In 2010, we had the dot-com bubble…

In 2007, we had the housing bubble…

Today, we live in the “everything bubble”:

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Literally every single asset class is historically expensive.

Bonds yield close to nothing after a multi-decade long decline in interest rates. If you account for taxes and inflation, you are losing money by lending it:

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This secular bull market in bonds has pushed a lot of investors into equities. As a result, the broader equity market is today priced at 22.3x earnings in a late cycle economy. This is ~30% higher than the average – and history suggests that such lofty valuations result in poor long-term results:

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So, Bonds and Stocks are pricey. What about real estate? We can see the same trend here in valuations. More capital than ever before is chasing real estate deals and as a result, cap rates have compressed to historically low levels for most property sectors:

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This creates three major problems to investors:

  1. Bonds: Not enough income is earned to meet investor’s immediate needs. This is particularly dangerous to large institutions and retirees.
  2. Stocks: With high valuations in a late cycle, risks are very high and investors could suffer significant capital losses from a return to historic valuation multiples.
  3. Real Estate: The returns are not particularly appealing in most traditional sectors (apartments, office, industrial…) – especially given that it is an illiquid asset class.

What is then the Refuge in this “Everything Bubble”?

We believe that it is Alternative Assets such as energy pipelines, specialty property sectors, land, infrastructure, and other real-asset backed cash-flow generating assets that are essential to our society.

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Most of these infrastructure-like assets have been under-owned in the past and remain relatively minor allocations in investor’s portfolio.

This is about to change drastically.

Over the next ~5 years, institutional capital in this space is expected to grow by nearly ~$40 trillion. Yes, that’s with a “t” – as in 40,000 billions.

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Allocations to alternatives / real assets were only 5% in 2000. Today, it is closer to 25%. And in 10 years, this figure is expected to exceed 40%:

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Investors remain today overexposed to stocks and bonds and capital is quickly shifting to alternatives – which commonly offer:

(1) Higher income yield: The 10-year treasury may yield only 2.1%, but real assets will often trade at yields in the 6-10% range – and can be leveraged to generate even greater cash-on-cash returns.

(2) Greater total returns: Real assets generate high income, but they also appreciate in value and grow cash flow. A high-quality REIT owning specialty assets may yield >6% but also growth at >5% per year.

(3) Inflation protection: One of the biggest and most underrated risks today is accelerating inflation. When you invest in low-yielding bonds, you are at big risk. Real assets, on the other hand, are well-protected, as their income and values tend to grow along with inflation.

(4) Valuable Diversification: Traditional assets (stocks and bonds) are highly volatile, and adding real assets to a portfolio has proven to lower volatility. As such, investors can profit from diversification benefits, while boosting income at the same time.

Early investors have been making a killing. Over the past 20 years, Brookfield (BAM) earned an unparalleled 16% annual return by investing in these lesser known asset classes… (compared to just 7% for the S&P 500):

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Brookfield was early to recognize the value of “real asset” investments (such as timberland, energy pipelines, wind farms…) and pioneered the space by building one of the leading asset management franchises.

Similarly, at High Yield Landlord, we are ahead of the crowd with the majority of our Core Portfolio already invested in high cash flowing alternatives.

Below we discuss three asset classes in which we are investing today, and you should too. These are asset classes that will not only boost your income, but also diversify your portfolio and mitigate risks in a market where everything appears to be trading at “bubble” valuations.

#1- Specialty Real Estate

Most traditional real estate sectors are rather pricey today. However, there remains some specialty sectors where value is abundant.

Investors looking for superior income, along with reasonably good price appreciation prospects over time – and with only modest risk – will certainly want to consider manufactured housing communities, hospitals, movie theaters, and other specialty property sectors.

While some time ago, these highly profitable investments may have been reserved to high net worth individuals and institutions, it is today easier than ever before to invest in them through specialty REITs.

REITs stand for “Real Estate Investment Trusts” and just like mutual funds, they allow investors of all kinds to invest in real estate without actually having to go out and buy, manage and finance properties themselves. Besides, most REITs are publicly traded on a stock exchange and allow investors to participate in the ownership of large scale, well diversified real estate portfolios in the same way as investors would invest in any other industry – through the purchase of stocks

There exists over 200 REITs today with each investing in different property sectors. Many of them are in overvalued category and this is especially true for the mainstream large cap REITs. A few popular examples include Realty Income (O) and Prologis (PLD). Opportunities are however still present in lesser known specialty REITs.

#2- Energy Pipelines

Energy pipelines, just like specialty real estate, generate a lot of cash and are an essential component of our infrastructure. Pipelines generally offer even greater income than traditional real estate properties but have lower appreciation potential in the long run.

Master Limited Partnerships (or MLPs in short) are publicly traded partnerships that own energy infrastructure. Just like with REITs, investors can get exposure to high yielding energy pipelines through the purchase of publicly traded MLPs. Popular examples include Energy Transfer (ET) and Magellan Midstream Partners (MMP).

#3- Airports

Airports are tremendous businesses because they enjoy significant barriers to entry, a near-monopoly once you enter the property, stable and growing demand, and high-margins.

Today, there exists many listed airport companies in which you can invest by simply buying their shares. Examples include Grupo Aeroportuario del Pacifico (PAC); Auckland International Airport (OTCPK:AUKNY); and Sydney Airport Ltd. (OTC:SYDDF).

#4- Timberland and Farmland

The demand for Timberland and Farmland investments has been steadily rising over the past decades. Both provide valuable inflation protection, diversification and a low-risk approach to generating high income in the long run.

You can today invest in both asset classes with listed REITs such as Farmland Partners (FPI) and Weyerhaeuser (WY) among many others.

#5- Windmills and Solar Farms

Renewable energy investments are particularly popular as the world transitions to cleaner energy sources.

Here in particular: windmills and solar farms are accessible to individual investors through listed partnerships such as Brookfield Renewable Partners (BEP) and specialty REITs such as Hannon Armstrong (HASI).

Closing Thoughts on Our Real Asset Strategy

These are just five “Real Asset” alternatives among many others in which we currently invest. Coming from a private equity background, I have always been compelled by tangible assets and currently hold positions in:

  • Real Estate Investment Trusts
  • Master Limited Partnerships
  • Infrastructure
  • Energy Pipelines
  • Timberland
  • Windmills
  • Solar farms
  • Airports
  • Other…

These are all high yielding assets that allow us to generate over $5,000 in annual passive income from a small $70,000 Real Asset Portfolio.

Source: High Yield Landlord Real Money Portfolio

Compared to traditional equities and bonds, our real asset portfolio also enjoys much more reasonable valuation metrics trading at:

  • 9.5x cash flow on average.
  • 18% discount to estimated NAV.

Most importantly, we are able to generate a high 7.2% dividend yield that is well-covered at a low 68% payout ratio.

With interest rates expected to remain lower for longer, we believe that these attractive attributes will continue to attract more and more capital towards real assets. This will result in bidding up of prices, compressing yields, higher valuations, and strong total returns to investors who position themselves early enough.

Still, 20 years ago, most investors would ignore these assets. Today, they are becoming a major components of institutions’ portfolios:

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By positioning ourselves ahead of the expected rush to real assets, we believe that we can enjoy superior appreciation along with high income – the best of both worlds.

The best time to invest is today. The second best is tomorrow. We do not know how real assets will perform in any given month, quarter or even year; but over the long run, we are convinced that returns will very satisfying.

Are you Positioned to Profit from the Rush to Real Assets by Yield-starved Investors?

At High Yield Landlord, we have positioned our portfolio to thrive in today’s rapidly evolving environment. We are the #1 Ranked Service for Real Asset Investors on Seeking Alpha with over 1,000 members on board.

We spend 1000s of hours and well over $50,000 per year researching the Real Asset market for the most profitable investment opportunities and share the results with you at a tiny fraction of the cost.

Join us Before the Price Hike!

Disclosure: I am/we are long WY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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2019-10-08