Forget The Recession – These 2 Stocks Win No Matter What

Forget The Recession – These 2 Stocks Win No Matter What

As I write this article, unemployment is still in the double-digit category, businesses remain limited in their operations, and things look very bleak for the US economy. GDP could collapse by as much as ~5% in 2020 according to Goldman Sachs, and investors are rightfully asking themselves how this will affect their investments.

At the same time, stocks (SPY) have surged back to the upside and bond yields have collapse to new historic lows:

ChartData by YCharts

This creates two major challenges for investors:



  • Stocks are priced very aggressively even as we experience one of the sharpest economic contractions ever.
  • Bonds pay close to nothing and provide no inflation protection even as printing presses are going wild.

Historically, stocks and bonds have been major allocations in investor portfolios, but right now, both of them look incredibly risky.

But is there a third alternative?

At High Yield Landlord, we invest heavily in defensive Real Asset investments. Good examples include healthcare properties, e-commerce fulfillment centers, farmland, or even windmills.

source

We believe that they offer much superior risk-to-reward when compared to regular stocks and bond in today’s environment:

  1. They generate recession-proof cash flow.
  2. They protect you against inflation.
  3. And they happen to be deeply undervalued right now.

Unlike stocks which quickly bounced back, a number of defensive REITs, MLPs, and other real asset investments remain priced at up to a 50% discount relative to pre-crisis levels. They offer high yield, high upside, and better margin of safety.

We are investing in them and think that you should too. Below we discuss two real asset investments in which we are adding new capital because we expect them to perform well even if we go into a prolonged recession in the aftermath of this crisis.

Medical Properties Trust (MPW): Hospital Investments

Most investors, when they think about real estate investments, they think about a traditional rental property. But nowadays, REITs invest in every property sector, including even hospitals.

MPW is the leading hospital investor in the world. It owns a portfolio of >300 hospitals that it rents on a long-term basis to more than 30 different tenants.

source

The cash flow that these properties generate is very resilient because:

  1. The leases are >10-year long,
  2. The rent coverage is ~3x on average,
  3. And the diversification limits exposure to individual tenants.

Our society desperately needs hospitals, whether the economy is booming or contracting. It’s a recession-proof business and MPW’s track record is a testament of that:

source

The revenue has grown every year, including even 2008-2009 when the world was upside down.

Today, MPW is once again proving to be very resilient. It has managed to collect near-100% of its rents and the strong collection rates are expected to continue. Moreover, even if things were to dip temporarily, MPW has $1.8 billion in liquidity and no near-term maturities. This has allowed MPW to even reaffirm its guidance in the midst of this crisis, even as most other REITs are withdrawing their own. The management also noted that:

They remain “very bullish” on both near and longer-term growth prospects.

Despite being so resilient, MPW has dropped quite significantly in association with other less resilient REITs. We estimate that its fair value is in the $25-30 range, and yet, you can buy it today at just $18 per share, which represents 11x cash flow.

Priced as is, MPW pays a generous 6% dividend yield that’s safely covered and backed by recession-resistant cash flow. The dividend was hiked earlier this year and we expect it to remain sustainable.

As MPW returns to fair value, we expect >40% upside, and while you wait you earn a steady 6% dividend yield. This is a very attractive reward potential for this level of risk in our opinion. We own a large position at High Yield Landlord.

W.P. Carey (WPC): Diversified Net Lease Portfolio

WPC is a REIT with a diversified portfolio of mostly industrial net lease properties. Below is a picture of an Advance Auto Parts (AAP) distribution center that they own:

source

But what are “net lease” properties?

A net lease is a special type of lease that’s designed to mitigate risks and favor the landlord. Unlike other leases, they are generally much longer (>10 years), have automatic rent increases (1-2% per year), and have no landlord responsibilities. This means that all property expenses and even maintenance is the responsibility of the tenant.

It results in very consistent and predictable cash flow because the rent payments are pre-determined for a long period of time and recessions have no impact on the current lease rates. As an example, WPC is one of the few REITs to not have cut its dividend even in 2008-2009. In fact, it has increased its dividend in every single year since going public:

source

Even in today’s crisis, the rents have kept on flowing, allowing WPC to again hike its dividend a few weeks ago. The dividend yield is currently over 6%, which represents the highest yield spread in ~10 years. As yield-starved investors return, we expect WPC to reprice at a 4% dividend yield, which would unlock 50% upside for shareholders.

While they wait for the upside, investors can sleep well at night knowing that WPC has never cuts its dividend and surely does not want to ruin its >20-year track record. It generates steady cash flow from resilient net lease properties and it has an investment grade rated balance sheet with plenty of liquidity.

It’s the ideal investment in this environment. It’s a resilient, simple real-asset backed business that pays high dividends and has large upside potential.

It’s exactly the type of investment that we like to target at High Yield Landlord. It’s a Safe Haven in today’s crisis and we expect good results in the coming years, no matter what.

Bottom Line

Still 20 years ago, very few investors would invest in real assets. Bonds were offering good yields and stocks were priced reasonably. However, today’s market is very different and investors are making significant changes to their portfolio allocations to adapt to this new environment.

In 2000, investors would allocate only 5% to real assets on average.

Today, investors allocate already 25% to real assets – a 5x increase.

And by 2030, the real asset allocation is expected to rise to 40% or more:

source

Brookfield (BAM) expects a staggering ~$50 trillion to shift to real asset investments over the coming decade. That’s a lot of money and it does not take a genius to realize that this will likely lead to great upside.

At High Yield Landlord, we are investing in these real asset investments ahead of the crowd. We believe that REITs, MLPs, and other infrastructure companies will greatly outperform as yield-starved investors rush back into them and bid up prices. Position yourself today to profit tomorrow.

Disclosure: I am/we are long MPW; WPC. 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.


Originally published on Seeking Alpha

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