Let’s talk about millennials. And let’s hold off on any instant opinions you might have on the subject for these first few paragraphs.

We want to start off with facts first, not feelings. Or at least as close to the facts as we can possibly get. Admittedly, finding out certain figures isn’t always easy.

For example, when you search for “how many millennials are there in the U.S.,” don’t expect a universal answer.

The first hit, at least on Google, is from Wikipedia. Of course.

You don’t even have to click on the link to see that (allegedly):

“In a 2012 Time magazine article, it was estimated that there were approximately 80 million U.S. millennials. The United States Census Bureau, using birth dates ranging from 1982 to 2000, stated the estimated number of U.S. millennials in 2015 was 83.1 million people.”

Scroll down past that, and you’ll find a second result, this one from the much more reliable Pew Research. Last year, it said that, “Millennials, whom we define as ages 20 to 35 in 2016, numbered 71 million…”

And just two months ago, CNN wrote that this particular generation was born between 1981 and 1996 – though it’s “sometimes listed as 1980-2000.”

Clearly then, the number of millennials all depends on how you define the cut-off ages involved. For better or for worse.

Breaking Bad Stereotypes
No doubt on the “worse” side of what it’s like to be a millennial is plentiful – and not at all flattering – stereotypes older generations (and even some Gen Zers) want to label them with.

For instance, millennials are called “snowflakes” who can’t handle reality. And “everyone” knows they all live in their parents’ basements and spend their days online, trolling people on Twitter.

Unfortunately, there does seem to be at least a little something to that unflattering depiction. For the record, don’t blame me for saying that. My millennial editor is the one who provided me with the following Business Insider headline from July 2019:

“Meet the average American millennial, who has an $8,000 net worth, is delaying life milestones because of student loan debt, and still relies on their parents for money.”

Ouch!

The article does go on to declare that most millennials are “actually financially savvy.” But it also actively admits that:

“There’s no way around it: The average American millennial is financially behind.

Faced with a high cost of living, staggering student loan debt, and the fallout of the Great Recession, American millennials are trying to make ends meet in the midst of The Great American Affordability Crisis.”

Apparently, “the generation overall is plagued by financial problems that baby boomers didn’t have to face at their age.” It’s hardly the most pleasant picture of 71-83 million people. But I guess that’s just how the cookie crumbles.

Sometimes…

Then again, sometimes it doesn’t crumble that way. Sometimes it doesn’t crumble at all. That’s why I’m going to draw your attention to a key adjective in that Business Insider headline: Average.

Because there are definite exceptions to that rule. And they’re more than worth noting.

Millennials Who Are More Than Making It
Actively fighting the stereotype described above are the 619,000 American millionaires who are apparently out there. That figure comes courtesy of yet another Business Insider article, this one published this month.

Here’s how the article begins:

“There are 618,000 millennial millionaires in America, and they’re sitting on a nice pile of assets. Think a net worth ranging from $1 to $2.49 million, three properties, and a BMW. That’s according to a new report by Coldwell Banker.

“The Coldwell Banker Global Luxury program worked with wealth intelligence data and research firm WealthEngine to analyze the lifestyles of millennial millionaires, from wealth creation and property investments to spending trends. It defined millennial millionaires as those ages 23 to 37 with a net worth of more than $1 million.

“The report found that the average millennial millionaire is married, lives in California, and is on the hunt for real estate that is affordable and within walking distance of the center of action.”

In which case, I like how these young-ish 40 millionaires think. Though, based on the description above – and throughout the rest of the article – I think they can do better with what they’ve got.

I’m more than happy to point out how.

Now, naturally, as pointed out in the last article segment, this generational subcategory largely owns their own homes. As well they should.

That’s a very important investment to make, to be sure. Moreover, many of them own more than one. And those might be great investments as well.

But personally owning physical property should be the mere start of a beautiful, lasting, productive love affair with real estate.

There’s so much more to go from there – particularly through a portfolio bolstered by real estate investment trusts, or REITs.

The REITs to Make the Most of Your Millennial Million

Crown Castle (CCI) is a cell tower REIT that should benefit from the growth in 5G. In our view, wireless connectivity has become more of a utility status and deserves to be covered as more of a critical mission infrastructure classification. With this sector, we see little impact with regard to political headwinds as we consider the asset class highly defensive with a firm “go-go grow” representation.

The main reason to own cell tower REITs (and data center REITs) is because we see no slowdown in demand, regardless who the next president is.

Over the years Crown Castle has delivered outsized growth – averaging 9.5% since 2016 – and steady dividend increases (of around 8%-9% per year). Shares are now trading at $131.11 with a dividend yield of 3.66% and given the more recent pullback, we have moved the company from a Hold to a Buy Watch. The dividend is well covered (76% payout ratio) and the BBB- rating is adequate for the company to optimize its cost of capital to scale the business model.

American Campus (ACC) is a campus housing REIT that millennials can appreciate. While it’s true than the parents are generally on the hook for the rent, college students recognize that room and board is an essential part of the college experience, and somewhat recession proof.

As Hoya Real Estate Capital explains: “over the past decade, student housing REITs have built a stellar reputation as the leaders in student housing development and the stalwarts of the public-private-partnership model.” American Campus recently updated FFO per share by raising the midpoint by $.02 per share. The company said that the raise was “driven primarily by better core performance, including better than anticipated operating performance year-to-date, improved seasonal occupancy performance in the spring and summer months facilitated by the advancement of our next-gen systems and business intelligence initiatives, and our performance from our 2018 and 2019 developments.”

We believe this sub-sector of residential housing is often overlooked by mainstream investors, and given the steady dividend growth profile, we expect to see more growth ahead. Analysts estimate that FFO per share will grow by around 5% per year and that the company can grow its dividend by the same rate. Shares now trade at $46.96 with a dividend yield of 4.0%. Given the more recent pullback, we have moved the company from a Hold to a Buy watch.

Digital Realty (DLR) is a data center REIT that in our view has one of the widest moats in the category. The company has been able to utilize its impressive balance sheet to deliver powerful economies of scale. The company enjoys a BBB rating with weighted average debt maturities of over six years and a weighted average coupon of 3.2%. Around 99% of debt is unsecured, providing the greatest flexibility for capital recycling.

The company recently announced it was combining with Interxion “in a highly strategic and complementary transaction that will create a leading global provider of cloud and carrier-neutral data center solutions with an enhanced presence in high-growth major European metro areas.” Digital expects to refinance Interxion debt assumed in the transaction with a combination of investment-grade corporate bonds and proceeds from other financings.

In the near term the transaction is said to be dilutive, but the company pointed out that it should provide “significant financial benefits” as the “combined company will have a global presence in 44 metros across 20 countries on six continents with an enterprise value of approximately $50 billion, nearly five times the size of the next largest competitor.”

The market was less receptive. Shares have pulled back around 6%, moving us from a Buy Watch to a Buy. Digital also has an impressive growth model, and that includes FFO per share of around 7% to 8% annually, with a well-covered dividend 65%. Shares now trade at $116.66 with a dividend yield of 3.70%.

Vici Properties (VICI) is a gaming REIT that has become the consolidator in the sector. The company was formed in 2017 as a result of the spin off of Caesars Entertainment (CZR) and today the company has 32 assets in 18 markets. Year-to-date the company has announced and closed the ~$558 million of acquisition of JACK Cincinnati, the $278 million pending acquisition of the Century Portfolio.

In 2030 VICI is forecasted to generate around $1.2 billion of net operating income, and by utilizing a 6% cap rate (Bellagio sale to Blackstone is 5.75%), we believe shares could be valued at $20 billion. After debt of roughly $6 billion – that translates into an equity valuation of $14 billion. And divide that by 500 million shares, and VICI could fetch $28 per share.

The stock is trading at $24.58 per share with a dividend yield of 4.8%. The P/FFO multiple is 15.1x, and given the price appreciation year-to-date (of ~25%) we have moved the company back from a Strong Buy to a Buy. We still like the growth prospects of the company that includes steady dividend growth. The company paid a dividend of $0.2975 recently (based on an annualized dividend of $1.19 per share), representing a 3.5% increase from the prior annualized dividend.

Simon Property (SPG) is a mall REIT that’s our top “Millennial Millionaire” pick. The company is a leader in the sector defined by best-in-class malls that generate sales per square foot of around $852. As CEO David Simon pointed out on the Q2 conference call those basic stats fail to take into account just how strong its property portfolio really is.

“We have over 77 properties; that’s right 77 properties that if you average their total sales will be over $900 a foot. So 77 over $900 a foot, and you can see that clearly as our report retail sales on an NOI weighted basis of $852.” – David Simon”

The average US malls generate about $325 sales per square foot and Simon’s malls are more than double that and, on a weighted NOI basis, nearly triple the industry norm.

Simon also has a quality balance sheet with around $6.8 billion in liquidity (second highest of any REIT in America behind Brookfield Property) and $1.5 billion in annual retained cash flow. The company recently announced a dividend of $2.10 per share, a 5% increase year-over-year.

Simon has grown the dividend more than 8% over the last few years and the dividend yield is now 5.4%, more than 325 basis points higher than the 10-year Treasury. The dividend also is well covered (more than 1.5x) and the company has paid out roughly $30 billion in dividends since going public.

We maintain a Strong Buy, recognizing that the company has ample cash flow to manage through the current retail cycle. While we anticipate more store closures in 2020 and beyond, we believe Simon is capable of growing its cash flows and dividend. Shares trade at $165.42 with a P/FFO multiple of 12.9x.

“I know multi-millionaires that do whatever they want, whenever they want because their business model is mobile and has nothing to do with an elevator or swiveling chair.” Richie Norton.

Author: Brad Thomas

Source: Seeking Alpha: The Millennial Millionaire’s REIT Portfolio

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