Real Estate Rut: 3 REITs With Major Growth Potential
Major U.S. stock indices have recovered sharply since the turn of the year. However, REITs have not followed suit, as the real estate sector has suffered from disinflation and increasing counterparty risk.
The MSCI U.S. REIT index is down by more than 6% year-to-date, providing substance to my claim. Nevertheless, I see the index’s decline as an opportunity instead of focusing on the negatives. As such, I decided to look for best-in-class REITs to buy on the dip.
Methodologically, I dialed in on growth REITs. Some of my recent articles on InvestorPlace covered high-dividend REITs, so I wanted to shake things up a bit.
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Without further ado, here are three major growth REITs to buy.
Essential Properties Realty Trust (EPRT)
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Essential Properties Realty Trust (NYSE:EPRT) operates a sale-leaseback program whereby it acquires single-tenant units from middle-market corporates and leases them straight back. The firm has achieved significant success with its business model, achieving a five-year compound annual growth rate of 31.86%.
Let’s look at some of EPRT REIT’s key data points.
With nearly 1800 properties under its control, EPRT REIT is 99.8% leased, with a weighted average remaining term of 13.9 years. Furthermore, same-store rent has increased by an average of 1.6% in the past four quarters while its cost of debt has remained low at 3.4%.
An alluring fact about EPRT REIT is that its sector exposure is well-blended. For example, EPRT REIT invests in cyclical industries like carwashes and automotive services. However, it also invests in countercyclical spheres such as medical care and childhood education. Thus, EPRT is equipped to deliver robust results throughout the economic cycle.
Essential Properties Realty Trust has a forward funds from operations per share ratio of 12.96x, which isn’t bad at all. In addition, the REIT’s dividend yield stands at 4.94%, providing income-based investors with an appealing prospect.
At face value, I would say that EPRT looks set to prosper.
Innovative Industrial Properties (IIPR)
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I decided to include Innovative Industrial Properties (NYSE:IIPR) on the list as it presents diversification benefits. The IIPR REIT is a sale-leaseback fund with a presence in the cannabis industry. Cannabis market participants often struggle to access debt financing due to regulatory obstacles. However, capital scarcity within the industry benefits funds like IIPR that offer liquidity in exchange for a firm’s property. As with EPRT, IIPR leases its acquisitions back to the sellers, concurrently consolidating long-life lease terms.
The U.S. cannabis end market is forecasted to grow at an annualized rate of 14.2% until 2030, and IIPR REIT is at the center of it. The vehicle hosts some of the world’s prominent cannabis producers, such as Ascend Wellness (OTCMKTS:AAWH), Curaleaf (OTCMKTS:CURLF), Cresco Labs (OTCMKTS:CRLBF) and Green Thumb Industries (OTCMKTS:GTBIF).
Approximately 98.5% of Innovative Industrial Properties’ portfolio is occupied with a weighted average lease term of 14.9 years. In addition, it is worth considering that the portfolio’s asset base could surge in the next decade amid rising per-unit cash flows and increased industry demand.
Innovative Industrial Properties went through a bit of a slump last year as elevated interest rates and softer-than-usual constituent revenue dampened its performance. However, IIPR’s third-quarter earnings suggest a turnaround has emerged as the fund beat analysts’ estimates after achieving funds from operations of $2.09 per share.
The REIT has a price-to-funds from operations ratio of $8.50 and a forward dividend yield of 9.50%. Although it remains a risky bet, factors such as a reversal in earnings, tremendous fundamental growth and alluring valuation metrics make IIPR a sublime growth REIT.
RLJ Lodging Trust (RLJ)
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If you’re looking for a short-term growth opportunity, then RLJ REIT (NYSE:RLJ) is your guy. RLJ Lodging Trust is still on a post-pandemic reopening recovery route. The hotel REIT experienced significant growth of late that looks set to continue for the time being.
RLJ REIT’s portfolio includes 96 high-margin hotels. Due to its high-end nature, the fund’s hotels are highly scalable, with this exact point illustrated in the REIT’s third-quarter earnings.
The hospitality REIT’s Q3 earnings report stated the vehicle beat analysts’ estimates, achieving a revenue surplus of $7.75 million. In addition, RLJ REIT succeeded its funds from operations target by one cent. Pivotal to the REIT’s quarter was a 3.4% year-over-year revenue increase per available room and a 4.9% broad-based revenue surge. The data illustrates the REIT’s ability to pass inflation through to its consumer base, which always comes in handy as it sustains investors’ residual value.
Furthermore, RLJ REIT is on a share buyback spree. The REIT has repurchased 6.6 million shares at an average price of $10.12 since the turn of the year. More enticing is that $219.9 million in committed share repurchases remain on the table, allowing investors to drop their cost basis in the next few quarters.
Regarding valuation, RLJ Lodging Trust’s price-to-funds from operations ratio of 6.04x is at a cyclical discount of approximately 46%. In addition, RLJ’s forward dividend yield is placed at 4.04%.
RLJ REIT is a stellar opportunity!
On the date of publication, Steve Booyens did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Steve Booyens co-founded Pearl Gray Equity and Research in 2020 and has been responsible for institutional equity research and PR ever since. Before founding the firm, Steve spent time working in various finance roles in London and South Africa. He holds an MSc in Investment Banking from Queen Mary – University of London. Furthermore, Steve has passed CFA Levels 1 & 2 and is working toward his Ph.D. in Finance. His articles are published on various reputable web pages such as Seeking Alpha, TipRanks, Yahoo Finance, and Benzinga. Steve’s articles on InvestorPlace form an interesting juxtaposition between mainstream opinion and objective theory. Readers can expect coverage on frequently traded stocks, REITs, fixed-income funds, CEFs, and ETFs.
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