Neil George has found a way to combine growth in the renewables industry, with the high yields of a REIT. Here’s the play
Many investors miss great picks because they fail to connect the dots — even though things are happening right in front of them.
For example, odds are you saw more and more of your neighbors using Netflix while Blockbuster video rental stores closed down, but did you buy Netflix stock?
You saw your friends and family buying an increasing number of items online from some outfit called Amazon, but did you invest in it?
Today, we’re going to look at some facts right in front of us, and talk about how they’re coming together to create a great investing opportunity — one that even comes with a fat yield.
So, what are these facts?
One, this past Monday, oil fell to its lowest level since October as the coronavirus stirred fears of a global pullback in demand.
Two, according to government figures, 2020 will be a record year for U.S. renewables energy construction.
Three, with bond yields hovering near historically low levels, income-investors have been focusing on higher-yielding investment sectors in 2020. One in particular that is outperforming and paying big income is REITs.
So, what’s the connection here?
Well, it’s a renewable-energy-focused REIT in Neil George’s portfolio. It’s taking advantage of the rise of renewables as oil faces headwinds … which is leading to the REIT hitting new all-time highs … all while paying a fat dividend…
Best of all, it’s still trading just below Neil’s buy-up-to price so it’s actionable today.
Neil is generous enough to allow me to reveal the name here in the Digest. So, today, let’s pull back the curtain to find out which REIT is in his crosshairs.
Let’s jump in.
***The background data that’s positioning Neil’s REIT for success
On Monday, oil tumbled into a bear market.
It hit a 3-month low, based on the fear that the coronavirus will grind global commerce to a halt.
But even if we forget the coronavirus and look broader, oil still faces major headwinds — namely, a global shift toward renewable energy.
It’s not going to happen tomorrow, but make no mistake … the rise of electric and renewable energy has begun — big tech is making sure of that.
For example, Amazon will have 10,000 electric-delivery vehicles on the roads by 2022. And as early as 2024, 80% of Amazon will be operating on renewable energy.
Or look at Google …
This past fall, it announced it was investing $2 billion into new renewable energy projects. That’s a record corporate purchase.
Even Duke Energy, the nation’s largest utility, is getting in on the renewables/conservation game. It recently announced it will reach an interim target of 50% carbon emission reductions by 2030.
Of course, we don’t have to go all the way out to 2030 to see huge advances being made in green energy.
According to the U.S. Energy Information Administration (EIA), three-quarters of new U.S. generating capacity here in 2020 will be renewable.
Two weeks ago, the EIA reported that wind and solar will make up 32 of the 42 gigawatts of new capacity additions that will start operation in 2020 — those are both record-breaking annual capacity numbers.
Bottom line, as these new energies power a great portion of tomorrow’s world, oil’s dominance over the energy sector will continue to fade.
***Meanwhile, REITS have been charging ahead in 2020
First, for any readers who are less familiar with REITs, we’re talking about real estate investment trusts. They’re businesses that own income-producing real estate in all sorts of real estate sectors — think single family homes … apartments … offices … and yes, even renewable energy.
To be considered a REIT by the government, a company must pay out at least 90% of its taxable income to its shareholders. This means that REITs can be a great source of cash-flow for investors like you and me.
Yesterday, the Wall Street Journal reported how income-investors have been turning toward REITs in 2020, given low bond yields. Real-estate-focused mutual funds took in $1 billion in just the first three weeks of January.
Below, you can see the S&P REIT index easily outperforming both the S&P and the Barclays bond index in 2020, as of last Friday.
So, if we put these two market realities together, we have a bright future for renewable energy, and strong tailwinds pushing REITs.
Now, let’s combine them …
***The REIT paying big dividends that’s capitalizing on renewables
Neil George is InvestorPlace’s income specialist. Whether through high-yielding dividend-stocks, bonds, REITs, MLPs, or more obscure investment vehicles, Neil is a master of finding his subscribers big income.
Here’s Neil to introduce what he’s dug up here in the renewable REIT space:
… I also want to focus your attention on a company that is a great behind-the-scenes business in the renewable energy market: Hannon Armstrong Sustainable Infrastructure Capital (HASI) …
As a REIT, it operates largely outside of Federal corporate tax liability. It invests in and finances projects in renewable energy that are built and operated on real estate properties …
The REIT provides lending and debt financing in addition to taking equity stakes in the renewable and energy efficiency markets. It does so through both private and publicly funded projects with a large collection of U.S. government properties. This provides a highly dependable credit behind its investments, as Uncle Sam has the power of the U.S. Treasury behind his wallet.
Furthermore, much of its investment projects come with underlying guarantees from not just the U.S. government but state and local governments as well. All of this aids the credibility of the company and the security of its underlying assets and cash flows.
In his January issues of Profitable Investing, Neil goes on to describe HASI and its portfolio, before pointing toward its financial strength.
It turns out HASI’s revenues are up over the trailing year by 30.5%. And that revenue has climbed over the past five years by 199%.
It also boasts a fat net interest margin (NIM) of 12.1%. A NIM is the difference between what a REIT pays to finance itself and what it earns in interest.
All of this has investors taking notice, driving up its price.
Below, you can see HASI soaring over 61% over the last 12 months, compared to the S&P at 24%, and 21% for VNQ, which is the Vanguard Real Estate Index Fund.
If we zoom in on just 2020, you can see HASI continuing to dominate …
***So, investors are seeing plenty of capital gains, but what about the traditional reason to own a REIT — the income?
Back to Neil:
Quarterly dividend distributions are running at 33.5 cents, which represents a 4.1% yield.
That’s above the average for REIT dividend yields, as measured by the Bloomberg US REITs Index. And those distributions have been on the rise over the past five years by an average of 7.7% per year.
For clarification, HASI has climbed since Neil wrote the above — its current dividend yield is 3.9%, which is still crushing the 10-Year Treasury, coming in at just 1.63% as I write, and S&P 500 dividend yield, currently sitting at 1.77%.
Best of all, HASI is still trading below Neil’s buy-up-to price, so it’s still actionable. As I write Wednesday morning, the REIT is at $34.59, below the $35 price cap Neil has place on it.
***On final reason to consider HASI — the November election
As climate change, renewables, and conservation continue to be a hot-button political issue, HASI could find itself in a sweet spot depending on U.S. policy change.
For example, Democratic presidential candidate, Elizabeth Warren has promised to end U.S. fracking if elected.
“On my first day as president, I will sign an executive order that puts a total moratorium on all new fossil fuel leases for drilling offshore and on public lands. And I will ban fracking — everywhere.” — Elizabeth Warren
If such a policy was actually put in place, it would be a huge tailwind to the renewables industry, and by extension, HASI. Not a bad insurance policy on the upcoming election.
Here’s how Neil sums it up:
HASI provides both a behind-the-scenes profit opportunity with yield in the renewable energy market as well as an important hedge leading into the 2020 elections. While we’re a long way from Nov. 3, I continue to evaluate the risks and rewards from possible and potential outcomes.
Renewables continue to work well. And if the status quo is maintained, the company should fare well.
But, if we have some changes, Hannon Armstrong will be on the front line to profit further from its position in the green energy market.
For more from Neil, click here. We’ll continue to keep you up to speed here in the Digest.
Have a good evening,
Jeff Remsburg
