4 REITs As Predictable As Cal Ripken

Cal Ripken was nicknamed "The Iron Man" for his "unbreakable" record for the most consecutive games played at 2,632. The former shortstop and third baseman played 21 seasons in Major League Baseball and is deemed one of the most offensively productive players of all time.

It was Ripken's consistency that earned him the reputation as one of the greatest athlete's ever and that predictability is also the reason Ripken is considered a leading ambassador in baseball.

One of the best tools (that I use) is to filter out real estate investment trusts (REITs) that are differentiated by the same patterns of predictability as Cal Ripken. In other words, by focusing on REITs with traits of consistent and durable profits, investors can better manage risk and steer away from loss (remember, it's hard to hit 400).

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Remembering that REITs - as an asset class - offer one of the most predictable forms of profits since the underlying revenue being generated are from lease contracts. So unlike C-Corporations, REIT investors and analysts can better forecast the rental income that grows over time.

So how can we find the REITs with the most meaningful patterns of repeatability?

I decided that in order to deliver you with the best possible model of predictability I would design a model that ranks the "Cal Ripken REITs" based on metrics that identify future profitability defined by "wide moat" differentiation.

Since dividends are most critical for REIT investors I created a list of companies that have both demonstrated a reliable pattern of dividend consistency as well as future prospects for continued dividend growth. As The legendary investor Ben Graham explained, "The defensive investor must confine himself to the shares of important companies with a long record of profitable operations and in strong financial condition."

4 Predictable REITs

Iron Mountain (IRM) is considered an “Iron Man” REIT based upon the company’s dominance in the information management sector. Today the company serves 220,000 customers in 45 countries and in six continents.  The company's business model is to provide integrated solutions to unify the management of both physical and electronic documents.

On May 2^nd IRM closed on the $2 billion acquisition of Recall acquisition and on the same day, S&P Global Ratings upgraded IRM’s corporate credit rating to BB- from B+ following the closing of the company's purchase. The outlook is stable.

The Recall deal was our primary catalyst for our previous BUY recommendation, since the combined companies presented a compelling opportunity to accelerate growth. By having a broader geographic footprint, the deal adds exposure to high-growth emerging markets and meaningful cost synergies. 

The level of synergy enables significant growth in AFFO and cash available for distribution. Accordingly, this rapid and large expansion of cash flow allows the company to simultaneously invest in new product and innovation for the benefit of customers, significantly grow the dividend, while simultaneously de-levering and markedly bringing down the payout ratio.

Dividend expectations remain consistent with IRM's previous guidance for 2016. The dividend per share is expected to grow from $1.94 this year to a minimum of $2.20 in 2017 and $2.35 in 2018, as the company realizes the majority of benefits, transformation savings and Recall synergies.

Beyond 2018, IRM expects to grow the dividend per share at roughly 4% per year. Importantly, the dividend payout ratio as a percent of AFFO is in line with prior expectations and should reduce to 70% by 2020, which underscores the strength of the dividend coverage.

Hannon Armstrong (HASI) is another REIT we consider to be a reliable dividend grower. The company is a hybrid specialty finance REIT focused on lending to the alternative energy space. The business model blends spread income created in the REIT and fee income generated through its origination/capital market business, which occurs inside a taxable subsidiary.

The flexibility of the model is highlighted by HASI's ability to hold and sell, which diversifies its funding base and enhances its profits. While HASI is a specialty finance focused REIT, its cash flow stream should be substantially more reliable than traditional consumer/corporate lending.

One primary catalyst for HASI is the fact that the company invests in the alternative energy space, a growing niche that could become mainstream in the future as the alternative/clean energy space expands. HASI's depth in the space is evident by its strong partnerships - Fortune 1000 companies and some of largest players in their respective industries such as Johnson Controls (JCI), Siemens (SIEGY) and Honeywell (HON).

These projects focus on increasing energy efficiency, providing cleaner energy, positively impacting the environment, or making more efficient use of natural resources.

HASI's dividends should continue to increase and reach $1.24 and $1.40 in 2016 and 2017, respectively. This represents a 100% payout ratio, in line with 2014 and 2015, and double digit dividend growth!

Healthcare Trust of America (HTA) is a “pure play” medical office building REIT that operates within one of the most durable categories in healthcare. The medical office sector has some of the strongest fundamentals of any real estate sector in the U.S. Barely a day goes by without a mention of healthcare demand expanding rapidly as a result of an aging population and the Affordable Care Act.

Add to that the need (and ability with new technology) for healthcare to shift away from the expensive hospital setting and into outpatient locations, and the demand for medical office space is as solid as there can be.

Within the space, HTA is one of the few REITs with the existing property portfolio, management platform, and relationships to take advantage of this growth and produce steady and growing returns.

The second-quarter (earnings results) was strong: 3.1% same-store growth - its 15th straight quarter over 3%; $435 million of acquisitions YTD; and continued expense efficiencies on both the operating and corporate overhead fronts, where it continued to demonstrate its ability to scale by driving G&A as a % of revenue down.

Since 2006, HTA has tripled investors' money. With a focus on a great sector and a national platform in place, the company should continue to perform for investors in the future. We are maintaining a BUY rating, with an overweight in our Durable Income Portfolio.

Realty Income (O) is one of the most predictable REITs that we cover.  One of Realty Income's core competitive advantages is its nominal 1st year weighted average cost of capital: having the cheapest "currency" in the net lease space means that pound for pound, an identical acquisition carries a greater "spread" when purchased by Realty Income relative to a peer with a higher cost of capital.

Additionally, having the lowest cost of capital means Realty Income can purchase the "best of the best" net lease assets while still generating earnings accretion, and doesn't have to move further out on the risk curve to achieve an acceptable level of growth.

Historically, Realty Income has invested at 150 bps spreads to its weighted average cost of capital. Today, that spread exceeds 250 bps (again, while purchasing high-quality assets), so there is plenty of "cushion" assuming the stock remains well priced.

By managing risk on both sides of the balance sheet, Realty Income has been able to consistently deliver annual dividend growth – over 22 years in a row. Shares are a tad expensive today and we recommend a pullback for accumulating new shares.

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Disclosure: I own positions in Iron Mountain, Hannon Armstrong Sustainable Infrastructure Capital, Healthcare Trust of America and Realty Income.

I’m editor of Forbes Real Estate Investor, coauthor (with Stephanie Krewson-Kelly) of The Intelligent REIT Investor and author of  The Trump Factor: Unlocking the Secrets Behind the Trump Empire .