Trick Or Treat, We’re Buying These Blue-Chip REITs

Here’s something to chew on for a moment: Why do so many eateries use red, yellow, or a combination of the two in their signage?

There’s McDonald’s, of course, which utilizes both colors. But it’s hardly alone in trying to get customers to see specific colors. Consider:

  • Pizza Hut (red and yellow)
  • Hardee’s/Carl’s Jr. (red and yellow)
  • Burger King (red, yellow, and blue)
  • Sonic (red, yellow, and blue)
  • Popeyes (red and yellowish-orange)
  • Dairy Queen (red, yellowish-orange, and blue)
  • Chick-fil-A (red)
  • Wendy’s (red)
  • KFC (red)
  • Arby’s (red)
  • Chipotle (red)…

That’s probably because of what’s called color psychology.

If the very term sounds a little ridiculous, I understand. And apparently so do a lot of other people. Psychology Today called it “one of the most interesting – and most controversial – aspects of marketing,” adding that:

Most of today’s conversations on colors and persuasion consist of hunches, anecdotal evidence, and advertisers blowing smoke about ‘colors and the mind.’

And Visual Content Space agrees that “a substantial part of the information you’ll find online is based on misconceptions and pop-science myths.”

Then again, neither deny the impact that color has on people in general and consumers in particular. That same Psychology Today noted:

The study ‘Exciting Red and Competent Blue’ also confirms that purchasing intent is greatly affected by colors due to the impact they have on how a brand is perceived. This means that colors influence how consumers view the ‘personality’ of the brand in question…

In short, we’re drawn to colors. It’s human nature.

Source

Roses Are Red, Violets Are Blue

“So is orange friendly or purple creative? And what does it all have to do with your logo?” asks Visual Content Space.

They’re good questions considering how “we all know” that:

  • Red represents love, anger, hunger, and such.
  • Orange represents happiness, excitement, enthusiasm, and such.
  • Yellow represents happiness, enthusiasm, warmth, and such.
  • Green represents growth, money, refreshment, and such.
  • Blue represents peace, stability, rejuvenation, and such.
  • Purple represents royalty, boldness, exclusivity, and such.

And then you have to factor in lights and darks, blacks and whites, browns and greys. It’s a long, long list of factors to take into consideration.

Incidentally, that’s why I included “and such” in every entry on that shorter list. It goes right along with something else Psychology Today wrote:

When it comes to picking the ‘right’ color, research has found that predicting consumer reaction to color appropriateness in relation to the product is far more important than the individual color itself. So if Harley owners buy the product in order to feel rugged, you could assume that the pink and glitter edition wouldn’t sell all that well.

In other words, you have to know your customer and what they want. That’s the key behind every successful business, which goes far, far beyond mere shades. You also have to understand the cultural, economic, and personal contexts they’re operating in.

For instance, you’re almost always going to find a bride in white here in the U.S. But elsewhere, that would be considered absurd. Therefore, if you’re planning on selling wedding dresses – or anything, really – you should probably look before you leap.

How Does That Make You Feel?

I’m going to quote one more non-investing source before getting to my main point. This time, it’s from Shutterstock, an immensely popular image selection site:

The way different cultures see and describe the meaning of color varies dramatically around the world. For instance, the Bassa people in Liberia only have two words for classifying colors – ziza for red/orange/yellow and hui for green/blue/purple – while the Inuit reportedly have 17 different words for white alone, which are modified by different snow conditions.

Yet:

Blue is considered the safest color choice around the world, since it has many positive associations. In North America and Europe, blue represents trust, security, and authority, and is considered to be soothing and peaceful. But it can also represent depression, loneliness, and sadness (hence having ‘the blues’).

In some countries, blue symbolizes healing and evil repellence. Blue eye-shaped amulets, believed to protect against the evil eye, are common sights in Turkey, Greece, Iran, Afghanistan, and Albania. In Eastern cultures, blue symbolizes immortality, while in Ukraine it denotes good health. In Hinduism, blue is strongly associated with Krishna, who embodies love and divine joy.

Other colors are far less universally appreciated. Which makes the term “blue-chip” even more appropriate.

Because blue-chip stocks – whether they’re real estate investment trusts (REITs) or not – are just about as universally accepted and respected.

They’re comforting long-term, even if they might not look as exciting in the moment.

They do help ward off “evil” from portfolios, promoting good health.

And they’re about as immortal as a stock can be considering how long it takes a company to build up that kind of reputation in the first place.

That’s why I love talking about them: because I know my audience and what they like… safe, steady, durable income via blue-chip REITs.

Source

Bring on the All-Inclusive Blue-Chip REITs

In order to screen for the best blue chip REITs we utilize the iREIT iQ (quality) scoring tool, in which we screen for over 150 U.S. equity REITs.

Realty Income (O), with an iREIT iQ score of 90, is definitely a blue-chip REIT, based on a number of wide moat attributes referenced below:

Diversification: 6,541 free-standing net lease properties in 49 states. The portfolio has 600 tenants operating in 50 different industries. Theaters (6.3% exposure) and gyms (7.1% exposure) are on the (industry) list, but Realty’s latest rent collection results are solid.

Rent Collection: September represents continued improvement and trends:

  • July 2020: 91.6%
  • August 2020: 93.3%
  • September 2020: 93.8%
  • September 2020 (Investment Grade): 100%

Balance Sheet: Fortress A-rated (A3/A-) balances sheet with strong metrics:

  • Net Debt/Adjusted EBITDAre: 5.1x
  • Total Debt/Total Market Cap: 27.8%
  • Fixed Charge Coverage: 5.4x
  • Revolver Interest Rate (All-in): .94%

Steady and Reliable Growth:

  • 1 of only 11 S&P 500 REITs with positive earnings growth in 2007-2009
  • 1 of only 9 S&P 500 REITs without a dividend cut in 2007-2009
  • 1 of only 5 S&P 500 REITs with positive total shareholder return from 2007-2009
  • Positive earnings growth in 23 out of 24 years as a public company
  • 1 of only 3 REITs included in S&P 500 Dividend Aristocrats® index

Valuation: BUY (our FV target is $61.75). Current yield is 4.7%

Source: FAST Graphs

AvalonBay (AVB) with an iREIT iQ score of 92, is definitely a blue-chip REIT, based on a number of wide moat attributes referenced below:

Diversification: 276 communities representing 80,182 homes and 19 development communities (6,198 homes). The company’s suburban exposure (approximately 2/3) and growing investment in SoFL and Denver are good, but impact on urban and coastal markets suggest pressure in Q3-20.

Rent Collection: Leg down in August as illustrated below:

  • May 2020: 96%
  • June 2020: 96%
  • August 2020: 93%

Balance Sheet: Fortress A-rated (A3/A-) balances sheet with strong metrics:

  • Net Debt to Core EBITDAre: 4.9x
  • Interest Coverage: 6.9x
  • Unencumbered NOI: 94%
  • Unsecured Debt: 88%

Growth could be muted, short-term

  • FFO CAGR of 10% from 2011-2019
  • Analysts forecast -4% growth in 2020
  • Management plans to slow development spending short-term

Valuation: BUY (our FV target is $157.50). Current yield is 4.2%.

Source: FAST Graphs

Essex Property Trust (ESS), with an iREIT iQ score of 84, is our final blue-chip REIT, based on a number of wide moat attributes referenced below.

Diversification: 245 communities dedicated to west coast markets like Seattle (17% of NOI), Northern CA (43% of NOI), and Southern CA (40% of NOI). We like the high-quality nature of ESS’ West Coast markets that are expected to see above average job and wage growth. The downside risk to our price objective is employment and operating conditions in ESS’s markets including the regulatory environment in California and higher interest rates.

Rent Collection: Rent collection stable and improving:

  • May 2020: 96%
  • June 2020: 96%
  • August 2020: 97%

Balance Sheet: Strong balance as evidenced below:

  • Net Debt to EBITDAre: 6.4x
  • Interest Coverage: 484%
  • Unencumbered NOI: 96%
  • Debt to Total Assets: 37%

Steady and Reliable Growth:

  • Since the IPO, ESS has generated compound Annual Dividend/SH and Total FFO/SH growth of 6.4% and 8.4%, respectively.
  • ESS has raised the Dividend every year since the IPO and paid entirely in cash.
  • ESS is an S&P Dividend Aristocrat: 26 years in a row of annual dividend growth.

Valuation: BUY (our FV target is $250.00). Current yield is 4.1%.

Source: FAST Graphs

In summary…

In the book, Investing in REITs, Ralph Block explained that “Blue-chip REITs have certain qualities that set them apart from most REITs. These qualities include:

  • Outstanding proven management, familiar with the demands of both real estate ownership and operation and the quirks of public markets.
  • Access to debt and equity capital, and a track record of effective deployment of that capital to create shareholder value.
  • Balance sheet strength and flexibility.
  • Sector focus and deep regional or local market expertise.
  • Conservative and intelligent dividend policy.
  • Good corporate governance.
  • Meaningful insider stock ownership.

A blue-chip REIT doesn’t have to exhibit all of these attributes, but it will have most of them. We are continuing to purchase shares in these three blue chip REITs, recognizing that quality and value are essential ingredients to being an intelligent REIT investor.

Author’s note: Brad Thomas is a Wall Street writer, which means he’s not always right with his predictions or recommendations. Since that also applies to his grammar, please excuse any typos you may find. Also, this article is free: Written and distributed only to assist in research while providing a forum for second-level thinking.

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Disclosure: I am/we are long O, AVB, ESS. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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