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2 REITs That Will Soar

Mar. 09, 2021 8:25 AM ETAMT, CCI, SAFE, SBAC, STAR.PD, STAR.PG, STAR.PI, VNQ77 Comments


  • Most REITs have strongly recovered over the past months, and as a result, our portfolio is now hitting new all-time highs.
  • Even then, there are still some REITs that remain undervalued.
  • We highlight two of them that are set to soar in the coming years.
  • Looking for a portfolio of ideas like this one? Members of High Yield Landlord get exclusive access to our model portfolio. Learn More »

Earlier this month, we published an update on our recent performance and explained that our portfolio has now fully recovered and continues its multi-year streak of significant outperformance:

However, because of this recovery, it's now getting harder to find discounted REITs in today's market.

To be clear, it does not mean that it is too late to invest in REITs.

Quite the opposite: We currently have 26 Strong Buy-rated REITs and an additional 20 Buy-rated REITs in our Portfolio Sheets at High Yield Landlord.

What it means is simply that most REITs are now fairly valued and investors need to become more selective to identify the last remaining bargains.

Therefore, we are slowly shifting from a phase of aggressive accumulation to a phase of more selective accumulation and portfolio recycling to make sure that our capital is invested in the most optimal way possible.

This implies that we will likely sell one or a few holdings that trade at close to fair value and use the proceeds to double-down on other existing positions and/or invest in new opportunities.

Below we highlight two existing positions that we expect to increase over the coming weeks. These REITs remain deeply undervalued and are set to soar in the coming years.

iStar (STAR)

STAR is a mortgage REIT with a diversified portfolio of loans, net lease properties, ground leases, and other land investments. It's a complex portfolio that is difficult to value, and for a long time, the lack of specialization has caused STAR to fly under the radar.

But recently, the story has become cleaner as STAR rebranded itself as a pioneer of ground lease investing.

It launched a separate REIT called Safehold (SAFE), which it manages against fees and also owns 2/3 of its equity. (If you are not familiar with ground

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This article was written by

Jussi Askola, CFA profile picture

Jussi Askola is the President of Leonberg Capital, a value-oriented investment boutique that consults hedge funds, family offices, and private equity firms on REIT investing. He has authored award-winning academic papers on REIT investing, has passed all three CFA exams, and has built relationships with many top REIT executives.

He is the leader of the investing group High Yield Landlord, where he shares his real-money REIT portfolio and transactions in real-time. Features of the group include: three portfolios (core, retirement, international), buy/sell alerts, and a chat room with direct access to Jussi and his team of analysts to ask questions. Learn more.

Analyst’s Disclosure: I am/we are long STAR; CCI. 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.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (77)

I notice that you haven't been talking about Mac which has done nothing lately. I believe you said that it was going through the moon !!!
Jussi Askola, CFA profile picture

I have always said that MAC is a 5-10 year investment.
The last time I wrote about it was a few weeks ago.
I have a few comments on this thread as I'm not taking sides or have an opinion on these REIT's now.
1. market cap vs enterprise value. Both sides are right, the article talks market cap but their is 3x more debt than stock equity (3.7B vs 1.3B) raising the enterprise value to be much larger than their SAFE position (2.6). Both sides are correct talking about different things but I didn't know much about enterprise value so I learned a lot.

2. Jussi's REIT's overall may not be performing super great now or in the near future, partly because US interest rates are going up (US10Yr, US30Yr), other interest rate sensitive sectors like utilities may not do the best. As long as Jussi is focusing on good value plays or the blue chip REIT's you'll survive any headwinds that come about due to cyclical movements of a sector. You'll stay diversifed overall too and avoid REIT's that may tank. I kind of side with Jussi and think that people are kicking him (nit-picking items) when the industry is so-so for now. He's an expert here and I would want him to stay with his expertise instead of jumping into the current hot sector and start recommending stock like Bitcoin that are soaring. (Like some other SA writers did that used to write about mall REIT's for years and finally abandoned them after their portfolios got destroyed and had to pick a new industry to be an expert in that they're not). You all probably know who I'm talking about here on SA.

I'll still allocate some new money to REIT's as my family has weathered slight downturns over the years but have one blue chip stock my parents & I have owned for over 70 years and the balance is very nice with big quarterly dividends.
Jussi Askola, CFA profile picture
@danno24 Thank you for sharing your thoughts. Just one note: our Portfolio value is currently sitting at all-time highs despite the recent surge in treasury rates.
Jussi Askola, CFA profile picture
We just published our Top 5 Picks of the moment for members of High Yield Landlord. You can read a portion of it for free here: seekingalpha.com/...

Have a great day!

When you say soar...what would be a conservative target for CCI? I'm thinking about putting 3-4K into CCI. I wanted to buy UNIT, but I think I missed the date to get the dividend. I think it had to be yesterday because the ex-dividend date is today. CCI offers a nice dividend too.
Jussi Askola, CFA profile picture
@mavsfan99 Fair value for CCI is in the $180-200 range. UNIT is more discounted, but also riskier.
@Jussi Askola Why is it riskier?
Jussi Askola, CFA profile picture
@mavsfan99 Tenant concentration is the main reason.
Jussi Askola, CFA profile picture

Thanks for reading!

We just published our monthly portfolio review for members of High Yield Landlord. You can read a portion of it for free here: seekingalpha.com/...

Have a great day!

Have you considered RMRM? Mortgage reit selling well below NAV.
Jussi Askola, CFA profile picture
@95Chatsworth We stay away from anything that is managed by RMR. They are conflicted and deserve to trade below NAV. Feel free to join us for a 2-week free trial to access all our Top Picks: seekingalpha.com/...
Thanks for discussing CCI bought a few weeks ago
Jason Wosje profile picture
I haven't spent much time studying STAR and it might be a good investment. But when you say STAR's stake in SAFE is 2x the total value of STAR that really isn't accurate. STAR has a market cap of $1.3B but its enterprise value is $5.0B. SAFE has a market cap of $3.9B so STAR's 2/3 stake would be worth $2.6B. Since STAR has an enterprise value of $5.0B that means the market is valuing STAR at $2.6B for its SAFE stake plus $2.4B for all of its other assets.
Jussi Askola, CFA profile picture
We look at equity value in the public market. STAR's stake in SAFE is worth nearly twice its market cap. Re-read what we wrote. We don't talk about enterprise value.
Jason Wosje profile picture
@Jussi Askola You did say share price but you make it sound like you think market cap is the total value of a company. If STAR had a market cap of $1.3B and no debt it would be a heck of a buy. If STAR had no debt its share price would be much higher than it is with its $3.7B in debt. A company's total value is its market cap plus net debt, aka enterprise value. STAR has $1.3B in market cap and $3.7B in net debt. STAR's debt is much larger than the value of its $2.6B stake in SAFE. When you buy STAR you are not getting the SAFE stake for half price and its other assets for free.
Jussi Askola, CFA profile picture
@Jason Wosje Once again, we are referring to the market cap/equity value of the company. It is clearly written in the article.
Won't CCI (or AMT for that matter) be disrupted by Starlink the coming decade?
@Wessie2.0 Totally different market. You can't connect to Starlink with a cell phone. Starlink is meant to replace other satellite internet providers which have slower speeds and much higher latency. It can't compete with Fiber in terms of cost or reliability. And 5G can't compete with either until the providers eliminate their data caps.
@Wessie2.0 Starlink is getting a lot of buzz in rural areas and not always for good reasons. It can be spotty depending on your locale, glitchy, and is expensive- $500 for setup, $100 a month. It will have a place but will not be stealing the thunder from CCI. This is an interesting bet on small cells, I like the idea. Thanks for alerting us to this drop and opportunity.
Most REITs will sore after they crash again
Jussi Askola, CFA profile picture
All markets move in cycles. Right now, we are in the recovery of the crisis and REITs still have a long way to go.
@Fred Ziffel well that makes sense cause when you crash you often get sore...
@Fred Ziffel Nice pun, the stock will be "sore" after they crash !!! sore or soar changes the meaning !!!
AlexFun86 profile picture
I much prefer STOR with nearly 40% revenue growth and higher dividend yield than STAR and CCI. At least with STOR you can get some price appreciation along with your dividend. I really have no interest in REITs with anemic revenue growths...
Jussi Askola, CFA profile picture
@AlexFun86 We own a lot of STOR so we are bullish. Note however that the "40% revenue growth" means absolutely nothing. You need to look at growth on a per share basis in the REIT sector. Most of this growth is achieved by raising equity. Their AFFO per share was actually down in 2020. Both CCI and STAR grow faster, not slower, than STOR. To learn more about REIT investing, feel free to take our course, which is available for free with the 2-week free trial: seekingalpha.com/...

Have a great day!
Crown small cell towers are popping up at a crazy pace. Taking advantage of all that fiber they have !
Jussi Askola, CFA profile picture
@adamyoung90 I agree. It is an important advantage that is often forgotten.
IMHO, the best value REIT is WPC.
@Class M Planet Being a holder, I wish it was so. Sadly it has been down or flat for a year. Without price appreciation the dividend is insufficient when better opportunities abound.
@dixie , I get your point but the 6% dividend is good enough for me. But, let's hope it declines to low $60's so we can buy more!
Jussi Askola, CFA profile picture
@Class M Planet We like WPC too at the current price. But it does not have as much upside potential in the long run. Feel free to join us for a 2-week free trial to access all our Top Picks: seekingalpha.com/...
Just the Millionaire next door profile picture
@Jussi Askola Most people buy a REIT for the above average dividends. STAR paid a dividend of $1.74 per year back in 2008. Then did not pay one until 2018 and only $.18 per year. What happened and a dividend yield for a REIT of only 2.61% with only 2 years of dividend growth does not exactly get me excited?

Also the stock over the last 10 years has a total return of 89%. Not very good!
Jussi Askola, CFA profile picture
@Just the Millionaire next door I wouldn't invest in REITs just for dividends, but a ~3-3.5% yield is actually around average for the REIT sector and you are getting above-average growth with it.

STAR's business model has changed dramatically in 3 phases. 1) It was a lender pre-2008. That went south with the great financial crisis. 2) It forced it to become a landlord post-2008 as it foreclosed on properties - a tough business especially since it never wanted to own these assets in the first place. 3) Finally, in the 3rd phase it is repositioning itself towards the ground lease business and this is really the business that we like. We would not had been interested in owning STAR in the phase 1 or 2. But today it is a completely different company with much better prospects. Therefore, it is not comparable anymore. If I can help with anything else, I am here for you.
High Yield FIREVestor profile picture
How's your tech portfolio doing today, Jussi?
Just the Millionaire next door profile picture
@Jussi Askola Missed a buying opportunity yesterday.
@Investing4FIRE - His REITs of course are struggling. He won't admit this sector is out of favor (not his fault) and it will be this way for some time. Oh well, Mr. conviction with more than 75% of his "personal" investments in this space has left him so far behind as to be embarrassing. I might come around when I see a portfolio with real numbers and not percentages convincing me its time to allocate more to this space. I say this as a very long and substantial O holder, but only as part of my very diversified portfolio.
jgrever621 profile picture

Thanks for the tip on STAR- wasn't aware of this. Will take a look.

Am long AMT and CCI, and plan to keep both for different reasons.

Jussi Askola, CFA profile picture
@jgrever621 Thank you for your comment. I appreciate your interest.
jara-mill profile picture
@Jussi Askola - Thanks for bringing CCI to my attention as I've always wanted a Cell tower REIT (and AMT was on my list but didn't know it was a REIT...just was too expensive). Now CCI is less than half but if you feel this is a good entry point, then a small allocation is worthy. Initiated my position in CCI and looking forward to it dropping more to add more.

STAR is also in the portfolio and it was easy to understand the concept of "ground leases" based on your intro course on them. Now if they shed their unnecessary assets, STAR can rise.
Jussi Askola, CFA profile picture
@jaramill Thank you for your comment!
Jussi, what's your take on UNIT?
Jussi Askola, CFA profile picture
@tomitomi We are bullish on recently bought more. Feel free to join us for a 2-week free trial to access all our latest Trade Alert: seekingalpha.com/...
SAFE is massively overvalued (50x ffo), so that should not be taken as a positive when valuing STAR
STAR needs to liquidate while it can, unless they're seeing some magic on SAFE that no one else does
Jussi Askola, CFA profile picture
@GreedySOB SAFE is actually undervalued. You need to understand the nature of ground leases as you assess their valuation. Ground leases are not comparable to other properties.

STAR is definitely seeing magic in SAFE, and rightfully so. They have managed to grow assets by 10x since 2017 and they are just scratching the surface.
Ján Mazák profile picture
I don't see how you get 12-15% total returns with 3.6% yield and 7-8% growth. If valuation multiples stay the same, you only get 10.6 to 11.6%. Even less in a very long term, since one cannot project 7-8% growth ad infinitum.
Jussi Askola, CFA profile picture
@Ján Mazák

1) The cash flow is expected to grow faster than the dividend.
2) Small cell upside discussed in the end.
3) Potential for valuation multiple expansion.
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