TRADE ALERT - International Portfolio September 2024 (Incl. CEO Interview)
Dear Landlords,
I want to extend a warm welcome to all our new members! We recommend that you start by reading our Welcome Letter by clicking here. It explains why we invest in real estate through REITs and how to get started.
As a reminder, our most recent "Portfolio Review" was shared with the members of High Yield Landlord on September 9th, 2024, and you can read it by clicking here.
You can also access our three portfolios via Google Sheets by clicking here.
New members can start researching positions marked as Strong Buy and Buy while taking into account the corresponding risk ratings.
If you have any questions or need assistance, please let us know.
==============================
TRADE ALERT - International Portfolio September 2024 (Incl. CEO Interview)
Last week, the Fed surprised many by cutting interest rates not by the expected 25 basis points, but by a significant 50 basis points. They also signaled their intention to continue lowering rates further in the coming months.
We have long predicted that this would happen and we are pleased to see it finally play out. It is this prediction that gave us the confidence to aggressively accumulate REITs over the past two years while they were heavily discounted.
Now our patience is finally paying off as REITs have surged by 40% off their lows and some of our biggest holdings are up far more than that:
On one hand, I am happy these gains...
But on the other hand, I also know that this will make it harder for us to identify new opportunities going forward.
A year ago, you could have bought almost any REIT and earned strong returns because they were so cheap. As an example, we invested heavily in blue-chip investment grade rated REITs like Camden Property Trust (CPT) because those REITs rarely come for sale.
But the easy money has now been earned and it is time for REIT investors to become more selective.
Many of those large and popular REITs are slowly approaching fair value, but there are still plenty of opportunities among smaller and lesser-known REITs, particularly in more complex situations with more leverage, portfolio transformations, and in foreign markets.
With that in mind, we are today buying another 1,500 shares of Canadian Net REIT (NET.UN:CA), making it our largest Canadian REIT holding.
We think that it is the single best investment opportunity in the net lease sector today and that's because it has mostly missed out on the recent rally, causing its equity to become deeply undervalued relative to that of its US peers:
This valuation differential is massive and unjustified based on the fundamentals of the company. As a reminder, Canadian Net REIT owns very desirable assets leased mostly to investment grade rated tenants and it has historically grown the fastest of any net lease REITs that we know of.
Moreover, rate cuts are expected to be even more aggressive in Canada and therefore, smaller more heavily leveraged REITs like Canadian Net REIT should be surging in value right now.
But we have often seen this happen with Canadian REITs. They are often slower to respond to macro changes than US REITs, which are more actively traded by investors.
This delay in market reaction is a great opportunity for more sophisticated REIT investors, allowing us to buy more shares at just 8.5x FFO. We expect about 50% upside as it eventually recovers and while we wait, we earn a 6.5% dividend, paid monthly and we expect the REIT to create an additional ~5% of value each year.
I just recently had the chance to ask questions to the company's CEO, Kevin Henley, and below I share the main takeaways.
In case you are new to this REIT, we recommend that you first read our investment thesis by clicking here.
Interview Takeaways:
Canadian Net REIT is not just the only net lease REIT in Canada, but it is the only institutional investor in its market niche, and this is a major advantage because it faces little competition for new acquisitions and can find deals with very attractive cap rates and lease terms.
The reason why US net lease REITs are not coming to Canada is because it is very hard to acquire larger portfolios in Canada. The market is highly fragmented and small acquisitions would not move the needle for them given their larger size. However, despite being the largest dedicated owner of such properties in Canada, Canadian Net REIT is still very small, owning just 93 properties compared to 15,000+ in the case of Realty Income. Their CEO explains that "they are essentially feeding on crumbs of giants and slowly building a very high quality portfolio." These crumbs move the needle for them, but not for the giants.
Therefore, they are in the sweet spot right now. Their unique market focus allows them to close highly accretive deals and because they are still small in size, these deals should result in above-average growth for many years to come. Historically, this approach has been extremely rewarding and they they are still in their early growth phase.
Their CEO makes it very clear to me that the focus is on growing FFO on a per share basis and they don't care about top line growth. They seem to be very well aligned with shareholders. This is well-reflected in their management cost, which is lower as a percentage of total assets than many of their larger US peers, and it is also reflected in their superior track record and the high insider ownership of the management.
Something unique about Canadian Net REIT is also that it has a very low payout ratio at 56% and they gradually amortize their debt with retained cash flow.
Closing Note
How many net lease REITs do you know that have historically managed to grow their FFO per share by 16% annually, and yet, trade at only 8.5x FFO?
I don't know any other.
As interest rates now return to lower levels and their growth accelerates, I expect their FFO multiple to also expand, resulting in significant upside from here.
They have a unique strategy that's very rewarding and we think that the company is still in its early growth stage.
We are happy to get the chance to buy more shares at a discounted price before the market realizes this.
Please click the ♡ button and share to help us grow. Thank you!
============================
Refer a Friend and Earn Rewards
If you find our research valuable, please show your support by sharing High Yield Landlord with friends and family. You will earn rewards for your referrals.
============================
Access Our Course to REIT Investing
Don't forget to take our 10-Module Course on REIT investing! The entire course is available to members for free as part of your membership.
============================
Access Our Portfolios Via Google Sheets
Our three portfolios are available through Google Sheets. These sheets provide detailed information on position sizes, risk ratings, and key metrics to help you make well-informed investment decisions:
============================
Access Our REIT Market Intelligence Sheet
This exclusive tool includes a list of all equity REITs grouped by property sector, providing all the information you need to make better decisions: FFO multiple, dividend yield, payout ratio, credit rating, and much more.
============================
Access Our Portfolio Tracker
The HYL Portfolio Tracker is a Google Spreadsheet designed specifically for members of High Yield Landlord. It helps you track all your HYL investments in one place with a simple format. It is very easy to use, so don't miss out on this free feature!
============================
Access Our Live Chat
Our live chat room is where the HYL community comes together to share market news, discuss investment ideas, and help new members get started. Members can post questions and receive prompt answers from other real estate investors and our team.
============================
Finally, feel free to contact us anytime. You can send me a direct message on the chat or email me at jaskola@leonbergcapital.com
Sincerely,
Jussi Askola
Analyst's Disclosure: I/we have a beneficial long position in the shares of all companies held in the CORE PORTFOLIO, RETIREMENT PORTFOLIO, and INTERNATIONAL PORTFOLIO either through stock ownership, options, or other derivatives. High Yield Landlord® ('HYL') is managed by Leonberg Research, a subsidiary of Leonberg Capital. All rights are reserved. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. The newsletter is impersonal and subscribers/readers should not make any investment decision without conducting their own due diligence, and consulting their financial advisor about their specific situation. The information is obtained from sources believed to be reliable, but its accuracy cannot be guaranteed. The opinions expressed are those of the publisher and are subject to change without notice. We are a team of five analysts, each contributing distinct perspectives. Nonetheless, Jussi Askola, the leader of the service, is responsible for making the final investment decisions and overseeing the portfolio. We do not always agree with each other and an investment by Jussi should not be taken as an endorsement by other authors. Past performance is no guarantee of future results. Our portfolio performance data is provided by Interactive Brokers and believed to be accurate but its accuracy has not been audited and cannot be guaranteed. Our portfolio may not be perfectly comparable to the relevant index. It is more concentrated and may at times use margin and/or invest in companies that are not typically included in REIT indexes. Finally, High Yield Landlord is not a licensed securities dealer, broker, US investment adviser, or investment bank. We simply share research on the REIT sector.