One of the best ways to predict stock price performance is to forecast earnings growth or the company’s ability to grow profits over time.
Keep in mind, there are only two ways of getting paid to invest – capital gains and dividends – and one of the primary reasons that investors own REITs is for the dependability of dividends.
Ben Graham once remarked that earnings are the principal factor driving stock prices, and REITs offer an attractive allure of predictability. Most REITs own properties with contractual leases and this makes the sources of income for REITs much easier to predict than ordinary stocks.
Last week the Federal Reserve announced a twenty-five-basis point increase in the Federal Funds rate and set the new range to 1.50-1.75 percent. The increase was widely expected and the language in the release was mostly moderate.
Ultimately, the key take-away from the Fed was that inflation is expected to remain under control and the trajectory of short-term rates is higher than was expected. Neither of these are decidedly negative for REITs and the REIT market.
There’s no question now that rates will continue their seemingly modest rise and REITs with the most robust growth rates are certain to outperform. One way to help stave off the effects of inflation is to make sure that your portfolio includes REITs with a habit of boosting dividends.
5 REITs Forecasted To Grow By Double-Digits
Using consensus data obtained by FAST Graphs I decided to filter out 5 REITs that are forecasted to grow their earnings, or funds from operations, the highest. Keep in mind, REIT earnings are easier to forecast due to the contractual income being generated.
Founded in 1995, American Tower (AMT) is the fastest-growing player in the world of telecommunications infrastructure. The Boston-based company started out as a subsidiary of American Radio and expanded operations in Mexico, Brazil, India, Chile, Colombia, Peru, Ghana, and South Africa.
AMT grows to meet demand as the demand for mobile device connectivity is exploding and more sites will be necessary to keep people connected. Keep in mind, cell Tower REITs are more than towers, though they are a network of connectivity.
So, when towers are not available, they provide a number of alternative in-building and outdoor solutions that keep people and businesses connected, no matter where activities take them.
AMT shares are trading at $142.27 with a P/AFFO multiple of 20.8x. While the 2.1 percent dividend yield may seem that shares are expensive, the forecasted FFO growth of 10.8 percent warrants a look. We recommend waiting on a pullback, as our target price is $130.00.
CyrusOne (CONE) was previously the co-location unit of Ohio-based Cincinnati Bell Inc., and on January 17, 2013, the company spun off its data center portfolio by listing around 16.5 million shares on Nasdaq, raising around $313.5 million (around $19 per share).
Cincinnati Bell is the last of the “Bell Companies,” and the 140-year-old phone company recognized that the data centers were throwing off a lot of cash. By spinning off CyrusOne, Cincy-Bell seized the opportunity to de-lever and help develop a standalone brand.
Given the underlying secular demand trends, and the value proposition that CONE offers (to both enterprise customers and cloud companies), we consider the platform sound. CONE is well positioned to capitalize on these broad opportunities and manage the business and capital structure prudently to maximize returns.
CONE shares are trading at $49.98 with a P/AFFO multiple of 16.2x. The dividend yield is 3.7 percent. We recommend CONE (as a BUY) today as the company is trading below its 2-year multiple of 17.9x. CONE is forecasted to grow FFO/share in 2018 by 14 percent.
On March 31, 2015, NexPoint Credit Strategies Fund spun off NexPoint Residential (NXRT) to create a pure-play multi-family REIT. The company is focused on acquiring, owning and operating well-located, middle-income, multifamily properties with “value-add” potential in large cities, primarily in the southeastern and southwestern United States.
NexPoint’s payout ratio is sound (~65%) and the company is positioned to generate outsized returns based on its tactical approach of investing in secondary markets.
The company targets markets that it believes have the following characteristics: (1) attractive job growth and household formation fundamentals; (2) high costs of homeownership or class A multifamily rental; and (3) elevated or increasing construction or replacement costs for multifamily real property.
NXRT shares are trading at $23.88 with a P/AFFO multiple of 14.1. The dividend yield is 4.2 percent. NXRT is considered a small cap ($500m market cap) and the forecasted FFO growth in 2018 is 15%.
In September 2012, Equinix Inc. (EQIX) announced its plan to pursue conversion to a REIT and on December 23, 2014, the company’s Board approved the conversion to a REIT effective on January 1, 2015. In May 2015, the company received a favorable response to the private letter ruling (‘‘PLR’’) it had requested from the IRS in connection with the REIT conversion for federal income tax purposes.
The providers in EQIX sites include the world’s top carriers, mobile providers, internet service providers (ISPs), broadband access networks (DSL/cable) and international carriers. EQIX’s neutrality also means its customers can choose to buy from, or partner with, leading companies across its five targeted verticals.
Equinix still has a short history as a REIT, but now appears to be well positioned to deliver meaningful annual dividend increases. Shares are now trading in fair value range (market close was $401.68) with a P/AFFO multiple of 21.1. The dividend yield is 2.3 percent. EQIX is forecasted to grow AFFO by 17 percent in 2018.
In May 2015, Community Healthcare (CHCT) priced its IPO of 6.225 million shares at $19.00 per share, and the shares began trading on the NYSE on May 21st. The company contributed the net proceeds from the offering and the concurrent private placements to its operating partnership, and it used roughly $114.5 million of funds to acquire the initial properties and fund corporate overhead.
CHCT considers itself a “capital source for non-urban healthcare providers”, and the company focuses on “smaller ancillary properties in non-urban markets – generally not a hospital or even a large on campus medical office building”.
CHCT has increased the dividend every quarter since the company’s IPO (paid Q3-17 cash dividend of $0.395 per share and $.3975 in Q4-17). The company anticipates that the payout ratio will decline over time as the revolving credit facility is drawn down.
Shares now trade $24.84 with a P/AFFO multiple of 16.8x. CCHT is a small cap ($436 million) with a dividend yield of 6.4 percent, and the consensus growth estimates the REIT will grow earnings by over 17.7 percent in 2018.
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