With interest rates falling, income-hungry investors are turning to high-dividend stocks or paying a heavy price for bonds with declining yields.
However, investors seeking the combination of both income and price appreciation upside should turn to real estate investment trusts (REITs).
REITs remain largely misunderstood. These “alternative” investments target the real estate industry.
But you’re not just investing in a single plot, townhome, or apartment complex. It’s diversified across a range of sectors. And sometimes, one of those sectors thrives enough to boost the value of the REIT significantly.
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Our scoring system scans the market for investments with the highest earnings potential. It assigns a score from 1 to 4.9. The higher the VQScore, the more likely the stock will break out.
Our top REIT today just earned a 4.3, putting it squarely in the “Strong Buy Zone.”
This REIT Prints Money for Investors
MGM Growth Properties LLC (NYSE: MGP) is a REIT that invests in highly popular gaming destinations and entertainment resorts. The firm’s assets include casino locations, hotel and convention spaces, entertainment facilities, and retail spaces.
The gaming REIT space is highly specialized. Three REITs explicitly focus on the highly lucrative industry.
Since the gaming REIT industry is relatively new, Wall Street is still working out the kinks for properly valuing the underlying assets. That’s an opportunity for early investors to take advantage of price anomalies.
The general thesis is that gaming REIT assets remain undervalued. It will merely take a little time for investors to adjust and value these assets similar to the highly lucrative healthcare REIT space and operators of ultra-luxe properties.
The company notes that many of the largest U.S. casinos generate cash flows that are three to four times higher than properties like the Ala Moana mall in Hawaii or the General Motors building in New York.
And MGM sits at the top of the food chain in this space. In addition to benefiting from the trusted MGM name, the firm also stands apart due to its remarkable portfolio and lease structure with its tenants.
Its portfolio comprises 11 resorts in Las Vegas and other lucrative markets around the United States. It owns the MGM National Harbor in Maryland, MGM Northfield Park in Northfield, OH, Empire Resort Casino in Yonkers, N.Y., and The Park in Las Vegas. Its properties contain 27,400 hotel rooms, 2.71 million convention square footage, 150 retail outlets, 300 food and beverage outlets, and 20 entertainment venues.
These assets have produced a market capitalization of $7.67 billion in cash-generating assets. Given the premiere nature of the real estate assets, competitive spaces have produced higher rents in recent years.
The company has seen an average annual rate hike of 1.8% for its customers. It also benefits because its tenants are responsible for all capital expenditures under the structure of net leases.
And those assets continue to show remarkable ability to return capital to investors regularly.
On Tuesday, the REIT increased its quarterly dividend to $0.47 per quarter – a 0.5% increase from the previous quarter. It was the ninth straight quarter that MGM Growth Properties had increased its dividend. Also, the company has increased its dividend by a whopping 31.5% since its 2016 IPO.
Even with these hikes, the firm has enough cash to increase its portfolio holdings.
Thanks to its alignment with MGM Resorts, the REIT expects to add additional high-value, income-producing properties across North America in the future. The REIT has added $4.7 billion in new assets since going public three years ago.
The Bottom Line
MGM Growth Properties is a specialty gaming REIT that continues to provide investors with steady cash flow in a low-rate environment.
With a dividend of 6.25%, this REIT should continue to see more cash inflows as institutions turn more to the real estate space.
And the REIT’s VQScore suggests it is poised for a large price upswing, because EPS and demand for shares are both rising. A rating of 4.3 puts MGM Growth Properties squarely in our “Strong Buy Zone.”
Positive financial metrics suggest that the REIT has upside of $40 per share. That price target represents a gain of 35% from Tuesday’s closing price.
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Source: Money Morning