Asset Allocation Strategies

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>>>2 Investments To 'Load Up' Before The Recession


Nov. 28, 2019

Jussi Askola

REITs, real estate, research analyst



https://seekingalpha.com/article/4308392-2-investments-load-up-recession


Summary

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

Investors are quickly seeking refuge in real assets such as commercial properties, 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 2 of our favorite real assets and explain why their cash flows are resilient to recessions.

Looking for a portfolio of ideas like this one? Members of High Yield Landlord get exclusive access to our model portfolio. Get started today »

Investors are today faced with a big challenge:

"There is nothing interesting to buy."

On one hand, stocks are trading at a 30% premium to historical averages – despite slowing growth 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:

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.

Bonds: Not enough income is earned to meet investor's immediate needs. This is particularly dangerous to large institutions and retirees.
What is then the solution to deal with these challenges?

Our preferred strategy is to invest in Real Assets. Commercial properties, farmland, timberland, energy pipelines and other similar real assets are the only remaining investments that can still provide high income and inflation protection – without taking an enormous amount of risk.

These are not just the empty words of a Seeking Alpha author. Over the past 10 years, institutional capital in the real asset space has grown by $30 trillion. Yes that’s trillion with a “t”. Over the coming 10 years, another $50 trillion is expected to shift to real asset investments.

real asset allocations on the rise

Stocks and bonds are not providing the needed returns and professional investors are quickly changing portfolio allocations. By 2030, the allocations to real assets are expected to reach up to 40% of intuitions portfolios:

So far, individual investors have been slow to react. With poorer access to research and no expertise in real asset investing, individual investors continue to overexpose themselves to the risks of owning traditional stocks and bonds.

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. This includes REITs, MLPs, Utilities, and other listed infrastructure companies.

If you've read until here, we want to share with you two of our "Top Picks" among high-yielding REIT opportunities. These two REITs are particularly well-positioned in today’s late cycle economy because of their more defensive nature, steady cash flow growth, and high level of dividend security.

INVESTMENT #1 – Medical Properties Trust (MPW)

MPW is our one and only Healthcare REIT investment at the moment.

The Buy Thesis in 3 Bullet Points:

Superior Cap Rates: Most REITs compete for properties in the 5-7% cap rate range. MPW is able to target greater cap rates at closer to 8% by specializing in hospitals - a property type that is mostly ignored by the investment community.

Resilience in Late Cycle: People need hospitals - regardless of economic conditions. MPW's tenants are healthy and enjoy strong rent coverage ratios. If we were to go into a recession tomorrow, we would expect the cash flow to remain stable - allowing it to pay a sustainable 5.3% dividend yield.

Strong Acquisition Pipeline: As the only "pure-play" Hospital REIT, MPW enjoys valuable relationships with operators to conduct sale and leaseback transactions. With a strong acquisition pipeline and the capital to fund it, we expect 5-8% annual growth in the coming years.
You can read our full investment thesis here:

Investing In Hospitals: Recession Resilience, High Growth, And 5.6% Yield

Recap of 3rd Quarter Results:

This company is doing absolutely amazing:

It beat on FFO and revenue expectations. It also reaffirmed its full year guidance – which it already boosted during the last quarter.
The CEO talks about a “record-breaking year” with “monumental results”. This is because year-to-date, the company has grown its assets by 40%!
Its new acquisitions are done at ~8% cap rates – which results in immediately accretive growth.

They note that they have a pipeline of up to $5 billion for transactions in the coming quarters. The company is not slowing down.
The investment story was already strong in MPW, but with these new acquisitions, the story is only getting better. We also love the recent expansion to more global markets including the UK and Switzerland which have very favorable demographics for hospitals. With such healthy spreads, and defensive properties, we believe that MPW is a near certain future outperformer. If the share price remains around $20 per share, we will buy more shares in the near term.

INVESTMENT #2 – EPR Properties (EPR)

EPR Properties (EPR) is one of our oldest investments. We invested heavily when it traded at mid-$50 and have a large capital gain at $77 today. To this day, it remains our Favorite net lease REIT investment idea.

The Buy Thesis in 3 Bullet Points:

Alpha-Rich Strategy: EPR targets specialty net lease assets that are ignored by most other investors. These include movie theaters, golf complexes, ski resorts, and other entertainment assets. They come with greater cap rates, longer leases, and higher rent increases.
History of Successful Execution: EPR has historically been a massive outperformer and everything points out to further outperformance in the long run.

Simple Story: The company beats its peers on all fronts. It pays a higher yield (6%), it grows faster (5-8%), and it has more upside potential due to its discounted multiple (14x FFO).

You can read our full investment thesis here:

A New Opportunity Has Emerged In EPR Properties

Recap of 3rd Quarter Results:

EPR has a long history of consistently beating expectations and surprising to the upside. The last quarter was no different:

It beat FFO and revenue expectations for the quarter. It also boosted its full year guidance.

It invested $118 million in new properties over the past 3 months alone. A big portion went into golf complexes such as the one illustrated above.
EPR is currently enjoying historically high spreads on its new investments and the guidance for further acquisitions is very strong.
EPR also issued $500 million in senior unsecured notes with a 10-year term at a 3.75% interest rate during the quarter. This cheap capital was used to refinance its previous notes that were yielding 5.75%.
The dividend is up by 4.2% as compared to same quarter last year.
We expect another dividend increase sometime in the coming quarters, likely in early 2020. We are very bullish and recently upgraded EPR into a Strong Buy. The discount to peers is historically high and the company is stronger than ever before. We expect ~15% upside from repricing to a higher FFO multiple and 5-8% annual FFO growth. Add to that a 6% dividend yield, and you have a recipe for consistent and predictable outperformance.

It's by targeting this type of defensive, yet undervalued REITs that we aim to outperform in today's volatile and uncertain environment.

As of today, our Core Portfolio has a 7.4% dividend yield with a conservative 68% payout ratio. Beyond the dividends, the core holdings are trading substantially below intrinsic value at just 9.2x Cash Flow - providing both margin of safety and capital appreciation potential.

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