As I'm putting this article together, I'm reminded of a different one I wrote.
I'd call it a recent piece except that it was published last decade. On December 31, 2019.
Despite the massive amount of time that's passed since, I'm still going to quote the intro of "Monmouth Realty: 20% Total Return Potential in 2020." It's a little lengthy, but bear with me.
We're headed in a very good direction:
"A few days ago, I coproduced an article with Dividend Sensei titled '3 Reasons It's the Best Time in 10 Years to Buy FedEx.' As many of my loyal readers know, I purposely focus on the REIT sector. But from time to time, I will veer over into another sector such as energy, utilities, or other dividend-paying categories.
"As an investor myself, I don't subscribe to putting all my eggs in one basket. And for that reason - and because it broadens my personal investment knowledge - I enjoy writing on non-REITs as well.
"In addition, I typically look to increase my knowledge of the REIT sector by writing on companies that help me become a more knowledgeable REIT investor."
As I also state there, "Let's face it: There's always something new to learn… and to benefit from."
That's my first point: That there's always something new to learn.
And here's my second: If it can point you toward a good real estate investment trust (REIT) - or, better yet, five of them - then more's the better.
That's the kind of value I found in the Psychology Today article "15 Ways to Build a Growth Mindset." Also authored last decade - though even further back, all the way on April 11, 2019 - it's written by Dr. Tchiki Davis.
According to her publication-specific profile, she's a consultant, a writer, and an expert on "well-being technology." Admittedly, I'm not sure what that means, but she seems like she has quite the interesting backstory regardless.
That is if the intro she wrote for this particular piece is any indication…
"Only 10 years ago, I stood behind an old brown cash register at a local retail store, sliding customers' purchases across a crisscross red scanner for $7.25 an hour (minimum wage at the time).
"If you had told me then that 10 years later, I'd have a Ph.D. from Berkeley, write a blog for Psychology Today, or be the author of a book on how to generate happiness in the technology age, I would have thought you were absolutely bonkers! I had no connections, no money, no information on how to get me from where I was then to where I am now. But I did have one thing…
"I had a growth mindset."
What does she mean by that? Let's explore it further.
"A growth mindset," Davis writes, "is simply the belief that our basic abilities can be developed and improved through dedication and hard work."
Before you roll your eyes at how "hippy" that sounds, her very next line is this: "It's not so much that this belief is some kind of magic. It's just that, without a growth mindset, we don't exert the required effort and so we remain perpetually stuck."
While the rest of the article is well worth the read, I'm going to stop there to add in a thought of my own. Because it's rare we end up completely stuck. That implies we're lying in a gutter somewhere. Forever.
Instead, most of us simply don't grow as much as we could. We have more potential, but we're too afraid or too set in our ways to actually achieve it.
But it's still early in the new year. So, let's make a promise to stop settling. Let's determine that we're going to be more proactive about recognizing what we want and what we need to get it.
For the benefit of ourselves and those who depend on us.
For proper inspiration in that regard, I'd like to present the five REITs you'll find below. They're the best dividend-growth REITs you'll find this year - with one caveat.
They're the best dividend-growth REITs you'll find this year that are trading at the widest margins of safety.
In other words, they're not being reckless. But they are being bold. They know what they can do, and so they're doing nothing less.
They embody Davis' description of a mindset that "embraces challenges, persists in the face of setbacks, takes responsibility… and acknowledges that effort is the path toward mastery."
And it shows. Significantly.
One of the many benefits for our iREIT on Alpha Marketplace service is that we cover a wide range of REITs that represent most every property sector. By carefully screening this universe, we can filter out the best companies based on dozens of critical attributes.
As referenced earlier, we decided that, in this particular article, we would screen for growth potential and value. We also decided to include our quality R.I.N.O. score for each REIT. That way, you get an idea as to how each company is differentiated within its peer group…
Starting with our first stock, CareTrust (CTRE), a healthcare REIT that focuses on skilled nursing, multi-service campuses, and senior housing.
The company was spun from The Ensign Group (ENSG) in 2014 and has since reduced its exposure from 100% to 33.2% (based on Q3-19 ABR). As of the latest quarter, its portfolio had 211 properties and 21 operators located in 28 states.
Since listing, CareTrust has improved its balance sheet to a BB- status. Its net debt to EBITDA (earnings before interest, taxes, depreciation, and amortization) is 3.4x. It has a 23% debt-to-enterprise value and a fixed coverage ratio of 6.2x.
Admittedly, the company is not immune to challenges. In the latest earnings period, it disclosed a few tenant issues, including:
The good news is that CareTrust reaffirmed its 2019 funds from operations (FFO) guidance of $1.36 to $1.37 per share. In addition, it provided 2020 guidance of $1.36 to $1.38 per share.
Obviously, that's modest growth in 2020. But we expect to see its dividend grow once again, since CareTrust has one of the lowest payout ratios in the sector - 63% on a funds available for distribution, or FAD, basis.
Also, analysts forecast growth of 9% in 2021. That's more consistent with the company's historical growth rate of 8%-10% per year. Thus, CareTrust scores a Buy for us, and we are adding shares of it to our Small Cap Portfolio.
Normal (5-Year) P/FFO: 14.05x
Dividend Yield: 4.57%
Payout Ratio: 66.2%
2020 FFO/Share Growth Forecast: 3%
2021 FFO/Share Growth Forecast: 9%
R.I.N.O. Score: 3.7 (peer average 3.6)
iREIT Rating: Buy
Ryman Hospitality (RHP) is a Lodging REIT that has demonstrated a successful history of growth. It focuses on investments in upscale meetings-focused resorts.
The company owns four Gaylord-branded hotels in Nashville, Orlando, Dallas, and D.C. Each of these Gaylord Hotels features at least 400,000 square feet of:
Ryman also owns and operates a number of media and entertainment assets, including:
Ryman should grow FFO per share by around 18% in 2019. And analysts forecast FFO to grow by 7% in 2020 and 6% in 2021.
The company has a number of catalysts in place to support an increase in full-year adjusted FFO (AFFO) guidance to between $351.1 million and $360.3 million. At the midpoint, this would represent a 17.8% growth rate over the full-year 2018.
Shares are now trading at $85.54 with a dividend yield of 4.2%. And our Fair Value Target is $83.
Ryman is one of the few lodging REITs forecasted to grow FFO in 2020. And while we're encouraged by its potential, we believe shares are a bit rich at this time.
We're therefore waiting on a slight pullback.
Normal (5-Year) P/FFO: 11.78x
Dividend Yield: 4.3%
Payout Ratio: 49.7%
2020 FFO/Share Growth Forecast: 8%
2021 FFO/Share Growth Forecast: 6%
R.I.N.O. Score: 3.1 (peer average 3)
iREIT Rating: Hold
Urban Edge (UE) is a shopping center REIT that owns 73 shopping centers in large metropolitan areas - some of the most densely populated markets in the country.
Sixty-two of these properties, or 88% of its net operating income (NOI), are located in the Boston-to-D.C. corridor. And its particular quality portfolio is impossible to replicate.
Northern New Jersey, one of Urban Edge's largest markets, is one of the most supply-constrained regions of the country. It features only 11 square feet of retail gross leasable area per capita.
As we screened REITs in our coverage spectrum, Urban Edge stood out as a deep-value pick. Shares are now trading at $18.73, with a P/FFO multiple of 16x.
That's around 300 basis points lower than the average four-year multiple of 19x.
Following its 7%-plus selloff in December, we find Urban Edge to be especially attractive based on a number of growth catalysts that support enhanced price appreciation potential.
It's expected to post above-sector-average FFO growth in both 2020 and 2021, as it leases vacant anchor boxes and secures entitlements for larger-scale redevelopments. Management said its annual investment of $125 million in 2020, stepped up gradually to $250 million in 2023 - should drive earnings considerably.
And, as viewed below, analysts estimate FFO growth of 7% next year.
Given the wide discount and potential for growth, we're upgrading Urban Edge to a Strong Buy. The dividend yield is 4.7%, and we believe there's enhanced opportunity to generate annualized returns of 25% over the next 12 months.
We'll be adding it to our New Money and Growth & Income portfolios.
Normal (5-Year) P/FFO: NA
Dividend Yield: 4.81%
Payout Ratio: 75.0%
2020 FFO/Share Growth Forecast: 2%
2021 FFO/Share Growth Forecast: 7%
R.I.N.O. Score: 3.1 (peer average 3.5)
iREIT Rating: Strong Buy
Iron Mountain (IRM) is an outlier that we believe has strong growth potential.
A few weeks ago, the company's CEO telegraphed his new headline catalyst by announcing Project Summit, "a transformation program… that will leave [the company] with a simpler and more dynamic management structure, better supporting our future."
Project Summit, it appears, is a simplification strategy that will combine core records and information management "under a single global leader to eliminate unnecessary work in rebalancing resources."
By streamlining staff - also known as eliminating around 700 positions - it's hoping it can more efficiently leverage its "global and regional customer-facing resources across RIM product lines." The goal is to create "better alignment between new digital solutions" in its core business.
Project Summit will begin in Q4-19 and should be substantially completed by the end of 2021. The cost to implement it is estimated to be around $240 million. And Iron Mountain expects to record pre-tax restructuring charges of about $60 million associated with the program in Q4-19.
In a recent article, I explained that "this translates to around 9.5% combined growth - 4% expected growth and 5.5% related to Project Summit - starting from the 2019 normalized adjusted EBITDA."
Analysts forecast AFFO-based growth of 9% in 2020 and 7% in 2021. The dividend is well-covered by AFFO, with an 82% payout ratio.
We maintain a Strong Buy here.
Normal (5-Year) P/FFO: 15.76x
Dividend Yield: 8.09%
Payout Ratio (AFFO): 82%
2020 FFO/Share Growth Forecast: 9%
2021 FFO/Share Growth Forecast: 7%
R.I.N.O. Score: 3.3 (peer average 3.3)
iREIT Rating: Strong Buy
CyrusOne (CONE) is a datacenter REIT that's been one of our best long-term performers. Since its Q3-19 earnings call, shares have pulled back by around 15%... providing us with an opportunity to upgrade from a Hold to a Buy.
It did slightly adjust guidance ranges in Q3-19 by decreasing the midpoint of its revenue and adjusted EBITDA ranges - though each by less than 1% - "reflecting a pushback and commencement timing for a few deals as compared [to] the prior outlook."
Also, CyrusOne increased its normalized FFO-per-share guidance midpoint by $2.05, "primarily as a result of lower interest expenses than it had previously anticipated." And, it tightened the "guidance range for capital expenditures to the $900 to $950 million range, given the projected development pipeline spending for the balance of the year."
Perhaps what spooked Mr. Market was CyrusOne's CEO on the earnings call saying:
"We are not currently pursuing a sale of the company. We remain focused on our strategy and creating long-term shareholder value. We do not intend to have any further comments on the recent media reports and market rumors, but look forward to discussing our results for the quarter."
One of the reasons we've been so bullish with CyrusOne is because of its strong growth opportunities. Its upped its development activities across markets in both the U.S. and Europe in response to the strong customer demand.
This generates higher colocation price points, with upsell opportunities into cloud hosting, cyber security, and connectivity offerings. And that lifts return on invested capital yields to between 11% and 15%.
Analysts forecast FFO-per-share growth of 10% in 2020 and 2021 - consistent with CyrusOne's historical growth rates. Shares are now trading at attractive levels, with strong potential for returns in the range of 18% to 20% annually.
Normal (5-Year) P/FFO: 17.9x
Dividend Yield: 3.22%
Payout Ratio: 53.5%
2020 FFO/Share Growth Forecast: 10%
2021 FFO/Share Growth Forecast: 10%
R.I.N.O. Score: 3.9 (peer average 3.8)
iREIT Rating: Buy