“Land is a rich man’s game,” a mentor of mine once told me. And he was largely right.
Throughout the majority of history, owning property has been something only the most well-to-do could afford. Most other people were nomads, tenants, serfs, or chattel.
Even the “American Dream” only includes residential properties, not commercial real estate (“CRE”) like shopping centers, apartment buildings, and offices.
Simply put, the rich have the obvious advantage in the land-grab game. According to The Land Report, the biggest landowners in America are:
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Red Emmerson, owner of timber-products company Sierra Pacific Industries. Worth over $5 billion, he and his family hold 2.44 million acres.
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John Malone, former CEO of Tele-Communications. Worth $11.1 billion, he holds 2.2 million acres.
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Ted Turner, founder of CNN. Worth “just” $2.8 billion, he still owns 2 million acres.
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Jeff Bezos of Amazon (AMZN) fame. Worth $220 billion, he holds 462,000 acres.
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Microsoft’s (MSFT) Bill Gates. Worth $107 billion, he owns 260,000 acres.
Back when I first began in real estate, I had no idea who most of those gentlemen were. Amazon (AMZN) wasn’t even developed yet, after all.
But I still knew the value of owning property.
That’s why I went straight from college to working for someone whose family owned land across the U.S. And from there, I began building up my own CRE empire.
I came from no money whatsoever. My mom was a single parent who couldn’t pay my way through college (though she did help me fill up my gas tank when she could).
Yet I was able to go on and make millions from CRE.
Then again, that was because I partnered with a rich guy – my first boss – who insisted on owning 51% of our company and never showing me the books.
He blew all our money in the end. So I guess it was a rich man’s game after all.
Fortunately, I’ve since learned to grow my wealth with real estate investment trusts (“REITs”). There’s a way even “little guys” like you and me can make money off of CRE just like the wealthy.
And, after years of sluggish performance, quality REITs could finally be ready to perform… or outperform.
The Dismal Jobs Numbers Mean a Rate Cut Is Virtually Certain
As I wrote yesterday, the jobs report from Friday was… not great. Only 22,000 jobs were added in August against an estimate of 75,000. The June figures were revised to negative 13,000.
That means that the Federal Reserve is all but certain to cut rates in an attempt to boost job growth when it meets later this month. The only question now – by how much?
The most likely outcome is still a quarter-point cut. But now, the market is wondering if that will be enough. There’s now a small chance 50 basis points could be on the table.
But whether it’s a quarter point or a half point, the trajectory seems clear. Barring something totally unforeseen, the Fed is going lower.
All else equal, that’s great news for REITs. Falling rates should lead to falling yield on fixed income. That will make the generous dividend yield on offer from many REITs more attractive. And CRE REITs in general should finally get some attention from Mr. Market.
But, of course, that doesn’t mean you invest in any REIT. At Wide Moat Research, we insist on quality.
And, so, if you’re looking to build out the REIT segment of your portfolio, here are a few I have my eye on.
REIT No. 1: Farmland Partners
Farmland Partners (FPI) is an internally managed farming REIT that owns and/or operates 125,500 acres across 15 states. The company has acquired over 300 properties since its IPO in 2014 – and that number could easily increase further still once rates start falling.
Based on acreage, 90% of Farmland’s portfolio is invested in row crops such as corn, soybeans, wheat, rice, and cotton. The remaining 10% focuses on permanent crops such as tree nuts, citrus, and avocados.
One key advantage to investing in farming REITs is that 50% to 100% of fixed farm rents are paid in advance of planting season. That makes it very unlikely for a farmer to default on prepaid rent, and tenant turnover is also low.
Farmland does have one competitor in this space, Gladstone Land (LAND), but it’s no competition to me. FPI offers a more stable dividend and internal management, which means there’s more room and money for the REIT to focus on investors.
Its market cap is around $470 million. And shares are trading at 36.9 times price to adjusted funds from operations (P/AFFO) – the REIT equivalent of price to earnings (P/E). Its current dividend yield is 2.2%.
Gladstone does offer a much higher 6.2% figure. However, I consider it a “sucker yield” given the company’s 200% payout ratio, which can’t be sustainable for long.
REIT No. 2: Safehold
Safehold (SAFE) is a unique REIT in that it owns 151 ground leases valued at around $7 billion.
A ground-lease agreement is when a landlord rents out a property long term, usually for 50 to 99 years. The tenant then gets to construct a building on that land and treat it as his (her or its) own until the lease expires – at which time everything goes back to the landlord.
In Safehold’s case, it owns the land beneath apartments, office buildings, hotels, and life science buildings, to name a few of its tenant types. These are primarily located in the top 30 metro statistical areas across the U.S., including:
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10 assets in Manhattan
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17 in Washington, D.C.
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Four in Boston
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Nine in Los Angeles
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Seven in San Francisco
One key advantage for Safehold is that its capital has a significantly lower attachment point in a property’s capital structure than typical REITs. So it benefits from higher levels of subordinate capital.
The company has an attractive and well-covered dividend yield of 4.3%. There’s also upside here based on the potential for unrealized capital appreciation since, at lease expiration, Safehold owns building assets as well as land.
REIT No. 3: Agree Realty
Agree Realty (ADC) is another way to play the ground-lease game.
Although not a pure-play landlord like Safehold, 232 out of its 2,500 rental contracts are ground leases. These represent 10.3% of its rental income.
It’s also important to note that around 88% of these ground leases are with investment-grade-rated clients. We’re talking about long-term businesses like Lowe’s (LOW), Walmart (WMT), and Home Depot (HD).
This is about as reliable income as a landlord can hope for.
Agree is trading with a fair margin of safety right now. It carries a P/AFFO of 17.2 times. Its normal (historical) ratio is 18.5 times.
This REIT also comes with an attractive 4.2% yield on its monthly dividend.
One Bonus Idea
Another land play to consider is Texas Pacific Land (TPL). It’s not a REIT, but it offers a similar “backdoor” access to property investing.
I discussed Texas Pacific on one of our recent YouTube shows. In particular, I highlighted its exposure to the oil- and natural gas-rich Permian Basin, which spans millions of acres in West Texas and New Mexico.
Shares have sold off since May, which provides investors with a solid margin of safety.
It’s companies like these that even out the land-owning playing field, allowing non-millionaires and billionaires to benefit right alongside the elite. In short, land doesn’t have to be a rich man’s game…
Just as long as you’ve got land in the game.
Regards,
Brad Thomas
Editor, Wide Moat Daily
P.S. Make sure to tune into my YouTube show this week, where I’ll be teaching a masterclass on net-lease REIT investing specifically.
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