For guaranteed income, you can’t go wrong looking among the real estate investment trusts (REITs). After all, these companies have a special incentive to pay nice dividends. As long as REITs pay out at least 90% of their taxable income to investors, they can avoid paying corporate taxes. Uncle Sam’s loss is our gain: While you’re lucky to get a 1% or even 2% dividend yield from most stocks, REITs are paying 4% or more.
No wonder REITs are popular among income investors…especially in times like these, when the Federal Reserve is busy cutting interest rates and other countries’ rates are already in negative territory.
But I’m looking for more out of MY investments than just a fat yield.
Ultimately, a dividend means nothing if the underlying business isn’t growing enough to sustain (and build on) that dividend over time.
And growth is not always easy to find these days. In this latest earnings season, 92% of S&P 500 companies have reported Q3 results so far – and on average, corporate earnings dropped 2.3% year-over-year. That’s no fluke, either: This would be the third straight quarter of negative earnings growth.
So when I see a REIT that pays a nice 8.5% yield – and is growing earnings like crazy – that certainly gets my attention.
Such is the case with Arbor Realty Trust, Inc. (ABR).
For the third quarter, ABR reported that earnings increased 22.7% year-over-year to $34 million (up from $27.7 million in the third quarter of 2018). It was also nicely higher than Wall Street analysts had predicted: $0.35 earnings per share, vs. $0.33 expected.
ABR also announced that it was increasing its quarterly dividend by 11%, to $0.30 per share, and with earnings like that, I’m expecting more to come.
Now, those are some impressive growth stats. But the growth prospects can be even better when you look at more early-stage investments. And that’s certainly true of REITs as well.
For example, in its third-quarter report, Innovative Industrial Properties, Inc. (IIPR) posted 314% earnings growth, year-over-year, to $0.55 per share. Analysts were expecting $0.47, so that was a nice earnings beat.
And it’s not like IIPR is cutting corners to “juice” its profit figures. This REIT is acquiring new properties like crazy. In its three-year history, IIPR has acquired 42 properties totaling about 2.9 million rentable square feet, which are 100% leased on terms of about 15.5 years. These properties delivered 201% revenue growth in the third quarter!
So where is this REIT finding growth opportunities like that? In the medical-marijuana industry.
IIPR has a unique business model that’s given it a strong foothold in this niche market. The REIT identifies top cannabis growers with specialized industrial and greenhouse facilities, licensed for medical use, then it buys those properties – and leases them back to the growers. From this property buyout, the growers get a nice influx of cash to finance their operations. (That can be tough to come by. Even though medical marijuana is legal in 33 states, the federal government has NOT legalized, and few U.S. banks want to get involved until it does.) And, of course, IIPR benefits in the form of that great revenue and earnings growth.
Just last week, IIPR announced another acquisition in Pennsylvania, leasing property to Green Thumb Industries, Inc. (GTI). This new partner has 13 manufacturing facilities and licenses for 96 retail locations, including seven in Pennsylvania. With the cash from this property buyout, GTI intends to boost its production capacity. GTI was already considered one of the “preeminent cannabis operators” in the U.S., and as such, is a great partner for Innovative Industrial Properties.
Since Innovative Industrial Properties operates in the highly volatile cannabis industry, the stock has been subject to fluctuations, too. But the REIT has strong forward-looking earnings. Analysts are expecting earnings to soar 170.8% in the fourth quarter-and forecasts have been upped by 14% in the past week alone.
This medical-marijuana REIT was actually my first foray into cannabis stocks, and I still think it’s the best way to go. So, how did I find such a small up-and-comer…in such a niche market?
Well, it was the same way I find all my best growth plays: my weekly scan of the markets using my suite of Portfolio Grader tools.
Here is Portfolio Grader’s full Report Card on Innovative Industrial Properties:
When I see a strong history of upward earnings revisions – and a tendency to beat those expectations – combined with top-notch Sales Growth, Operating Margins Growth and Earnings Growth…
…well, that’s a stock that gets my attention.
IIPR also gets a top rating of “A” for its Quantitative Grade. This indicates that I’m not the only one who’s noticed this stock’s appeal: It is also attracting big money on Wall Street.
This approach, identifying solid fundamentals and strong money flow, is responsible for all my greatest finds in over 30 years of stock-picking. In my view, you can’t go wrong if you stick with what works.
ABR and IIPR are two great REITs to consider – and I just recommended another high-quality REIT in my Breakthrough Stocks November Issue, exclusively for subscribers. Click here for a free glimpse at the strategy and what else you get when you give us a try today.