Roaming Returns

030 - Tim's 3 Must-Have Undervalued REITs for 2024

January 23, 2024 Tim & Carmela Episode 30
Roaming Returns
030 - Tim's 3 Must-Have Undervalued REITs for 2024
Show Notes Transcript

REITs have been beat down because interest rates have been high. The FED announced that they intend to lower interest rates in 2024 if the economic metrics keep looking good. That means REITs are going to turn around soon enough.

If you're not familiar with REITs, go back and listen to Episode 13 first.

Tim has combed the list of potential investments using several criteria to get him to the best of the best REITs.  

  • P/E vs peers to compare value 
  • Free cash flow
  • Profit Margin
  • Year-over-year sales growth
  • Number of years of dividend increases

And this episode goes over the 3 that stand out above all the rest in detail. 

  • IIPR
  • ABR
  • EPR

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Ticker metrics change as markets and companies change, so always do your own research. The content in this podcast is based on personal experience and is for educational purposes, not financial advice. See full disclaimer here.

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Welcome to Roaming Returns, a podcast about generating a passive income through investing so that you don't have to wait till retirement to live your passions.

In today's episode, we're gonna go over the three best REITs. So you can take advantage of the fact that the last year beat the ever living crap out of those real estate investment trusts, and this is an excellent way to invest in real estate without actually owning real estate. Settle in your britches, here we go. Alright, we are back for the three, top three REITs my

top three arrays now. What, how do you like, quantify what's the best like there's different?

You have to give it a scope of standards or metrics or whatever. Yeah, but like

there's going to be ones that have higher yields or a better value and might be undervalued more or they like

better growth than the metrics of what our definition or your definition for me I

look at. I'm more interested in dividend growth which would then equate to the company itself growing so one of the metrics I use a lot is a sales growth for like the last five years sales increase year over year cash cash from operations is going up, you know, before I even like put it into like my little tracker thing I look at the snapshot of it and I will make sure that the revenue has gone up. It's not going down like it's like.

So his definition of best is that the revenues continuing to go up. They're continuing to pay dividends if not increasing

dividends or want them to increase dividends. And that's like a huge thing I look for the valuation

of them right now is under undervalued. undervalued,

because if you combined with if you can combine an undervalued valuation with a company that is having strong growth in revenue or sales, that's generally going to equate to more dividend increases and price appreciation to bring that undervalued is back to the mean.

And then you look at the actual company like do you like the company from a they should be making profit or they're in demand or something along those lines, right?

Usually, sometimes he wouldn't pick something

like we were just ended the crypto episode on the fact that you said the office space free office spaces are trying to go and it makes a lot of sense if you think about it from a the whole COVID caused everybody COVID caused everybody to basically telework and then they realized pretty bad five years, but they realized during that period that they were actually more productive and they were paying way less office space or needed to pay way less office space costs. And then they said why like one of the really good companies like why do we even need to have an office. So they're going to nix the office spaces. So it makes a lot of sense that the office space for us would not be a good area segment within the rates. Because

like the overall momentum of the office rates is like the last week maybe eight days, like five of them have cut their dividends like substantially like we're talking 40 5060 70%

Why and then that that to me says that that's proof that our intuitions on that whole thing was in the right ballpark. Like and I think on the other side side of the fence would be if that was what was happening with COVID the office spaces and stuff and with the shipping and people staying at home, you know that you would think warehousing and shipping and storage facilities read to be increasing in demand popularity profit. At the same time, I'm

a minor in my top for your warehouse.

Well, I'm not saying that that has to be a thing but I'm just saying think about these what do we call it micro trends, macro Trend Micro trends, to kind of give you a predictive because you want to definitely be making your moves before everybody else realizes Oh shit, I shouldn't be in this sector. Oh, the sector is really awesome and pushes the price going

forward. I fully anticipate like the next couple of years. To be really good for the right REITs office bases obviously not one but like warehouse like you said like pull Polaris, Polaris or whatever however you say that's like that. They literally just focus completely on industrial warehouses that are they go on like storage space like the RSA and PFA or whatever they're called. They're literally just they devote their entire portfolio is storage basis. They just buy up those little things you drive by and you see the little storage thing. But what we're gonna focus on is my thought three because I'm super important

to podcast, but

and now. None of them no one is a weed one. One is a pretty much everything one. And one is that I guess it's residential. I don't know. I don't know what they do. I have to be honest, I just know it's really a company. But

like we're saying he looks at a whole bunch of different metrics. And this is the ones that came out and if you look

at what but if you like if you look at whenever I mentioned the three and I go over them if you look at them individually, you'll see that there are better reads out there the higher dividend yield with more free cash flow with more revenue with more the better sales but like to me if I was just going to have like my read portion of my portfolio I would have these three and maybe another one one more but definitely these three.

So my question is going to be what makes you pick these over

Halloween one because we're becoming legalized. As

you do, talk about why you're choosing this one over other ones. Okay,

the first one we'll talk about will be IPR innovative, industrial property, someone other. It is a weird one. It's quite wacky tabacky it's kind of pricey. I think it's trading like $93.93 Samba share, which I know that's very difficult to get into that.

So in IT sector was PE versus here's,

its P e is 16.1. And its peers are 28.2. So it's undervalued by 12.

So even though it is pricey, still looks like it has room to catch up.

And its prices. Price per sales is well above the sector median it's like in the top 12 percentile of all rates. Its price per free cash flow which is a super huge one for rates I don't know if you're free like when you're looking at stocks the only like REITs and BDCs or like there's they have their own special like terminology and for REITs free cash flow that means after they pay off all their dividends and then they pay whatever they need to pay and all other fees of what they have is a metric called free cash flow that's kind of like net cash for the other one. So you want to find REITs that have a high free cash flow because that means they're not going to cut the dividend firstly, and secondly, if they have a lot of free cash flow, they can make other acquisitions to further boost the revenue or they can make the

research and development dividend increases.

So what I PR does is they literally just buy up properties that are undervalued and they use them for we whether it's the storage of it, whether it's the growing of it, whether it's the turn of like a like a transportation hub, we would like to transport things. That's pretty

cool. Are they centralized in Denver by any chance?

Please oh no.

That was a joke.

So IP are has a trailing 12 month revenue of 3.8 million per year. So that's pretty awesome. But they have but they have a profit margin of 54.1% which is incredible. Yeah, that's really really like the profit margin scale. If you subscribe to the weekly emails we have that when I break down like the top 10 companies going to x Dev. The Zero is bad hundreds, like God never seen 100 So but 100 Like it's on a scale of zero to 100. So 54.1 is really good. Year over year it has grown by on average for the last five years. 9.7 So it's almost doing a 10% year over year sales growth and it yields currently 7.8% So it's not a slouch like it's not like a three percenter but it's not like some of the Ricci seasons are like 1214 16% but they do raise their dividend every year. I think they're up to like 14 or 15 years is straight. years straight of dividend increases.

That's what I was gonna ask. So that's actually been out this long. Yeah, dang. been

out for a while. I like them because they are like probably, in my opinion, the best REIT in this particular area like whatever your personal feelings are about. weed is irrelevant whenever you're investing unless you're one of those investors that refuses to invest in certain things because it's morally morally unjust or whatever in your opinion. Yeah.

I believe it or not, as as we weed sounding as Tim is. Stoner sounding as Tim knows,

I don't smoke smoke at all. We cannot even tell you how many times we're out and about on the streets of random people roll up and just asked him if he wants to buy so it is so funny we're even in Greece the last time it's so random dude wrote up was like hey man.

Yeah, so like to further to further show you why I like this one like their growth. Their growth is the smoke smoking stupid. Let me finish that point.

Steven for him, because if you saw what it did to him, Jesus God,

I become a hyperactive nut that has no like, no, no on off switch and I'll just be like, I can do that and I'll just go do dumb shit and like hurt myself and all sorts of stuff.

That's what happens with him.

I know most people smoke weed. They like veg out and they chill out and they're like, Yeah, I'm like the opposite. I turned into like, what do we what do we do?

I have no absolute risk thing whatsoever. Everything's good.

So yeah, so the five year annual average growth is like I said, it's 97%. They've actually increased their year over year sales all five of the last five years. I can't it's very difficult to find something beyond five years for whatever reason, cash from operation has increased five out of five of the last years this company is growing like I know it sucks because it's $97 but it's a company that's going to keep growing and growing and growing and growing. And that's like, ideal this undervalued by like I said 16 to 28. So it's undervalued. It's like damn near 50%, undervalued compared to its peers, but it's growing so much faster than its peers in this area. That you're getting a undervalued see that? You've got the value portion of our formula completed. You're doing the contrarian thing because it's a REIT. And it's a pot rate and people are all weird about pot raise. So a lot of like last in the last couple of years, they sold this down it was traded like down to $200. So at one point so now it's down to 993 Holy crap is that because of any of the government reg the winning? No, no, I really don't care. I don't know. I don't care.

Do you think it was more of a anti weed sentiment? Because I know that will CBD oil things taken off? I

don't like that because majority of Americans like we they back we they don't think it should be criminalized. So it's not from a public sentiment sentiment thing? I don't know if it's from a poll or like a political thing. I don't know.

Well, you know, I think it kind of has a lot to do with what we were talking about in crypto where they trash talk something until they can get a hand in the pot or hand under regulating or whatever there's

they've done that when they legalize it like they like Pennsylvania we're we're where you live and where we record this Italy were the one of the slowest states it's still not completely legalized but like what they do is like once they know they're gonna legalize it, they actually will set into motion they're the government's plan to like, they'll sell licenses to certain people who have been crazy

credential, and Kuba has the money in the bank to even be able to grow for them.

I think it's like, I think it's then your $2 million a year for a Pennsylvania license to grow with.

And then I think you have to have a whole bunch of different metrics. My brother was looking into growing and he was like God damn, that is just a noxious ly ridiculous

once the government has all their ducks in a row as they say dispensaries already,

so I don't

think it is full blown here.

Right? I mean, I

don't smoke either. So I don't really have any idea

why I run into people that smoke I'll ask and then I'll give you guys a yes or no,

yes or no, it

was legalized here. I think. I think it's medically legal. I don't think it is.

Oh, yeah, it is. It is you need a medical card. Otherwise you can't have access. So it's not legal legal, but it's medically,

Switzerland. I was just so like ours is only like half legal for medical purposes. medicinal purposes and it's cost a lot and so that government's getting a lot of money. I think that was the whole point to have people grow weed so like that might be I think they saw it wasn't going away a political aspect I don't know I don't I don't know why this one's down or because their debts not bad. So like their debts. Not weighing them down. I don't know why it's standing. They're always expanding. They're always buying like, places to store it and grow it and ship it. And maybe

it's a competition issue. Maybe it's a demand issue. Maybe it's because everybody's gone to the local distillery or the distilleries, distributors

like I said you're probably you can you can totally find better REITs that have better dividend you but like their dividend growth. I don't really have to look that up. I don't know how many years but they've grown their dividend, dividend pay the dollar is yours, but I think it's 14 or 15. It's $1.68 or dollar $1.86 per share. We just got our we got our dividend in this one. That's

gonna sneeze out. That's pretty decent.

So you figured that's only one quarter. So it's like, what is it? 360s Seven, seven, about 730 a year in dividends. That's not bad. So it's pretty good and it's undervalued and like that's why I think it's a really good one. That's number one. Number two is AVR. If you've been on the podcast, you've heard me talk about AVR harbor a few a few times me asking dumb

questions about trees. I like them

because they are actually what they do is like anytime people take a loan from them or whatever they send them a tree to plant or they plan to plant a tree in their name. That's how they got the arbor like really thin. Arbor ABRs P is 9.7. Again out of the 28 so it's very it's well undervalued compared to its peers, and it has a 20.3% profit margin so it's not near as good as IPR is but it's still pretty decent and to make sure that dividends not being cut at anything. I found anything that's above 10% profit margin, the dividends generally not cut. It's when it gets put back into single digits. Sometimes is or sometimes not and if it gets below zero, it pretty much always cut Yeah. Which makes sense because you have no profit,

you'd have to that makes no sense whatsoever. Year

over year sales for Arbor ABR is 37.7%. So it's doing pretty good in that regard. And it yields 11.7% So this is a this is a double digit yield and it trades for like 14 I think 1460 or something like that. price to sales is 1.71. So not great. Price to free cash flow is 38. So again, not great, but not bad. It's just an average. Yuck. It's like, you know, kissing your sister type stuff. I've heard that somewhere. I have never heard that. That's hilarious. Yeah, it's uh, it's the same.

In the Redneck towns Yeah. Where you're from

five out of five years and sales have increased year over year. So that's good, but only three out of five has its cash increased from year over year. So that's not troubling but quick, again, because they have a pretty good profit margin at 20 What

we have to consider COVID And the whole economy thing right into that. And

this one they've grown their dividend I think. I don't remember if it was 12 or 14 or 12 or 15, but 12 out of 14 or 15 quarters,

they raised their dividend in the ones they didn't work during like that pullback with the COVID stuff. Yeah, this one.

This one always is raising this dip and this one has a This one's really nice for like a dividend growth. So I liked this one a lot and like most of the income investing publications that I have subscribed to and if you've subscribed to other ones you do familiar with this one because it's like everyone's favorite is kind of like Hercules capital, like maybe ours just like

the price point of this one.

It's like 1460 I

think I'd like to buy like 10 of these for the price of the other one.

Yeah, you can but the other one has better than the other ones like pretty much a monopoly and in the weed. Real Estate thing. Where's this one? Just I think this I do believe this is single family and multifamily like a residential.

I mean that even saw as a sector. Yeah,

so like the sector This one's not as like as not as my thinking like No, like it doesn't have a vote like not Modi like IPR er kind of dominates that, that we sector as this one. It's just one of multiple and the, the residential.

I do think the tree aspect probably sets it apart. I know there's a lot more people willing to pay. Are they go they support companies that typically give back in some way, especially to the environment? No,

but I liked I liked this one because they are continually growing their dividend is cheap and the like once you're in it for a while, you know, it's way easier to determine when to turn the drip off, and then turn it back on. Because it does kind of vacillate between like 1225 and 1250 to like 17 if it ever breaks out above 17 Who the hell knows how high it's gonna go? Like it's been it's been like it does that bouncing back and forth between those numbers.

Do you think it'll do that if we do end up in a bull run?

I think twice. I'm just curious. Possibly.

Tim does like to find ones that trade and bandwidth and then just dump them when they hit the top point and then get back at him when they go down

somewhere. You know, I mean, twice. 26 or 27 would be my guess for the like the peak of this one. So you're like you're in this one not that doesn't have as much growth potential as IPR like you're good there is unfortunately there is a cap that this one will only go up to a certain point before it's it's it's tapped out. And that's not a reflection of the company. The company's very well ran. It's just a reflection of the sector that's in the single family, especially

here, where it specializes in because there

are is so much competition that the price doesn't generally go above where it goes because of that. I really like AVR though like It's like this should be if you're just starting out income investing. This should be one of the first ones that you get along with her for this cap, but we'll get to that when that in the BDC one. There's a there's a few and Main Street capital. There's a few that you should have in your initial whatever your initial basket of investments in your portfolio once you first start out, this is one of them, just because it yields 12% So even, even if it maxes out at 26 at whatever you're still getting 12% a year. That's pretty that's pretty awesome. And the third one is a probably my favorite one ever. Just because they do some wacky shit. It's APR, APR is it's in the diversified industry because it like they have like the vindo Dave and Busters like you where you go out to eat and you play basketball and there's arcades and bowling alleys and shit. Yeah, that's probably an EPR property. They have ski resorts. They have learning centers, they have schools, like they invest in all sorts of stuff. That's not what you would normally think of when you think of REITs sounds

like they're in the sector that buys the oddities they

are they go Hold on one sec. Well, I looked so I want to get you everything they're in there. They're in so much crazy shit. Let me Google this. Chiclet Okay,

theaters, good.

They have 360 locations. They have movie theaters, they have eaten play like I said like Damon busters tie it's not David but there's obviously because David busters have their own their own stock. They have like water parks and amusement parks. They have ski resorts ski lodging and they have other loud like, I don't know what the hell that means. Experiential lodging like I guess like

so that makes me think of like the squares Stargate spiritual lodging. Now then they're probably means that they have like beachfront lodge properties or like out in the middle of nowhere where they have the like Aurora Borealis type stuff,

maybe yes. And they have gaming which is like casinos. They have cultural which is like museums, they have gyms. I guess gyms. Gyms like gyms. They have private schools and they have early childhood education centers. Like I said, they like they have a bunch of shit that you wouldn't think of when you think of real estate. Investing. They have all the all the fun stuff. I really one that one's interesting. This is like my, this is my favorite rate. I love them. Kind

of sounds like they like to give back towards recreation and education, or that's like their specialty. Now

their their price to earnings is 24.6 but because they're in the diversified industry that diversified industry, P e is like 48. So they're like they're like 50%, undervalued according to the compared to their peers. They have a 20.5% profit margin. So again, good, not as good as IPR but it's really good still. And their sales growth is 17.3%. So I mean, they're again, they're growing. I mean, when she I guess you invest in all these fun things, because people are like, I guess leaving the house compared to how they used to be stuck in the house there for a year or two.

I would think just in general if you're part of the whole nine to five workforce like you're gonna put a lot of your downtime into recreation sports.

I'm gonna have a seven 7% yield. So there again, not as high as IPR or ABR but seven is still really good. If you think that the average dividend yield for s&p 500 companies is 1.5% which means do you think about like when people say like, Oh 1.5% That's not terrible, but you have to think that's the average of 500 companies and you got a few companies in there to have like 1012 Eight, seven, so you some of these companies are paying like

nothing, not that a lot of them are paying nothing for like here's

your here's your point, zero 5% dividend, that is a bank joy that but

the other thing that we always talk about what the whole that whole dividend payout if you're below the inflation number, which is supposed to be average of three a year. If you're below 3% for your dividend payout. You're losing money.

You are they've been they've increased their sales for the five last four of the five last years. And they've increased their cash five out of the five last year. So they're actually better than AVR in the fact that they've increased their cash but they're not as good as AVR because AVR has increased their sales five out of five. But if I was going to say which is more important criteria there it would be the cash from operations being up five out of five because that means they have more money in their coffers and all read some cases. In case you didn't listen to the podcast, where we mentioned rates, they all have to pay out 90% of their net profit. Yeah. So

if you're not familiar with rates go back to that episode in the very beginning where we actually outlined all the nitty gritties about REITs

through rehab because the government basically said okay, we're going to establish this this area here. And then to avoid paying taxes, you guys pay out 90% of your net proceeds to your shareholders, you don't have to pay taxes for the federal level. So that's what basically makes it real rate. Because there's other ones that actually have like properties and stuff but they're not classified as a REIT because they don't pay out. So

I have a question, do you still find a lot of people talking or being anti REIT? Because I hear a lot more people be more scared to get in REIT investments than anything else? And I don't know if that's a byproduct of them being so down right now.

I there wasn't this in 2022 and part of 2023 Everyone was anti REITs because most REITs they borrow money to fund their advancements, whether it be acquiring properties or fixing up properties or research, whatever. And because you borrow money at a higher interest rate, you're gonna have less money in revenue. So like everyone's like, that's one of the like, there's, there's an inverse and, like BDCs love whenever the interest rates are up because they're getting more money for the money, they're loaning it out. Where rates are worse because they borrow money all the time to do things that they're borrowing at a high rate. They're screwed, basically, what was so REITs were anti, the last couple of years that people were like, No, REITs are bad, they're bad. They're bad. But everything that I've read saying 2024 and 2025 is super awesome for REITs because the rate the rate the interest rates are gonna start

10 kind of made that justification himself when Powell or whatever his name is decided or made the announcement that they're planning to actually decrease interest rates on it and I was in the reason well before them no I know but you still felt like this was going to be the year that they're going to hardback I

didn't like start squawking about him until he said that. That's what I mean. I've been accumulating shares and AVR and IPR and EPR for damn near the entire time the interest rates went up, because it

makes sense what they do, because that's what I do

then like I mean, I know I don't really like Warren Buffett but like what what he said is in meshed in companies that you're wanting to hold on to for 10 years like yeah, that's that's what I'm when I'm invested in REITs and BDCs. And things that are kind of obscure and they they're like, sensitive to certain things like such as interest rates, like I wanted, like the eight Hercules capital, for example. I'm going to be in that for as long as that company is around. Same with AVR I'm going to be an AVR for as long as companies around so like I don't care like what is going on macro macro trend wise, what's going on micro economic wise, I don't care because the companies are awesome ran and they are like the leaders in their particular area. So I don't care. It's like investing in Amazon Amazon's the leader in E commerce, you're gonna invest in it regardless of what's going on because it's like the best you

know, they're gonna pivot you know, they're gonna like change what they're doing to just keep up or stay ahead to stay making money. So

like the when it comes to REITs and BDCs. when we get to that one, I'll probably also say the same thing that the most important thing. Criteria for me when I'm researching REITs is dividend cuts. I don't want to get into something that's going to cut their dividend like MPW for example, that decision

Is that a REIT, yes so

it is a read, and it kind of stay.

For what I look for as you, I want to see dividend growth, not dividend cuts because I'm getting entities for years upon years upon years, I want to make sure that they're continuing to grow their dividend. And generally REITs are if not the highest they're like in the top 5% of all sectors when it comes to dividend yield to begin with because of that law with Congress and get to pay

I love that that's a thing that's pretty close and advises them to do what they do.

So that's my three APR, IPR ABR if you're just starting out I would invest in those three and you'll do fine. Alright,

so next episode, we're going to do the three best VDCs according to Tim. We will see you in that episode. Yes.