The precipice of a brand new year and decade is a great time to reflect on where we are and where we might be going in the New Year and beyond. Two little-known REITs in particular stand out as great investments going forward.
The current bull market, which began in March of 2009, is almost 11 years old. And the economic recovery is over 10 years old. The length of both the bull market and recovery are much, much longer that historical averages. Investors get a sense that they are playing musical chairs, and the music has been playing for a really long time.
But bull markets and recoveries don’t end just because they’re old. They end because of a buildup of excesses. This time, the slower than normal recovery has not led to the bubbles and excesses that typically accrue before now. As well, the economy is still strong with no signs of recession in the near future. And with interest rates still at rock bottom levels, money still has no place else to go but stocks to fetch a decent return.
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Sure, the overall market isn’t offering a great bargain right now. The old bull market will die eventually. We have a solid economy and low interest rates and demand for stocks and yield continues. In short, it is the same basic dynamic that has existed for the past several years, and the bull market has forged on. Stocks are still the place to be but it is prudent to be very selective.
Real Estate Investment Trusts (REITs) have been popular investments in the current environment. They offer a higher level of dividend income than most stocks, and are generally considered safer, more defensive plays that offer some protection for when the market turns south. But the REIT sector has been one of the better performing stock market sectors over the past couple of years and many of the best ones have gotten pricey.
But 2020 is shaping up to be a special year where certain powerful trends are likely to dominate. I found two little-known REITs that offer reasonable valuations and are poised to benefit from mega trends in the New Year and beyond.
2 Little-Known REITs with Big Growth Potential
The 5G Revolution is Here
You’ve probably heard the term “5G” floating around. Technically, it is the new generation of cellular wireless technology. A new generation comes out every decade or so, from the first one that enabled phone calls to the 3rd and 4th generations that enabled smartphones.
But 5G technology is far more than just another incremental advance in smartphone gadgetry. It represents a tipping point into a digital age that will catapult the world into a new technological era. It will enable everything to be connected to the internet and computerize the whole world. It will enable artificial intelligence, self-driving cars, smart cities and much more.
In fact, the technology is such a game changer that the U.S. government has called the buildout a “national security imperative” that could advantage the first to develop it for the next several decades. It’s the new arms race and the government has streamlined regulations to enable the buildout to continue in haste.
Crown Castle International Corp. (CCI) is a little-known REIT that leases cellular technology infrastructure. More specifically, the company leases a portfolio of properties that currently includes 40,000 cell towers, 65,000 small cell towers and 70,000 miles of fiber optic cable primarily to the four largest wireless service providers (Verizon, AT&T, Sprint and T-Mobile).
It is one of the main players that will enable the new technology. There are several reasons why I like CCI better than other 5G technology REITs. For one thing, 5G will have a shorter range than past generations and will require an enormous amount of small cells that enhance the range of the large towers and relieve congestion. CCI is king of the small cells.
The company also operates exclusively in the U.S., and therefore limits risks associated with foreign governments and negative effects of trade wars. The REIT still sells at a reasonable valuation, 11% below the recent high, with a 3.64% yield that should grow. CCI should benefit from growth opportunities and the 5G buildout continues rain or shine in any economy.
The Legalization of Marijuana
A brand new industry has recently been born. Marijuana is becoming legal. It’s now legal in Canada and 33 U.S. states for medical use and 11 states for adult use. The stuff has emerged from the shadows of the stoner culture into big business. And it’s no joke.
The growth in marijuana is undeniable. It is already the most used recreational drug in the world. And usage is growing at a fast clip. Global marijuana use has grown by 60% over the last decade and more than tenfold in the U.S. in the last 25 years. In fact, the U.S. is the marijuana capital of the world and currently accounts for anywhere from one-third to one-half of global consumption, depending on estimates.
But the growing market only concerns legal marijuana. That market was a little over $10 billion last year but is expected to grow to about $30 billion by 2025 and the global legal cannabis market is expected to grow to over $66 billion by the same year, according to Grand View Market Research. But that might be an underestimate as marijuana is likely to be legalized in a lot more places going forward, and perhaps even nationally.
That said, the industry is in its infancy and stocks in the sector have been enormously volatile. While there is huge opportunity, not all the players will survive. But I found a company that isn’t subject to volatile commodity prices of ever-changing regulations. The company simply benefits from the fact that more marijuana will continue to be grown. And it’s already making money.
Innovative Industrial Properties (IIPR) is a REIT specializing in the acquisition and ownership of properties used to grow and process legal marijuana in the United States. The company currently operates 42 properties in 11 states under long term leases.
The business model is to purchase existing buildings from marijuana growers, providing them with a needed cash injection, and then lease the properties back to them. The properties are leased back under long term contracts, currently with an average contract length of over 15 years, with triple net leases, where the operator pays for maintenance, taxes and insurance.
Established in December of 2016, this REIT is growing at breakneck speed. Consider that at the beginning of 2019, IIPR had just 11 properties. It now has 42 properties. In the recently reported third quarter, revenues grew 201% from the year before and funds from operation were 126% higher than last year’s quarter. And there is a huge runway for future growth. The REIT still only has 42 properties. Most REITs have hundreds of properties.
The timing could be fantastic. The sector has endured a selloff since last March and IIPR currently sells almost 50% below the recent high while paying a 5.43% yield. After the December tax selloffs, the sector, and IIPR in particular, is poised to rise.
Tom Hutchinson, Chief Analyst of Cabot Dividend Investor, Cabot Income Advisor and Cabot Retirement Club is a Wall Street veteran with extensive experience in multiple areas within the financial world. His advisory is geared to providing you both high income and peace of mind. If you’re retired or thinking about retirement, this advisory is designed for you.Learn More