only reflects the rate at which buyer and sellers are willing to exchange a stock for, in that particular moment.”

That “rush to the exit door” in REIT-dom seems to be dying down  as investors have become more fixated on the strength of the economy and less rattled by Mr. Market’s irrational behavior. I tend to agree with RBC Analyst, Rich Moore as he said the “interest rate pullback may be close to running its course”.

Overall the U.S. commercial real estate market is steady and construction spending is still below pre-recession levels. As rates creep up, consumers should feel better and that bodes well for landlords that lease to retailers, restaurants, and movie chains.

Also, healthcare has become a highly predictable business, thanks in large part to the recent ACA (Affordable Care Act) “stamp of approval” by the Supreme Court last week (see my recent article here).

Since February, and as interest rate fears have manifested, the RMS index has dropped 12.0%, sharply underperforming the S&P 500 total return of 0.2% over the same period. This irrational pullback has created a window of opportunity for REIT investors to begin planting seeds – picking up high dividend paying stocks with a margin of safety.

In my monthly newsletter, Forbes Real Estate Investor, I research around 80 REITs (mostly Equity REITs) in an effort to filter out the most favorable securities that could provide long-term growth and safety. Within my REIT research universe I have characterized around 20 securities as “sleep well at night” (or “SWAN”) alternatives in which dividend safety is the #1 goal.

It takes a real superstar to be included in the SWAN club, and to even qualify for my prestigious ranking system a REIT must have demonstrated a long-term track record for paying and increasing dividends. Ben Graham wrote (in The Intelligent Investor),

One of the most persuasive tests of high quality is an uninterrupted record of dividend payments going back over many years.

My research is granular and often tiresome, but at the end of the day, my REIT exploration is traced back to the stamina of the dividend  and whether or not it can be relied upon in good times or bad. In order to be considered a SWAN, my REIT candidate must have an earnings stream that is reliable and that can be relied upon over series of years. That’s what I call “sleeping well at night.”

I’m providing you with four of my favorite Sleep Well at Night REITs.

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W.P. Carey (WPC) is a Net Lease REIT that owns over 850 free-standing buildings consisting of over 89 million square feet. The company was founded in 1973 and converted to a REIT structure in 2012. The New York-based REIT has a diverse portfolio that represents over 219 tenants ranging from office, industrial warehouse, retail, and self-storage. Carey has a Total Capitalization in excess of $10 billion and a healthy balance sheet supported by credit ratings from S&P of BBB. Like most REITs, Carey shares have fallen hard year-to-date – down 15% since January 1. For a value investor, Carey has become an enticing selection. The company’s P/FFO multiple is 14.6x and the dividend yield is 6.4%.

Ventas was founded in 1983 and is a diversified healthcare REIT based in Chicago. As one of the largest healthcare REITs ($32.7 billion Total Cap) Ventas owns a diverse portfolio of over 1300 properties. On April 6th Ventas entered into a definitive agreement to acquire Ardent Medical Services for $1.75B in a transaction that should be immediately accretive (by around $.08 to $.10 per share in Funds from Operations). This strategic transaction should also provide Ventas with a strong hospital operator/partner and a base to grow its hospital portfolio. Also, Ventas announced its plan to spin-off certain assisted living assets into a new REIT, Care Capital. Upon completion of that deal Ventas is expected to increase its dividend by around 10 percent.

With a fortress balance sheet (BBB+ rated by S&P) and reliable dividend record, Ventas has become a very predictable REIT. Year-to-date Ventas shares are down around 12 percent and the current P/FFO multiple is 13.5x. That means Ventas is an excellent buy today: the current dividend yield is 5.0%.

Much like W.P. Carey and Ventas, Omega Healthcare Investors (OHI) has a similar track record of dividend performance. This best-in-class healthcare REIT has extended its record of paying dividends for over 13 years in a row. The company recently merged with Aviv and the combined company now has a Total Capitalization of around $9.3 billion. Omega is the largest REIT in the skilled nursing sector and the company recently said it was expanding outside of the U.S.

OHI is in excellent shape to continue to expand its foothold as the dominant "pure play" skilled nursing REIT. As part of the merger, all of Aviv's outstanding unsecured debt was repaid or otherwise satisfied and discharged. At the close of business on April 1, Omega and its affiliates had outstanding revolving credit facility borrowings of $320 million and term-loan facility borrowings of $500 million (rated BB+ by S&P).

Omega shares are down 10.9 percent year-to-date and the company’s P/FFO multiple is 11.6x. The dividend yield id 6.2 percent.

There’s a big difference between “sleeping well at night” and “sleeping like a baby.” The difference is Realty Income .

Realty Income owns 4,378 properties in 49 states, and this portfolio is one of the largest in the Net Lease sector. As one of the most diversified REITs in the U.S. Realty Income has been able to mitigate risks of multiple recessions by maintaining a very conservative balance sheet (rated BBB+ by S&P).

Realty Income also has an impressive track record paying and increasing dividends for over 20 years in a row (better than the others mentioned in this article). Shares haven’t been beaten down as hard as the others, but given the premium valuation (of 16.7x P/FFO) I consider the superior track record a safety blanket (that’s what I call sleeping like a baby). With a company trademarked as “The Monthly Dividend Company” it’s easy to identify with the brand equity for this REIT. Just sleep and don’t worry about the dividends (yield is now 5 percent).

I can’t guarantee that you will get any sleep on the Fourth of July, but I can assure you that by investing in sound companies that pay steady and growing dividends you will be able to enjoy the benefits of compounding. More importantly, by investing in securities purchased below their intrinsic value you will improve your odds of making a successful investment. One of the best tools for pursuing a sleep well at night strategy is to focus on dividend safety and predictable income that will grow over time.

Disclosure: I own shares in WPC, VTR, OHO, and O.

Brad Thomas is editor of the Forbes Real Estate Investor and writes for Forbes.com and Seeking Alpha. He is also a frequent guest on Fox Business.