Seeking Alpha

Michelangelo, Vince Lombardi And 37% Gains - So Far

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Includes: ABR, CTT, HASI, IRET, LMRK
by: Brad Thomas
Brad Thomas
Dividend growth investing, REITs, newsletter provider, value
Summary

I’ve never claimed to strive for perfection. Maybe Michelangelo did. For that matter, maybe he even achieved it.

Vince Lombardi was right: “Perfection is not attainable. But if we chase perfection, we can catch excellence."

I’d happily intermix the two quotes to say that, “Excellence is no small thing, but it is made up of small things."

The Internet tells me that Michelangelo once said that “Perfection is no small thing, but it is made up of small things.”

Whether Michelangelo actually said that or not, I genuinely don’t know. The internet can be a very misleading place, of course. But someone somewhere did say it, in which case that someone somewhere should be quoted.

Don’t get me wrong: I’m not against big things. That’s why I’m in the business that I’m in: Because of the big picture. I want to build my readers’ personal portfolios up to retirement-supporting levels. So you’d better believe I’ve got big goals for my platforms here, from the free one to iREIT on Alpha to Dividend Kings.

Each one comes with wide scopes, large offerings, and outsized profits waiting to be taken advantage of. At the same time, I fully realize that each one of those platforms are made up of much smaller pieces: Individual articles, recommendations, pieces, aspects, and tools.

It’s just that those “little” things all add up. That’s rather how life works, I’ve found. For better or worse.

Though, for the purposes of this article, we’re definitely focusing on the better.

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Achieving Excellence

Before we go any further, I need to go on record about that opening quote of ours…

I’ve never claimed to strive for perfection. Maybe Michelangelo did. For that matter, maybe he even achieved it.

The Sistine Chapel is, of course, phenomenal. Far be it from me to point out any criticism of such a work of art, hence the reason why I won’t.

However, as for my personal view of what can and can’t be achieved in the markets, I’ve acknowledged my missteps to you in past articles. That’s why I tend to side more with Vince Lombardi. He (allegedly) said that, “Perfection is not attainable. But if we chase perfection, we can catch excellence.”

In fact, I’d happily intermix the two quotes to say that, “Excellence is no small thing, but it is made up of small things.” That about sums it up on my end.

With that established, let’s get back to those small things that matter so much. The ones that add up. Big time.

To illustrate this, have you ever heard of the compounded penny example? When investing experts talk about it, they usually start out with a trick question.

Would you want a million dollars upfront or a penny compounded for 30 days?

It only makes sense that the vast, vast majority of people are going to fall for the trick. They want the million, and they want it now. They’ve got their eyes on the prize and their mind working full-speed over obvious details – such as the fact that there’s an absolutely enormous difference between $0.01 and $1,000,000.00.

It’s not hard to imagine all the things you could buy with the latter and all the things you couldn’t with the former.

Yet don’t ever discount the little things to such a large degree. It won’t go well for you, as evidenced by the conclusion to that “million-dollar question” we posed above.

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It All Adds Up

Remember that it wasn’t just a penny vs. a million bucks. It was a compounded penny over 30 days vs. a million bucks.

In which case, here’s how that penny would grow…

On Day 1, you’d start out with a single cent, amounting to an utterly uninspiring $0.01. And by Day 2, it wouldn’t look much better, sitting at a mere $0.02.

Twice nothing is still nothing. Right?

For that matter, you’d no doubt still be feeling rather silly about your decision all the up through the halfway mark. There, at Day 15, you’d have a decent bit more than you started out with. But $163.84 is still far shy of what you turned down.

Tragically so, by all appearances.

Yet $163.84 doubled is $327.68. And $327.68 doubled is $655.36.

From there, it’s $1,310.72… $2,621.44… and $5,242.88.

Are you starting to see the perfection through the small things?

By the time you hit Day 30, you would have not $1 million. Not $2 million. But $5,368,709.12

Clearly then, that significantly smaller option leads to much bigger gains.

I bring all this up not because I’ve found a stock that can double in price every day for 30 days. Like perfection, that’s quite the ideal to strive for.

But I can point you to a portfolio of companies that are up 30% for the year. Better yet, I see more growth for them up ahead.

They’re small caps, sure, but they’re making big inroads on their own. Moreover, they can make a significant difference in your overall gains when you buy them up.

Every portfolio should have at least a few such up-and-comers in play, especially when they boast the numbers down below.

Small Caps Aiming for Something Higher

Now, believe me, I did not provide you with a history lesson and few inspirational quotes to set you on your merry way. Instead, I simply wanted to get you warmed up for some stellar results generated from my Small Cap REIT portfolio. Let’s start with the highlights:

Active Positions: 19

SWAN %: 30%

Commencement Date: January 2016

Annualized Total Return Since Commencement: 37.6% (9.57% for VNQ)

Year-to-Date Total Return: 29.94% (vs 27.9% for VNQ)

Source: iREIT / Sharesight

The Top 5 Small Cap REIT Picks in 2019

CatchMark Timber (CTT) has returned +67.9% year-to-date and is the top performer in our Small Cap REIT portfolio. Unlike the other timber peers, CatchMark focuses entirely on investing in and managing timberlands, and does not undertake volatile land development or manufacturing. This makes for a much simpler story and is one of the reasons the company has achieved 25% compound annual growth in revenues since going public in 2013.

CatchMark also has maintained discipline with its capital allocation strategies. The management continues to execute on “capital recycling” and has made progress in reducing leverage (hopes to get to 8x net debt to adjusted EBITDA by year-end) and has more than $200 million in liquidity.

The company recently declared a quarterly cash dividend of $0.135 per share and maintains one of the lowest FAD payout ratios in the sector (~77%). Although shares have spiked (now $11.44) we consider the business model solid, warranting a buy (dividend yield is 4.7%).

Source: FAST Graphs

Arbor Realty Trust (ABR) has returned +59.9% year-to-date and is the second top performer in our Small Cap REIT portfolio. This specialty finance REIT invests in a diversified portfolio of structured finance assets in the multifamily and commercial real estate markets, with a primary focus on multifamily, senior loans that generate strong leveraged returns.

The primary reason for Arbor’s growth is the strong origination platform ($35 billion in agency loans since inception in 1995) that has become highly-scalable and very difficult to replicate. Arbor focuses on smaller loans ($1-$8 million) and this provides solid diversification attributes.

From 2012 to 2017, Arbor originated $17.3 billion of loans, producing a 25% four-year annual growth rate, and it’s not slowing down – the company accessed around $320 million of capital over the last 12 months (from common equity and debt with attractive terms to fund accretive growth).

The latest dividend increase provides confidence that it can maintain such a solid growth profile ($.30 per share or 3.4% increase over $.20 per share). Although shares are up considerably, we maintain a Buy on Arbor with a 2020 year-end target price of $14.50.

Source: FAST Graphs

Investors Real Estate (IRET) has returned 57.3% year-to-date and we’re happy to see Mr. Market appreciating the acceptance of this REIT’s improved focus. Last year we explained that “the company’s circle of competence should drive earnings growth... as it continues to improve its dividend payout ratio and drive occupancy, the company should generate durable cash flow through its higher-quality apartment portfolio.”

In the latest (Q3-19) quarter IRET said that Core FFO grew by 15.1%, increasing to $0.99 per diluted share, compared to $0.86 per share in Q3-18. Also, same-store revenue grew by 4.0% year-over-year driven by 2.6% growth in rental revenue and 1.4% growth in occupancy (eighth consecutive quarter of year-over-year NOI growth).

IREIT also increased the range of full-year Core FFO per share from $3.68 to $3.78, which increased the midpoint from $3.67 to $3.73, validating the recycling initiatives that were the primary catalyst we were relying upon when we initiated a position in the small-cap REIT portfolio. Shares now trade at $74.71 with a dividend yield of 3.75%. We have moved the company to a Hold given the current valuation (P/FFO is 19.5x).

Source: FAST Graphs

Landmark Infrastructure (LMRK) has returned 55.6% since we sold shares in the Small Cap REIT portfolio. Since the Q3-19 earnings period shares have pulled back around 15% due to disappointing distribution coverage (115% based on AFFO) that was reported. As I explained to Marketplace readers,

“We had previously modeled AFFO per share for LMRK in Q3-19 to be $.335 per share and the company reported $.320 per share.”

Given the price decline, we have decided to more LRMK back to the BUY list (was a HOLD due to valuation). Shares are now trading at $15.70 with a dividend yield of 9.4%.

Recognize the company also is a small cap (~$400 million) so shares trade with higher volatility. Also, keep in mind that Landmark is an MLP with a REIT blocker (investors obtain a 1099). We would like to see the company convert to a REIT structure, specifically an internalized commercial mortgage REIT.

Source: FAST Graphs

Hannon Armstrong (HASI) has returned 49.92% year-to-date and the company is considered the “first U.S. public company solely dedicated to investments in climate change solutions.” The company seeks “to deliver Core ROE at or above 10%” and targets “core earnings growth guidance at 2% to 6%.”

HASI has a lot of experience over political and economic cycles, including several of the big downturns in the clean energy industry as well as in the broader markets. Still, the company has continued to prosper and is well positioned to grow earnings over time (HASI employees own ≈6% of the shares).

On the latest earnings call the company said that “given investments year-to-date and (its) view on fourth quarter opportunities” it remains “comfortable it will be able to meet or exceed the $1 billion annual target.” The company added that “residential solar has become a larger portion of the portfolio because of the attractive risk adjusted returns.”

Shares trade at $29.10 with a dividend yield of 4.60%. The company pays out around 100% of core earnings and EPS is expected to grow by around 5% per year in 2020 and 2021. Given the current valuation, we are maintaining HASI as a Hold.

Source: FAST Graphs

In closing, we will continue to source new investments in the Small Cap REIT portfolio, recognizing that the unpolished gems offer a compelling value proposition.

While it takes an extra measure of due diligence to spot the “needles in the haystack,” it’s extremely rewarding as evidenced by the 37% annualized returns being generated annually since January 2016. Vince Lombardi was right, “Perfection is not attainable. But if we chase perfection, we can catch excellence.”

Author's Note: Brad Thomas is a Wall Street writer, which means he's not always right with his predictions or recommendations. Since that also applies to his grammar, please excuse any typos you may find. Also, this article is free: Written and distributed only to assist in research while providing a forum for second-level thinking.

Disclosure: I am/we are long CTT, ABR, LMRK, HASI. 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.