Just over a thousand kilometers southeast of London sit the mountainous, chilled vistas of Davos, Switzerland. And while I’ve never skied there, I’ve enjoyed invitations to the major economic gatherings in that beautiful, small, yet cosmopolitan town in the Alps.
The name Davos also helps me illustrate an important aspect of Real Estate Investment Trusts, as I cover the REIT investing landscape from here in South Carolina (U.S.). DAVOS as an acronym helps me narrow down the world of REITs into an index, to make a point.
You’re likely familiar with “FANG,” the acronym popularized by TV business personality Jim Cramer. FANG represents the tech-heavy giants Facebook, Amazon, Netflix, and Google. Since FANG’s creation, Apple has been added (now literally FAANG) – showcasing these voracious, forward-thinking, post-industrial heavyweights of the new future.
My REIT radar kept showing me a similarly tight collection of heavy hitters, so I sought something equally memorable but less fierce than FANG – and a bit more pleasant. I invented D.A.V.O.S. – standing for: Digital Realty Trust (DLR), American Tower Corp. (AMT), Ventas, Inc. (VTR), Realty Income (O), and Simon Property Group (SPG).
Different than a portfolio, this DAVOS index is made from arguably the most popular REITs on the planet, and is designed to help investors make sense of the REIT marketplace.
Popularity contest? Indeed – that’s how Mr. Market behaves, with stock prices changing rapidly, based on the environment, while the underlying value doesn’t change.
Warren Buffett famously said, “In the short term the market is a popularity contest; in the long term it is a weighing machine.” Meaning: investors shouldn’t be concerned with the supply and demand intricacies of the stock market.
I’ve watched REITs move through this year, and been fascinated watching the “chase for yield.” But I prefer the more thoughtful, reasoned, clear-headed, obvious, “flight to quality” – a charge forward I’m more comfortable with, and happy to help lead; these five DAVOS index components are great examples.
Note: with so few REITs, this group does not provide adequate diversification. I like to use it as a tracking index, and you might even do so, as a bond or utilities proxy, to measure against investments you’re holding. Remember – it’s quite concentrated.
Digital Realty (DLR) is great for those investors looking for strong growth, as the company has set ambitious growth targets over the next several years, and expected to achieve them from a global connected sustainable framework. With a footprint of over 200 properties in more than 30 global markets, the company supports the data center, colocation and interconnection strategies of more than 2,300 firms across its secure, network-rich portfolio of data centers throughout North America, Europe, Asia and Australia.
American Tower (AMT) is the fastest-growing player in telecommunications infrastructure. U.S. mobile data usage continues to skyrocket, and the average U.S. smartphone user now consumes more than 4.4 gigabytes of mobile data per month, up over 400% from just three years ago. Projections suggest average smartphone consumption is growing another 200%, reaching more than 14 gigabytes per month by the end of this decade. The company’s international portfolio is nearly three times the size of its U.S. footprint, including key strategic markets in India, Brazil, Mexico, and Nigeria.
Ventas (VTR) owns the very best properties run by the very best operators, with a portfolio spanning across 1,200 assets in the United States, Canada and United Kingdom. The company’s balanced mix includes Senior Housing (62%), Medical Office (20%), Life Science (7%), Health Systems (5%), IRFs/LTACs (2%), and Skilled Nursing (1%). The company partners with top operators in each asset class – leaders in their specialties, and well-positioned for growth. Within the healthcare REIT sector, VTR has the absolutely best balance sheet.
Realty Income’s (O) triple net lease investment strategy is rooted in high-quality tenants with over 51% investment grade-rated tenants (BBB- or higher), and a portfolio diversified by tenant, industry, geography, and property type – which all contribute to the stability of cash flows. With high retail exposure, the company’s holdings are predominantly necessity-based, with around 81% rental revenue from traditional retail properties; the second largest component, industrial properties, is about 13%. O’s credit rating has been increased, and the company joins a special class of just 9 REITs with a strong rating of A- or better.
Simon Property Group’s (SPG) malls portfolio is well-diversified from a geographic, tenant, and revenue sector perspective. Major state concentrations (by net operating income) include Florida (15%), Texas (10%) and California (13%). The company does an excellent job re-leasing space to new tenants, and possesses strong pricing power given its high-quality properties. Their balance sheet provides superior operating financial flexibility to continue to create long-term value for shareholders. Simon continues to carve out an impressive moat by using its scale and cost of capital advantages.
(An earlier version of this article appeared on 8/24/18 at the Seeking Alpha website.)
Disclosures: I am long DLR, VTR, O, SPG.
The index was originally called DAVOS, but I changed the name to SADOS to avoid any association with Davos, Switzerland and its registered DAVOS trademark.
