2023-06-08 07:00:00 ET
Summary
- I remind myself daily that “a stockholder is an owner of the business and an employer of its officers."
- Investors are the rightful owners of these enterprises and deserve to be treated with the respect and consideration that owners of a private enterprise would expect from them.
- Always remember that the millionaire mindset revolves around betting on both the horsey and the jockey!
This article was published at iREIT™ on Alpha on Tuesday June 6, 2023.
As I explained in my book, The Intelligent REIT Investor ,
“Bet the jockey, not the horse.”
That refers to the idea that investors should focus more on the management team than the business model. Stated bluntly, bad management can destroy value in a portfolio of real estate properties. Good management can add value.
I’m in New York City this week attending the REITweek 2023 meeting with over two dozen REIT CEOs and other industry executives. One of the things that I enjoy about this conference is that I get to spend valuable time with these thought leaders to gain insight into their respective businesses.
As the CEO of my research firm, Wide Moat Research, I always look for ways to lead my team, which consists of attributes such as passion, vision, self-confidence, humility, and work ethic. I remind myself daily that “a stockholder is an owner of the business and an employer of its officers (Graham and Dodd).”
In Benjamin Graham’s book, he reminded investors that they, not the corporations’ management, are the rightful owners of these enterprises and deserve to be treated with the respect and consideration that owners of a private enterprise would expect from its management.
As I meet with these industry execs, I constantly reflect on the fact that “owner orientation” is an essential element of the value investing process and one of the reasons that I have been able to build my net worth back (from the Great Recession) is by not only looking at the fundamentals behind the business, but who is leading it.
Today I’m going to examine a few recommendations that our team has vetted based upon the jockey and the horse.
Enbridge Inc. ( ENB )
Enbridge is a master limited partnerships (“MLP”) based out of Canada that specializes in energy infrastructure, including Liquids Pipelines throughout Canada and the U.S. that transports crude oil and liquid hydrocarbons, natural gas pipelines and processing facilities that runs through Canada and the U.S., Gas Distribution and Storage that serve residential and commercial customers in Canada, and Renewable Power Generation including wind and solar investments located in North America and Europe.
Their midstream pipelines delivers crude oil and natural gas to millions of homes and businesses. Additionally, they have an interest in over 3,000 megawatts of alternative energy generation such as solar panels and wind turbines.
Enbridge is investment-grade with a BBB+ credit rating from S&P Global and has a strong balance sheet with a debt to EBITDA of 4.6x, a long-term debt to capital ratio of 50.47%, and an interest coverage ratio of 4.04x. Additionally, approximately 10% of their debt is exposed to floating interest rates, and as of the end of the first quarter ENB had $12.6 billion in available liquidity.
Over the last 10 years, ENB has had an adjusted operating earnings growth rate of 2.91% and an average dividend growth rate of 8.99%. Furthermore, ENB has increased the dividend for 28 consecutive years.
They currently pay a 7.01% dividend yield with an operational cash flow dividend payout ratio of 58.48%. Currently ENB trades at a P/E ratio of 17.60x, which is well below their normal P/E of 21.81x.
At iREIT™ we rate Enbridge a BUY.
W. P. Carey Inc. ( WPC )
W. P. Carey is a real estate investment trust (“REIT”) that has a diverse portfolio of single-tenant, net lease properties. They own or have an ownership interest in 1,446 net-lease properties that cover around 176 million square feet and a portfolio of 84 self-storage properties.
Their portfolio of net-lease properties consists of industrial / warehouse, retail, office, and net lease self-storage properties. Combined, their warehouse and industrial properties make up 51.5% of their annualized base rent (“ABR”), retail properties contribute 17.4% of their ABR, office properties make up 17.2%, and net-lease storage properties contribute 4.5% of their ABR.
Their portfolio of net-lease properties has an occupancy rate of 99.2% and a weighted average remaining lease term of 10.9 years. Their portfolio of self-storage properties has an occupancy rate of 91.5% and contains 52,105 self-storage units. Along with their diversified asset mix, they are also geographically diversified with properties located in North America and Europe.
WPC has a BBB+ investment-grade credit rating from S&P Global and solid debt metrics including a pro rata net debt to enterprise value of 33.3%, a pro rata net debt to adjusted EBITDA of 5.8x, and a consolidated debt to gross assets ratio of 40.3%.
WPC’s debt has a weighted average years to maturity of 4.1 years and a weighted average interest rate of 3.1%. Only 3.7% of their debt is due in 2023 ($306 million), and they have a total of $1.7 billion in liquidity.
WPC - IR
WPC is currently trading at a P/AFFO (adjusted funds from operations) of 13.28x, which is essentially in line with their normal P/AFFO multiple of 13.96x. On average, they have grown their adjusted funds from operations by 3.25% annually and have an average dividend growth rate of 6.29% over the last 10 years. WPC currently pays a 6.04% dividend yield that is well covered with an AFFO payout ratio of 80.19%.
At iREIT™ we rate WPC a BUY.
Hannon Armstrong Sustainable Infrastructure Capital, Inc. ( HASI )
HASI is an internally managed mortgage REIT (“mREIT”) that provides capital to companies engaged in climate solutions. They invest in renewable energy, efficient energy, and other sustainable infrastructure projects.
HASI has a strong focus on clean energy and requires projects to either reduce carbon emissions or promote some other benefit to the environment, such as the reduction of water usage.
The investment projects include solar power generation and storage as well as onshore wind turbines. HASI has 3 main segments: Behind-the-Meter, Grid-Connected, and Fuels and Transport. Their behind-the-meter segment invests in building-specific projects including solar power and energy efficiency improvements including lighting, air conditioning systems, and building shells.
Their grid-connected investments include renewable energy infrastructure that assists in deploying clean energy such as onshore wind and solar, and their fuels and transport segment investments include natural gas plants and decarbonization of transportation fleets.
HASI is not yet investment-grade with a BB+ credit rating from S&P Global. As of the end of the first quarter, HASI had $3.4 billion in debt and $1.7 billion in equity for a leverage ratio of approximately 2.0x.
Their debt is 87% fixed rate and they have $142 million in cash, $350 million available to them under their unsecured credit facility, and $2 million available to them under their secured credit facility.
HASI - Form 10-Q
HASI’s distributable earnings per share has a compound annual growth rate of 11% since 2014. They currently pay a 6.35% dividend yield that is well covered with a distributable earnings payout ratio of 72.12%.
Over the past year HASI’s stock price has fallen 36.94%, which has pushed its EPS yield up to 8.67%. The stock is currently trading at a P/E of 11.54x, which is a significant discount to their normal P/E ratio of 19.06x.
At iREIT™ we rate HASI a STRONG BUY.
Realty Income Corporation ( O )
Realty Income is a net lease REIT that specializes in free-standing properties that are typically leased to a single tenant on a triple-net basis. Their portfolio consists of 12,237 properties that encompass around 236.8 million square feet and have an occupancy rate of 99%. Realty Income has properties in all 50 U.S. States and has international properties in the U.K., Spain, and Italy.
As well as being geographically diversified, they have 1,259 tenants that operate in 84 industries, most of which are resistant to e-commerce. As a percentage of their annualized contractual rent, grocery stores makes up their largest industry at 10.2%, followed by convenience stores and dollar stores at 8.7% and 7.3% respectively.
Their largest tenant is Dollar General, which contributes 4.0% of their contractual rent, followed by Walgreens at 3.6% and 7-Eleven at 3.4%.
Realty Income is investment-grade with an A- credit rating by S&P Global. They have a strong balance sheet with a fixed charge coverage ratio of 4.6x, a net debt to pro forma adjusted EBITDAre of 5.4x, and a debt to total market capitalization of 31%.
Their debt is 90% fixed rate, 95% unsecured and has a weighted term to maturity of 5.9 years with minimal debts maturing in 2023 and $3.1 billion in liquidity as of the end of the first quarter.
Realty Income is a Dividend Aristocrat having increased their dividend for 29 consecutive years. The monthly dividend has been raised for 102 consecutive quarters and they currently pay a 5.13% dividend yield that is well covered with an AFFO payout ratio of 75.69%. Realty Income trades at a P/AFFO of 15.10x, which compares favorably to their normal AFFO multiple of 18.86x.
At iREIT™ we rate Realty Income a BUY.
In Closing…
Our analysis at iREIT™ goes much further than just fundamentals as the concept of business ownership and “unless it’s ingrained as part of your basic philosophy, you’re going to get in trouble in life when you do investments.” (Warren Buffett.)
Our team spends considerable time interviewing executives within our coverage spectrum, which weighs heavily on our recommendations. As we evaluate opportunities, we consider whether the management team has delivered a sustainable competitive advantage that preserves pricing power and profitability.
Thus, always remember that the millionaire mindset revolves around betting on both the horsey and the jockey!
For further details see:
Million Dollar Mindset: Betting On The Horse And The Jockey