Imagine 26 Empire State Buildings – each standing 1,250 feet tall, comprising 102 stories, capable of containing over 20,000 occupants – all standing completely empty.
This has been a popular headline over the last week: Right now, there are 26 Empire State Buildings’ worth of empty offices in New York City.
And aside from the images of ghost towns it kicks up… there are deeper implications behind this number.
Implications that go beyond office buildings and even real estate. And they’re causing investors to worry about the future.
Most of us remember the residential real estate crash that led to the Great Recession in 2008/2009.
So it’s only natural that these scary memories have investors questioning whether the issues we’re seeing in commercial real estate today will trigger the next big stock market crash.
As I told you last week, the problems in the office space will cause volatility in the overall real estate sector. But I believe the risk is overblown.
Sure, some owners will struggle. High interest rates will mean owners/investors who own commercial property and lots of debt will have trouble accessing the capital they need to run their business properly.
However, for investors like us, I believe the fear surrounding the real estate sector will be a major opportunity.
Here at the Intelligent Income Daily, we’re focused on guiding you through chaos to the safest income investments on the market. And in this scenario, the blue-chip, well-capitalized real estate investment trusts (REITs) we cover closely at Wide Moat Research will do more than survive; they’ll thrive. And deliver strong dividends to their shareholders for years to come.
Today I’ll share with you how these REITs will come out on top of the commercial real estate chaos and how you can benefit.
Blue-Chip REITs Continue to Invest
Extreme circumstances test the mettle of companies. And it becomes a survival of the fittest scenario.
In the commercial real estate market, of course, not every property is worth investing in and not every landlord will succeed.
That’s why it pays to invest in high-quality REITs. They can successfully vet tenants who are likely to keep paying rent. And that allows these REITs to deliver outsized returns and dividend growth.
But that’s not all. As higher interest rates force players with poor management and irresponsible levels of debt out of the market, these high-quality REITs can go bargain shopping.
REITs with access to cheap debt will be able to scoop up bargains in the commercial real estate space as landlords with lower quality credit will be forced to sell.
These purchases will bolster their growth prospects over the coming years. And that should continue giving them higher share prices and growing dividends – which is why we like them in the first place.
For instance, Realty Income (O) is a REIT I consistently put in the best-in-breed category. Last year, it invested approximately $9 billion dollars, adding 1,301 new properties to its portfolio.
And in the first quarter of this year, it invested another $1.7 billion into new properties and intends to invest $6 billion over 2023. That’s because this has been a winning strategy for the company.
Making great investments is what has enabled Realty Income to grow its adjusted-funds-from-operations (AFFO) every year since 2010. [AFFO is the earnings per share, or EPS, equivalent for REITs.]
Plus, based on its most up-to-date data, we know this cash cow can make money, even in today’s higher interest rate environment.
Its average lease yield is 7%.
During the first quarter, it issued 2028 bonds and 2033 bonds. The market scooped them up quickly with yields of 4.9% and 5.15% attached to them, respectively.
Since Realty Income can raise capital at roughly 5% and reinvest it into physical real estate that generates a 7% capitalization rate, the company’s profit spread remains intact. (And that’s before we factor any future rent increases into the equation.)
[Remember, capitalization rates, or cap rates for short, are the most important metrics for landlords. A building’s cap rate is the rate of return a landlord can expect to generate on a given property. It’s calculated by dividing net operating income by the build’s net asset value.]
So when looking at opportunities to target right now as weak property managers flounder and fail, keep these fundamental metrics in mind.
Don’t Buy Into the Fear… Buy Blue Chips
The next time that you see a scary headline about a commercial real estate crash… remember, there will always be someone there waiting to pick up the pieces.
As investors, we want to partner with smart, well-capitalized entities. They’ll use their relatively low-cost debt to make savvy acquisitions on the cheap. And reap the profits as the market comes back and rewards them for their smart management decisions.
Finding these companies means looking for those that have war chests of dry powder and strong balance sheets. This gives them access to cheap capital in the debt markets.
And Realty Income isn’t the only company I follow that’s aggressively acquiring distressed assets in this opportunistic market.
Other blue-chip REITs like W.P. Carey (with a BBB+ credit rating) and VICI Properties (with a BBB- credit rating) have also been major buyers in recent quarters.
These well-capitalized REITs are leveraging their investment-grade credit ratings to buy discounted properties. This strategy should generate profits for them for decades.
That’s what enables them to not only survive but thrive during tough economic times. And allows their investors to sleep well at night…
Poor economic conditions may cause mom and pop real estate investors – or even low-quality publicly traded REITs to struggle. But blue chips like Realty Income, W.P. Carey, and VICI can use their war chests to grow and come out much stronger than today.
To learn more about opportunities like these in the markets right now, check out Intelligent Income Investor, where you’ll find a REIT portfolio full of well-capitalized landlords. The market has pushed many of their prices lower recently, but that makes this an incredible opportunity to add them to your portfolio today.
Happy SWAN (sleep well at night) investing,
Brad Thomas
Editor, Intelligent Income Daily