3 Strong Buys Poised To Profit
Summary
- There just aren’t that many bargains these days. Prices have soared lately in line with the rebound in travel and the growing number of vaccinations.
- Our coverage spectrum is vast, and there are always moats worth exploring. And, of course, the wider the moat, the better.
- All three of these picks are forecasted to return at least 25% over the next 12 months.
- Looking for a portfolio of ideas like this one? Members of iREIT on Alpha get exclusive access to our model portfolio. Learn More »
An entire year ago, I published "No REIT Is Pandemic Proof, but These 3 Are Close."
That was on Saturday, April 4, 2020, when "there were 245,175 confirmed cases" of COVID-19 in the U.S. And there were "1,039,166 cases in the world."
Fast-forward to this week, and the BBC reported that more than 2.8 million people died from Covid worldwide - with 549,795 of those being from the U.S.
Brazil, it adds, takes the unfortunate second place with 332,752 deaths. Mexico is next with 204,399. And India is fourth with 165,547.
(Interestingly enough, China - where the problem originated - doesn't rank in the top 10. It doesn't even rank in the top 50, in fact.)
While we were all hoping to leave the worst of the worst behind in 2020, the article reports that:
"Several European countries, including France, Poland, Germany, and Turkey are seeing sharp rises in infections once more.
"In France, Paris has entered a new month-long lockdown, together with several other regions in the north and south… Fears that the third Covid wave could be worse than previous ones have prompted a clampdown on borders."
Because of such measures, more than one person has asked which is worse: the disease itself or the efforts to stop it.
(Source: Storyblocks)
Those That Didn't Survive… and Those That Did
That last comment isn't meant to be a political statement. It's only an acknowledgement that these aren't easy times. To quote Time magazine from December 30:
"Across the U.S., this year has taken a heavy toll. The coronavirus has upended daily life and resulted in the deaths of over 300,000 people. 2020 is on track to be the 'deadliest year in U.S. history,' according to The Associated Press, with a projected rise of 15% in total deaths from 2019.
"The pandemic's economic impact has left hundreds of thousands of people out of work, struggling to provide for themselves and their families. Other stresses and pressures related to lockdowns and prolonged periods of isolation have also carried significant burdens."
That's included elevated levels of depression and the unfortunate consequences of such. All of that is well worth talking about. But since this is a finance-specific writeup, we're going to focus on the shutdowns' financial fallout instead.
That's why I'm next quoting Small Business & Entrepreneurship Council, or SBE. On January 21, it noted how, "small businesses have been hit hard… the bottom line still points to an estimated 9.4 million businesses being closed - some temporarily and some permanently."
Then in February, CNBC said that "53% of small business owners" - those that actually did survive - "don't expect to return to pre-Covid levels for at least" half a year. And Bloomberg added its own commentary last month:
"The ranks of the world's middle-class shrank last year for the first time in a decade because of the coronavirus pandemic, with emerging economies more at risk of an extended fallout."
As for bigger companies, some of them did VERY well because of last year's conditions, of course. Yet there were also plenty that struggled almost as severely as their smaller counterparts.
The Best of the Best to Bet On
In last April's "No REIT Is Pandemic Proof" article, I wrote how:
"There's no guarantee that any stock, preferred stock, bond, option, fund, or other portfolio possibility will be a winner. There are only probabilities.
"Unfortunately, in this new coronavirus environment we're working with, those probabilities are not in our favor the way they used to be. That's a new reality we have to deal with: a reality that's flipped our previous existence on its head… after tumbling it around repeatedly…
"And kicking it a few extra times for good measure.
"This time, it might actually be different for some [real estate investment trusts]. And it's going to be a struggle for most of them regardless.
"But the ones that come out ahead? We have no idea the golden opportunities we might be staring at right now. At these prices, the profits could be enormous once everything COVID-19 is said and done."
As my regular readers know, that's exactly what happened. iREIT on Alpha has made some truly phenomenal plays in the past year, netting enormous profits - complete with dividends.
I'd pass up on every bit of that if it would erase the pain of 2020 into 2021. But it was what it was. It is what it is. It will be what it will be.
And we have to deal with that reality as best as we can.
So, with that understanding… and with everything else, we already know (including fears of a third wave and economic activity that never really returned to begin with)… and everything we don't know…
Here are my three newest almost-pandemic-proof picks you can consider to get you through whatever 2021 may still bring.
"Cash Is King" Has Paid Off Royally
In response to the pandemic, the resulting shutdowns, and the market's reaction to it all, we decided to act just over a year ago. Recognizing that investors could benefit from the once-in-a-lifetime buying opportunity, we opened a new REIT portfolio called Cash Is King.
Our investment strategy is rooted in deep value and capitalizing on our team's fundamental analysis skills.
To be considered a "Cash is King" constituent, the company must be part of a rigorous screening process - and deliver superior total return potential with a minimum annualized return target of at least 25%.
Now, I recognize that buying stocks is easy when they go on sale. And trying to cherry-pick REITs during the beginning of a global pandemic is much like shooting fish in a barrel.
Today, I'm exceptionally proud of our record of managing risk during COVID-19. But let's face it: There just aren't that many bargains these days.
Prices have soared lately in line with the rebound in travel and the growing number of vaccinations. However, our coverage spectrum is vast; and there are always moats worth exploring.
As always, the wider the moat, the better.
So without further ado…
Let me tell you about three exceptional strong buys that we've purchased for the Cash Is King portfolio. Keep in mind that each of these picks is forecasted to return at least 25% over the next 12 months…
Profits Are Right Around the Streit Corner
(Source)
The first Strong Buy pick is Netstreit (NTST), a net lease REIT that owns 203 properties in 38 states. Listed last August, it's differentiated from its peers by its high number of investment-grade tenants, at 70%.
NTST owns zero theaters. Instead, it caters to a basket of high-quality tenants like:
- 7-Eleven (8.9% of annualized base rent, or ABR)
- Lowe's (8.6% of ABR)
- Advance Auto (7.6%)
- Sam's Club (6.5%).
Ninety-one percent of its revenue is correlated to defensive industries, such as home improvement, auto parts, and convenience and drug stores. Its weighted average lease term is 10.5 years.
That's how 100% of Netstreit's tenants were able to pay contractual rent in Q4-20.
The company raised around $227 million through its IPO. And today, it's offering another 8 million shares to repay borrowings and fund its growth pipeline.
As of December 31, NTST had $93 million of cash - including $14 million of restricted cash held in 1031 exchange accounts. Meanwhile, it remains fully undrawn on the $250 million revolving line of credit it operates.
In Q4-20, Netstreit's net debt to annualized adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) ratio was 2.8x. So it was sitting pretty while paying its quarterly dividend of $0.20 on March 30.
Moreover, it's expected to generate around $1 in adjusted funds from operations (AFFO) per share in 2021. Therefore, the dividend should remain well-covered.
But what makes me really excited is the whopping 18% growth analysts are forecasting in 2022.
NTST could have engineered its yield to be much higher than its current 4.3%. Instead though, it opted to be a more conservative vehicle that could grow its dividend year-in and year-out.
Combine that with its the forward-looking growth, and you end up with a very attractive Strong Buy pick.
(Source: FAST Graphs)
Good Morning, New York
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The next Strong Buy pick is small-cap Clipper Realty (CLPR), the only pure-play NYC-centric REIT out there. Headquartered in Brooklyn, it owns buildings there as well as in Manhattan - 66 in all (3.2 million leasable square feet).
Yes, New York City was the U.S. epicenter for COVID-19. Yet we remain bullish on CLPR's multifamily focus that amounts to 81% of ABR.
Its Flatbush Gardens in Brooklyn generate 37% of its revenue. This is a "low-cost option" with 2,496 rent-stabilized apartments in 59 buildings on 21 acres.
Clipper's next largest property is the two-building, multipurpose Tribeca House, which generates around 33% of revenue. It offers 506 apartments and 77,000 square feet of retail space, with strong upside because of its below-market rent.
The Downtown Brooklyn offices at 141 and 250 Livingston Street, meanwhile, make up 14% of ABR. They feature approximately 549,000 square feet of office space and 27,000 of residential.
141 Livingston is 100% leased to NYC at $40 per square foot (PSF), which will increase to $50 next year. Its sister property is also 100% leased to the city, with a recent lease renewal involving impactful net operating income (NOI) growth trajectory.
CLPR also owns the residential Clover House. Brought online in mid-2019, it involves about 102,000 square feet and indoor parking garage, as well as:
- 158 well-appointed apartments of various sizes
- A rooftop terrace
- A fitness center
- A landscaped courtyard.
It reached stabilization after a three-month lease-up period and is now 98.7% leased at an average $71 PSF.
There's also 10 West 65th Street, another residential building. This one involves about 76,000 square feet, plus 53,000 more of air rights. Six stories high with 82 apartments, it's located near Central Park and Lincoln Center in Manhattan's Upper West Side submarket.
Growing at a Clipper Pace
Clipper remains a small-cap right now, but its debt profile is well-positioned for long-term growth. Its portfolio is financed on an asset-by-asset basis, and its debt is non-recourse and not cross-collateralized.
With no debt maturities on any operating properties until 2027, it's sitting pretty right now even in the shutdown-induced mess. Moreover, its founders - who have significant experience and deep relationships that open many a business door - own 67% of the company.
CLPR just barely covered its dividend last year at 100% of AFFO. And analysts expect to see negative growth of -7% in 2021. That puts its future payouts at a higher risk.
However, analysts expect growth of 30% in 2022, driven by several value-add projects.
CLPR is now trading at $8.16 per share, with a 21.8x p/FFO multiple. One of the things I like about it especially is - believe it or not - its exposure in Brooklyn. According to my sources, this market has become a magnet during COVID-19.
I'm not too concerned with the office exposure since it's leased to New York City. Although riskier than most REITs out there, CLPR has the potential to generate returns of 25%.
We maintain a Strong Buy.
(Source: FAST Graphs)
This One Hits the Mark With Us
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Our last Strong Buy is Broadmark Realty (BRMK), a commercial mortgage REIT that finances single-family and multi-family builders. Its active loan portfolio includes 204 loans across 12 states, plus D.C.
The company targets areas with favorable demographic trends and non-judicial foreclosure laws.
Broadmark is unique in focusing on senior secured lender positions on 100% of its loans. The borrower maintains skin in the game by contributing initial equity at loan origination.
The company's strict adherence to 65% loan-to-value (LTV) thresholds has resulted in approximately 0.1% of principal losses since inception.
In Q4-20, BRMK generated over $190 million of originations and risk-reducing amendments. That was primarily due to a Q3-Q4 acceleration in activity as construction holds lifted and market activity normalized.
It finished the year with a total loan production of more than $625 million.
On Broadmark's recent Q4-20 earnings call, CEO Jeff Hyatt explained:
"We are confident that, in the long run, our expertise and reputation as a lender of choice will continue to give us an edge over our competitors. We also operate in a large and highly fragmented construction market; and we believe we can continue to drive earnings growth, even with conservative market gains."
We recently asked Hyatt about the monthly dividend payment. To which he explained:
"The retail investors like it. If you were to ask David Schneider, our CFO, it's more work than paying them out quarterly. And it's certainly a board decision… but it's worked for us for 10 and a half years. And I don't anticipate that changing anytime soon."
BRMK now yields 8%, and analysts expect growth of around 16% in 2021 and 18% in 2022. We suspect that means super-charged dividend growth, which is why we recently upgraded it to a Strong Buy.
(Source: FAST Graphs)
In Closing...
There will always be unloved stocks worth buying. That's point No. 1.
Point No. 2 is how something I especially love about REITs: how there are so many property sectors and subsectors to consider.
Our success at iREIT on Alpha is in finding the "needles in the haystack" in each area. Though, believe me, that's no easy task. Our team approach is rooted in screening, interviewing (management), and group thinking though.
So it all comes together in the end - sometimes with intensely profitable results.
Keep in mind that our quality (IQ) scoring tool provides us with great intelligence related to the REITs we follow. So while we do have a Strong Buy on all three of the ones above, they're not sleep-well-at-night (SWAN) stocks.
At least not for now.
That's why I must stress that you, the intelligent investor, do your own research!
Good luck and happy investing!
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.
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This article was written by
Brad Thomas has over 30 years of real estate investing experience and has acquired, developed, or brokered over $1B in commercial real estate transactions. He has been featured in Barron's, Bloomberg, Fox Business, and many other media outlets. He's the author of four books, including the latest, REITs For Dummies.
Brad, with his team of 10 analysts, runs the investing group iREIT® on Alpha, which covers REITs, BDCs, MLPs, Preferreds, and other income-oriented alternatives. The team of analysts has a combined 100+ years of experience and includes a former hedge fund manager, due diligence officer, portfolio manager, PhD, military veteran, and advisor to a former U.S. President. Learn moreAnalyst’s Disclosure: I am/we are long BRMK, CLPR, NTST. 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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