PSA - 12 Sturdy REITs Expected To Grow Revenues By Double Digits

2023-08-07 09:00:00 ET

Summary

• Most REIT investors prioritize high dividends, while I focus on growth and healthy companies.
• This article identifies 17 REITs expected to have double-digit FFO per share growth this year or next, and to grow FFO at a 2-year CAGR of 7.5% or better.
• This article then evaluates the balance sheet strength of those 17, to winnow the list down to 12.
• Of these 12 REITs, this article then considers their dividend scores and modeled returns, to arrive at 3 Buy ratings.

Most REIT investors are dividend-oriented. They seek the largest safe dividend they can get, at the lowest price possible, even if the company is troubled or stagnant. By contrast, I am growth-oriented. I seek healthy companies with growing revenue streams and burgeoning cash flow.

In a previous article, I laid out a list of 17 REITs with strong 3-year track records for double-digit revenue growth, and sturdy balance sheets. But past growth is one thing, and future growth is another.

What kind of list would we get, if we asked the same questions about growth and balance sheet strength, but looked 12 - 18 months out into the future instead? Let's create a watch list. Let's call them Future FROGs of America.

The preliminary list

Predicting the future is a very inexact science. Nobody has a crystal ball. However, if we go by the Bloomberg analyst consensus forecasts, courtesy of Hoya Capital Income Builder, we find the following 17 candidates, expected to

• grow FFO per share both this year and next,
• with at least one of those years at 10% or better, and
• an expected forward 2-year CAGR (compound annual growth rate) of 7.0% or better:

1. Public Storage ( PSA )
2. Rexford Industrial Realty ( REXR )
3. VICI Properties ( VICI )
4. New Lake Capital Partners ( NLCP )
5. Veris Residential ( VRE )
6. Ryman Hospitality ( RHP )
7. Pebblebrook Hotel ( PEB )
8. Services Property ( SVC )
9. Southerly Hotels ( SOHO )
10. Diversified Healthcare ( DHC )
11. Americold ( COLD )
12. Elme Communities ( ELME )
13. Equinix ( EQIX )
14. Chatham Lodging ( CLDT ))
15. Hersha Hospitality ( HT )
16. Terreno Realty ( TRNO )
17. Iron Mountain ( IRM )

Source: TD Ameritrade and Hoya Capital Income Builder

This eliminates VRE, SVC, and SOHO, which are red all the way across, as well as DHC and IRM, which fail on two criteria. There are 5 companies that fail on only one criteria, so I am inclined to keep them on the watch list as second-tier prospects, in case they clean up their remaining balance sheet issues:

• COLD fails only on Debt/EBITDA at 7.7,
• CLDT, PEB, and HT fail only on Debt Ratio at 45%, 52% and 54% respectively, and
• RHP fails only on Liquidity Ratio, but it's huge miss, at 1.03.

Technically, EQIX misses the Liquidity cutoff by a narrow margin of .03, but the company's debt ratio and debt/EBITDA are so strong I chose to make a small exception.

By the way, no, that is not a misprint. New Lake Capital Partners ( NLCP ) has debts of only $1.99 million, over against assets totaling $448.46 million, so the debt ratio rounds down to 0.0. Similarly, with EBITDA of $36.95 million , Debt/EBITDA rounds up to a microscopic 0.1.

Factoring in the Dividend

Rapid growth usually comes with lower yield. In fact, the relationship is usually inverse. A company that has strong growth prospects usually doesn't need to bribe the investor as much, to entice the investor to buy shares. Yet despite lower initial yield, fast-growing companies usually grow the dividend faster, so that over the course of time, they end up outyielding on cost.

Let's see how our dandy dozen prospective FROGs stack up in the dividend department, by checking out their Dividend Score, which guesstimates the company's yield on cost three years from now, on shares bought today. Ordinarily I use the 3-year track record for dividend growth to arrive at Dividend Score. However, 3 years ago the market was in the icy grip of the pandemic, so 3-year dividend growth scores are currently distorted and produce unrealistic Dividend Scores. So just for the next several months, I will use the 5-year dividend growth track record instead.

Source: Market Watch, Hoya Capital Income Builder, author calculations

NOTE: NLCP did not exist 3 years ago, so I used its IPO closing price as the starting point.

The Vanguard Real Estate ETF ( VNQ ) is currently yielding 4.51%, for a dividend score of 4.99. But its price performance has been poor, gaining just 1.12% per year since this date in 2020, so its modeled return is only 6.10. That's a pretty low bar to clear, yet only three of our first-tier candidates exceed that standard. While I was able to identify 17 FROGs in January, based on trailing 3-year FFO growth, there are only 3 Future FROGs of America, based on forward 2-year FFO growth: VICI, REXR, and PSA. That shows how much REIT earnings are expected to compress over the next 18 months.

Meanwhile, there are four potential FROGs in the second tier, if they can get their balance sheets in order: RHP, PEB, HT, CLDT.

Investor's bottom line

Rapid growth in revenue doesn't always lead to a gain in the stock price. Numerous REITs took a pounding on their stock price in 2022, despite stellar operating results. However, rapid revenue growth usually does lead to substantial dividend increases, and nearly always signals a healthy company.

There are obviously more than one or two factors to consider when investing, whether you are looking for REITs or any other security. The future is always murky. This article is just an attempt to look through the fog and identify REITs that are potential winners. To my way of thinking, VICI, REXR, and PSA are solid investments going forward over the next two years. My jury is still out on the other nine.

However, as always, the opinion that matters most is yours.

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