3 Unusually Profitable Investments That You Need In 2019

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Includes: BAM, CTT, CVS, CVX, DG, NNN, O, RYN, SPY, WY
by: Jussi Askola
Summary

The investment world is faced with an unprecedented challenge: both stocks and bonds have become overvalued and risky.

Investors are quickly seeking refuge in real assets such as energy pipelines, farmland, airports, timberland, and other.

While investing in real assets may have been reserved to high net worth individuals in the past, today there exists a lot of publicly-traded alternatives.

Below we present 3 of our favorite real asset classes and explain why you should invest in them.

In the past weeks, we have discussed at length the biggest challenge of today' marketplace:

"There is nothing interesting to buy."

On one hand, stocks are back at all-time-highs with stretched valuations in a late cycle economy:

And on the other hand, bonds pay historically low interest rates that may not even cover inflation in the long run:

This creates two major problems to investors:

  1. Stocks: With high valuations in a late cycle, risks are very high and investors could suffer significant capital losses from a return to historic valuation multiples.
  2. Bonds: Not enough income is earned to meet investor's immediate needs. This is particularly dangerous to large institutions and retirees.

Question: What is then the solution to deal with these challenges?

Answer: Investing in real assets.

Real assets such as commercial real estate, windmills, energy pipelines, timberland, airports, solar farms and railroads are the last remaining investments that can meet investor's needs for high return without taking on excess risks.

These are not just empty words from a Seeking Alpha author. Over the past 10 years, institutional capital in this space has grown by $20 trillion (with a "t") and another ~$40 trillion is expected in the decade ahead.

Allocations to real assets were only 5% in 2000. Today, it is closer to 25%. And in 10 years, this figure is expected to exceed 40%:

Source

Interestingly, while professionals are quickly shifting to real asset strategies to generate higher income and greater returns, individual investors are missing out to the party so far.

With poorer access to research, less resources, and no expertise in real asset investing, individual investors continue to overexpose themselves to the risks of owning traditional stocks and bonds.

At High Yield Landlord, we are ahead of the crowd with the majority of our Core Portfolio already invested in high cash flowing real assets. My personal net worth is also allocated at over 50% into real assets.

Below we discuss three important "real" asset classes in which we are investing, and you should too. These are asset classes that will not only boost your income, but also diversify your portfolio and mitigate risks.

Real Assets: Higher Yield, Upside, Diversification

Institutional capital in real assets is expected to nearly double by 2025. Some investments will benefit more than others from this capital shift and it does not take a genius to realize that with more money chasing real assets than ever before, valuations are likely to be pushed higher and higher.

Fortunately, you do not need to be a multi-billion-dollar institution to invest in real assets. At High Yield Landlord, we specialize in liquid alternatives to gain exposure to high yielding real assets.

Three of our favorite real asset classes include the following:

#1 Real Asset Investment - Timberland

The beauty of timberland is that it is simple, necessity-based and technology-resilient. As long as trees keep growing, there is a possibility to profit from them. We identify 5 key reasons to invest in Timberland as part of an overall portfolio strategy:

  • Strong Risk-to-Reward Profile: Historically timberland has achieved returns often surpassing the broad equity markets despite showing lesser price volatility. After all, the supply of land is limited, demand is growing, and the product derived from timberland is a vital commodity. According to the National Council of Real Estate Investment Fiduciaries (NCREIF) direct investing in US Timberland has averaged annual returns of ~10% between 1990 and 2011.
  • High income: Timberland generates a large portion of its returns from cutting down grown trees and selling the commodity. It throws off a lot of income while you wait for the underlying land to appreciate in the long run. Yields may range from 4-7%. Several Timberland REITs pay 5-6% today.
  • Long-term appreciation: Well-located timberland has a solid case for long term appreciation due to the decreasing supply as land is converted into other uses. Moreover, the demand is expected to continue its upward trend over time as a result of population growth, changing consumer needs and increased demand from emerging nations.
  • Inflation protection: Real estate and especially timberland can serve as valuable hedge against the risk of accelerating inflation. For the last 20 years, the NCREIF annual timberland index has shown strong positive correlation with inflation. During inflationary periods, commodity prices tend to increase and so does the value of timberland.
  • Diversification Benefits: Timberland values do not fluctuate with the stock market, the bond market or even the real estate market. The diversification benefits are stronger than average and very appreciated during the occasional bear market. It makes an attractive addition to our Core Portfolio which is heavily allocated in more traditional property sectors such as residential, industrial and retail real estate.

Picture of me lost in the Finnish Forest during my year in the Army:

Today, you can invest in Timberland from the comfort of your own home in just a few clicks of mouse. There exists several publicly traded Timberland REITs such as CatchMark Timber (CTT), Rayonier (RYN) and Weyerhaeuser (WY) to mention a few.

#2 Real Asset Investment - Net Lease Properties

"Net lease" are freestanding retail property investments such as Dollar General (DG) convenience stores, CVS (CVS) pharmacies, or even Chevron (CVX) gas stations.

They are some of our favorite properties at High Yield Landlord because they have historically generated some of the highest returns, and yet they have done so while being less risky and paying higher income.

Source

Most property investments are rented with a "gross lease," which generally comes with greater cash flow volatility. The "net lease" mitigates the risks by modifying the lease terms more in favor of the landlord:

  • Very Long Lease Terms: Tenants will commonly sign an extraordinarily long lease of 10-20 years with multiple 5 year extension possibilities.
  • No Landlord Responsibilities: During the lease term, the tenant takes care of all property expenses and must maintain the building.
  • Defensive Sectors: The businesses that occupy net lease buildings commonly operate in defensive sectors such as convenience stores, pharmacies, gas stations and quick service restaurants.
  • Strong Profitability: The rent coverage ratios are generally in the 2-4x range - making it very unlikely that tenants default on their leases. In most cases, tenants would need to see +50% drops in unit profits before they would struggle to cover their rent payments.
  • Seniority of Rent: Even in a case of financial distress, the rent payment is senior to most other expenses, even the interest expense of the tenant's debt capital. There is no easy way out of a lease and often tenants will continue to pay rent even through a bankruptcy proceeding.
  • Protection against inflation: Net leases are generally tied to an inflation index or include fixed and automatic rent increases of 2% per year or 10% every 5 years. Since property expenses are borne by the tenant, but the rent keeps on rising, the landlord is protected against inflation.

Therefore, the cash flow is "bond-like" and net leases are often referred to as the safest income properties for real estate investors. You have probably already heard about the two largest and most popular net lease REITs, namely Realty Income (O) and National Retail Properties (NNN).

They are both famous for having been exceptionally strong performers with market-beating total returns of up to 15% per year on average and consistently growing dividend payments over many decades. Not even the great financial crisis could take them down as both REITs increased their dividends in 2008 and 2009:

source; source

We are currently looking for the "next" Realty Income among "small cap" net lease REITs to target similar long-term returns. Among smaller less popular companies, yields remain attractive at close to 6% today.

#3 Real Asset Investment - Airports

The great majority of investors have never even considered Airports as investment opportunities. We look closely into them and believe that they offer tremendous opportunities with potential for above average returns because:

  • Wide-Moat Business: They enjoy significant barriers to entry. Outside of very large cities like New York, London, or Tokyo, there is not enough traffic to warrant building more than one major airport in a city, so building a second rival airport is not worth the risk or expense. Additionally, attractive land availability in large, developed cities is hard to come by, environmental and zoning regulations are often a major hurdle given the flight path and noise pollution issues.
  • Monopoly-like Economics: Once customers enter an airport premises, the airport has a monopoly on their options for things like parking, shopping, dining and refreshments, and lodging. On each of these businesses, airports typically charge both rent as well as royalty fees.
  • High-Margin: They are able to run high-margin fee-based businesses on things like passenger passes (with higher fees for international travelers), landing charges per plane, plane parking fees, security and baggage fees, and even terminal navigation fees.
  • Strong Long-Term Prospects: They are very stable with a consistent track record of long-term growth, especially in strategically-located airports that serve as main entrance points for international business, tourist, and government travel. Over time, the revenues grow with inflation, the economy, and the population. Each of these factors combine to drive strong and stable growth similar in nature to utilities. However, international air travel is growing far faster than GDP in airports closely connected to developing economies since the growing middle class in these countries is causing a travel and tourism boom.
  • Appreciation and Inflation Protection: They are real assets that appreciate themselves over time. In fact, as wide-moat and mission-critical cogs in a city's, nation's, and even region's economy, they often appreciate at rates well above inflation since their revenues also tend to grow at rates that greatly exceed inflation.

Source

Investing in airports also provides a good opportunity to diversify abroad. There exists a lot of foreign publicly listed airport companies today and investors can earn 4-6% passive from these opportunities.

Building a Diversified "Real Asset" Portfolio

Timberland, net lease properties and airports - along with many other real asset backed financial asset investments - allow us to generate over $5,000 in annual passive income from a small $70,000 Real Asset Portfolio.

Source: High Yield Landlord Real Money Portfolio

Compared to traditional equities, our real asset portfolio also enjoys much more reasonable valuation metrics trading at:

  • 9.5x cash flow on average
  • 18% discount to estimated NAV
  • 7.2% dividend yield (with safe 68% payout ratio)

We expect this approach to strongly outperform traditional stocks which are today priced at over 23x earnings and a ridiculously low 1.8% dividend yield.

Brookfield (BAM) is the pioneer in real asset investing and here is its track record:

Source

By positioning ourselves ahead of the expected rush to real assets, we believe that we can enjoy superior appreciation along with high income - the best of both worlds.

The best time to invest is today. The second best is tomorrow. We do not know how real assets will perform in any given month, quarter or even year; but over the long run, we are convinced that returns will very satisfying.

We are not the only one to think so. Consider that by 2025, the capital chasing real assets is expected to increase by nearly $40 trillion. The time to act is now:

Source

Disclosure: I am/we are long WY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.