Choosing a stock for a retirement portfolio should of course focus on when you might be retiring or -- even if you keep working at an "advanced” age" -- when you might need to sell a holding to raise some cash to supplement that fixed income you’re also getting.
Real estate investment trusts (REITs) are a natural fit for many such portfolios, and office REITs are one of those segments that have been beaten down by the pandemic enough that it’s a good time to consider buying into some.
Then the question becomes, growth or income?
And, as a boomer, I would suggest considering somewhat stodgy Easterly Government Properties (NYSE: DEA) instead of Empire State Realty Trust (NYSE: ESRT).
The long view looks good for this Big Apple stalwart
My Millionacres colleague Matt Frankel is a big fan of Empire State, as he makes clear in this article: “Is Empire State Realty Trust a Good Fit for a Retirement Portfolio?” After all, he points out, this trust not only has a lot of cash, it also has a lot of prime real estate in and around the Big Apple, including the Empire State Building itself.
Empire State, however, is not paying a dividend for the last two quarters of 2020, instead, as CEO Anthony Malkin says, "Our focus is to preserve and enhance shareholder value." That decision was made because the REIT says it expects no taxable income in 2020, and thus no obligation to pay any dividend on its common stock.
Empire State had been paying $.0105 a share each quarter since 2016, providing a nice yield of around 6% when Matt wrote his assessment in July. Now, without a dividend, it feels like a growth stock. And a promising one at that. The REIT’s stock had a 52-week high of $14.84 before plunging with the pandemic and is still bouncing around its 52-week low of $5.19.
The dividends will come back eventually, most likely. And, like Matt says, this company has a solid history, a great portfolio, has just sunk hundreds of millions into the observation deck at the Empire State building, and has way more left to invest in other properties. If you have a few years to wait for it to turn around, it looks like an awfully good choice for a retirement portfolio of your own.
But Matt’s 38. I’m … not.
Stodgy, maybe, but sometimes that’s a good thing
So, let’s look at Easterly Government Properties. Based, naturally enough, in Washington, D.C., this REIT buys, develops, and manages Class A commercial properties that are leased to federal agencies through the General Services Administration.
Easterly has properties across the country, leased on average for 10 to 20 years at a time, with what it calls extremely high renewal rates. In its third-quarter earnings call on Nov. 2, chairman Darrell Crate said, "You will not find a single U.S. REIT with better tenant credit quality than Easterly. … Today, our existing leases, each with one assumed 10-year roll and a 10% rental increase, would equal $4.3 billion of future cash flow that’s backed by the full faith and credit of the United States government."
While Empire State has stopped its dividend and posted a one-year total return of minus 60.49% at the end of October, according to Nareit, Easterly is plus 2.16% in that metric, and after its latest dividend declaration, it has a current TTM payout of $1.04 and a yield of 4.77% at its Nov. 5 price of $21.80. Its all-time high of $29.32 occurred earlier this year, so there’s even some upside there.
The biggest threat to office REITs
The biggest threat facing any office REIT -- private or public -- is the new normal of working from home brought on by the pandemic. Matt points to a survey that shows that most employees, in fact, want to work from a physical office, at least some of the time. And it makes sense that that normal human desire to be together, combined with social distancing requirements, could actually drive demand for even more office space.
That, however, is true for the government agencies that occupy Easterly’s spaces, and they have the federal budget paying their rent. I’m not saying these would necessarily be profligate spenders, these agencies, but they seem like pretty reliable tenants who can sign long leases and pay the rent.
So, maybe I’ll just take those dividends and that stability -- if I decide to buy some Easterly stock -- and pay a visit to the Empire State Building like the aging boomer tourist I’d be there. Paying admission for the observation deck will also be doing my small part to help a holding I already have: Empire State Realty Trust.
And as for you, Matt, get off my lawn!