NLCP - 2 New Buy Alerts With A 10+% Dividend Yield And High Potential Upside

2023-06-23 07:30:00 ET

Summary

• REIT dividend yields have expanded over the past year.
• Some companies now yield over 10%.
• We highlight two of our favorite high yielders.

A few years back, it was very unusual to find a 10% yielding real estate investment trust, or REIT.

Valuations were a lot higher and therefore, dividend yields were also lower.

If a REIT had a 6%+ dividend yield, it was typically a sign that the REIT perhaps suffered from overleveraged, poor management, or a combination of the two.

Today, however, things have changed.

Following the surge in interest rates, REIT share prices collapsed even as their cash flows kept on rising in most cases, and as a result, REIT dividend yields have expanded to historically high levels:

That makes our job a lot easier at High Yield Landlord.

There are now many REITs and other REIT-like entities yielding over 10%.

It goes without saying that there is no such thing as a safe 10% dividend yield, but the risk-to-reward is very compelling in some cases, and we are able to mitigate the risks by holding many of them as part of a well-diversified portfolio.

In what follows, we highlight two of our highest-yielding investments as of today:

Cibus Nordic: 10% Dividend Yield

Cibus Nordic Real Estate AB (publ) (STO:CIBUS, OM:CIBUS) is the only public company in the Nordics that’s consolidating grocery-anchored properties, a resilient property segment that generates recession and inflation-resistant cash flow. It is still fairly small in size with a €550 million market cap and it is growing rapidly:

Due to the lack of capital for such properties in Finland, Sweden, and Denmark, it has been able to buy them at attractive lease terms, including CPI-linked rent increases.

It only has caps on these CPI-hikes on a small minority of its portfolio and as a result, Cibus is expecting ~8% rent hikes in 2023.

That's a lot better than what REITs like Realty Income Corporation ( O ) are getting in the U.S.

Food is one of the best inflation hedges in the world, and the higher CPI is reflected in higher sales and profitability for its tenants. Kesko ( KKOYF ) is Cibus's largest tenant, it is publicly listed, and its profits have grown by 43% since 2020. It takes time for this higher profitability to be reflected in higher rents, but the long-term prospects appear very compelling.

So this is generally a safe and growing business, but here's the issue:

It has too much debt for an environment of rising interest rates, and this forced it to slash its dividend, which in turn caused its share price to collapse.

Cibus has a 55-65% LTV target and historically, it made sense for them to operate at closer to 65% when interest rates were incredibly low in Europe and they could earn massive spreads on new investments. It, of course, increased risks, but the risk-to-reward was attractive. Needless to say that they didn't plan for Russia's invasion of Ukraine and the unprecedented surge in rates.

It caught them off guard and forced them to slash the dividend and raise a bit of equity. It hurts investors in the short run, but it is not the end of the world.

Today, its rents are rising rapidly as a result of the high inflation and it has no debt maturities until December 2024. As Cibus deleverages its balance sheet and collects big rent hikes, its stock is likely to recover eventually, unlocking ~50% just to return to its NAV, and in the meantime, the company offers a ~10% dividend yield. (Note that it just went ex-dividend so you will miss a payment if you invest today, but it also caused its share price to dip a bit further so that should compensate for it).

If you ignore the recent events, Cibus has actually been one of the best-performing stocks in Europe since its inception, more than tripling investors' money from its IPO in 2018 until the recent crash:

NewLake Capital Partners, Inc. ( NLCP ): 12.5% Dividend Yield

NewLake Capital Partners is a REIT that targets cannabis cultivation facilities and then structures long triple net leases with large operators that enjoy strong rent coverage.

This is generally a riskier sector but NewLake is able to mitigate these risks by focusing on limited license jurisdictions and maintaining a pristine balance sheet with no debt and ample liquidity to face any potential tenant issues.

Occasional tenant issues are inevitable in this sector, and this will lead to some bumpiness in the near term, but the focus on limited license jurisdictions allows to minimize the lease delinquencies.

As cannabis consumption continues to grow, these properties in limited license jurisdictions will likely hold and grow in value over time.

But recently, the entire cannabis sector fell out of favor, and this caused NewLake to drop alongside Cannabis operators, despite being a safer play as the "pick and shovel" play of the sector. It has been dragged down alongside companies like Trulieve ( TCNNF ), which are down a lot more than REITs ( VNQ ):

Eventually, the market sentiment will likely turn again in favor of cannabis and that may result in rapid repricing to its NAV, unlocking up to 40%+ upside potential in the meantime, the REIT offers a 12.6% dividend yield.

I would add here that the management is buying back stock and is optimistic about their ability to keep growing the dividend.

Bottom Line

The nice thing about getting such a high yield is that you are not reliant on growth to earn attractive returns. Even in the absence of growth, you would still earn a 10% annual return from the yield alone.

But the best of both worlds is when you can earn a high yield and then get some upside on top of that.

I think that this is the case here.

Both of these companies are heavily discounted and could surge in a future recovery.

There are risks of course, but you can diversify those as part of a well-diversified portfolio to optimize your risk-to-reward.

For further details see: