Top REITs for April 2023

Source: YCharts

• iStar Inc.: iStar finances and develops ground lease investments. On March 31, iStar and Safehold Inc., a ground leasing company, closed their merger agreement. The combined company will operate under the name Safehold Inc. and trade under the ticker (SAFE).
• Getty Realty Corp.: Getty Realty is a net lease investment trust that acquires and develops single-tenant retail real estate. The company’s portfolio includes convenience stores, car wash properties, and auto service facilities located primarily in New York, California, and Texas. On Feb. 28, Getty Reality announced a common stock public offering of 3 million shares, with proceeds expected to total $100 million.
• VICI Properties Inc.: VICI owns 49 entertainment properties in the U.S. and Canada and four championship golf courses. The company also leases properties to Caesars Entertainment Inc. (CZR), PENN Entertainment (PENN), and Hard Rock International. The REIT’s net income skyrocketed 117% in the final quarter of 2022, with total revenue doubling from the year before. The company credited its financial success to continued acquisitions and expanded partnerships in Las Vegas and Canada.

Key Metrics for Analyzing REITs

Investors should have an understanding of specific metrics when analyzing REITs due to their specialized structure. Two key metrics used to analyze these securities include funds from operations (FFO) and adjusted funds from operations (AFFO).

FFO: This metric measures a company’s cash flow generated through its business operations by adding and subtracting certain items from net income. Investors calculate FFO by adding depreciation and amortization charges to net income while deducting gains from property sales. FFO provides investors with a more accurate reflection of operational performance, as real estate investments typically appreciate, rather than depreciate like many assets, in value over time.

AFFO: This metric measures a real estate company’s recurring/normalized FFO after deducting capital maintenance expenditures. Many analysts consider AFFO a superior measure to FFO as it considers the ongoing costs of managing a real estate property over its life. Investors typically use AFFO to determine a company’s ability to pay dividends to stockholders in the future.

Practical Example Calculating FFO and AFFO

Let’s assume XYZ Limited reported net income of $1 million. It also incurred $50,000 and $100,000 in depreciation and amortization costs during the same reporting period. In addition, the company had a $200,000 profit from the sale of a property in its portfolio.

XYZ also reported rents of $75,000 and recurring capital expenditures (CapEx) of $100,000, which it incurred when making maintenance repairs to properties it owns.

Step 1: Calculate the FFO value.

FFO = $1,000,000 + $50,000 + $100,000 – ($200,000)

FFO = $1,150,000 – $200,000

FFO = $950,000

Step 2: Deduct recurring capital expenditures and rents from the FFO value.

AFFO = FFO – Capital Expenditures – Rent Adjustments

AFFO = $950,000 – $100,000 – $75,000

AFFO = $775,000

Advantages of Investing in REITs

Two primary advantages REITs provide investors relate to liquidity and diversification. Real estate investments have a time-tested favorable risk/return profile with less volatility compared with other assets. However, closing real estate deals typically takes weeks or months, making the asset class extremely illiquid. REITs solve this problem by having their securities traded on major stock exchanges, allowing investors to buy and sell easily.

Real estate investment requires a significant financial commitment, often limiting buyers to a specific market or type of property. Investing in REITs solves this issue by allowing investors to diversify, with many trusts holding a portfolio of different property types, such as condos, retail space, healthcare facilities, or even telecommunication infrastructure.