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No doubt, you’ve heard of the term “battleground states” before.
Actually, come to think of it, you might be completely sick and tired of the term. In which case, you’re probably sick and tired of politics in general.
You know what though? Tough luck!
It’s 2020, and another round of presidential elections are upon us – a vote Americans typically tend to take much more seriously than your “average” national election.
It’s like we think the presidency is a four-year monarchial position, and Congress doesn’t matter at all. Which, for the record, it does. Or at least it should.
But I digress. Back to that oft-used, two-word concept we opened with…
Like it or not, there’s a reason why battleground states are all the rage when it comes to political polling – and subsequent behavior.
That’s because there are traditional Democratic states, such as the whole West Coast, and New York. And then there are traditional Republican states, such as Texas and anything solidly in the Bible Belt.
That’s just the way it is and has been for a while. California is automatically assumed to go blue in elections. Texas is automatically assumed to go red.
Though, with the increasing influx of Californians into Texas, who knows how much longer that will last. I don’t see its 38 electoral votes going to Democrats this time around. But the future, I suppose, is up for grabs.
Which, incidentally, is my exact point with the “battleground REITs” mentioned below.
Factors, Factors Everywhere, and Not a Drop to Drink
So, as already stated, there are as-close-as-sure-thing states out there in this complex, complicated, compelling American union. Then there’s the more “iffy” areas of the country.
That latter grouping is either more openminded or more easily influenced by temporary factors, depending on your take. Regardless, they’re often major deciding factors in presidential elections.
Speaking of openminded (or easily influenced by temporary factors, depending on how you look at it), The Hill released a story on January 22 that said this:
“The Democratic National Committee (DNC) is preparing to spend millions of dollars in six battleground states in a bid to expand the electoral map for the party’s eventual presidential nominee.
“The multimillion-dollar investment will go toward adding new infrastructure and organizers in Arizona, Florida, Michigan, North Carolina, Pennsylvania, and Wisconsin – six states that President Trump carried in the 2016 presidential election and that Democrats see as key to defeating him in November.”
And, as expected, it notes further down how the RNC has the same exact designs on the same exact states.
Why wouldn’t it when it wants to win every bit as much as the DNC?
And the Winner Is…
Ultimately, however, that winner-takes-all first-place prize will be decided by a number of factors, including these:
- How well the U.S. economy is doing
- How well people in those battleground states perceive the U.S. economy is doing
- How optimistic they are about how the U.S. economy will be doing in the short-term, mid-term, and – hopefully – long-term as well.
And those factors are oftentimes dependent on other factors, such as:
- Media presentation of the U.S. economy
- Personal interpretation of the U.S. economy
- Promises made (compelling or otherwise) by the presidential candidates of choice
- Campaign spins concerning facts and figures (about the U.S. economy or otherwise) coming from either party…
You get the point, no doubt. Besides, by now you’ve lived through more than a few of these election cycles. You know how it works, for better and for worse.
All the polls, and pundits, and people make their best guesses about how it’s going to turn out. There’s also a fair amount of finger crossing and flat-out bets in the process.
But then, like it not, it turns out how it turns out, as predicted or as unpredicted. In short, nobody knows a thing until it’s all said and done.
It’s that utter uncertainty that makes me classify a certain set of real estate investment trusts – or REITs – as having battleground odds. There are just too many factors involved right now in calling whether they’re deep-value picks…
Or money-sucking black holes in an otherwise star-filled stock-picking universe.
And, as individual investors have found out one too many times over the market’s history, that distinction isn’t always clear.
Here’s What We See. You Be the Judge.
CoreCivic (CXW) describes itself as “a diversified government solutions REIT with the scale and differentiated expertise to solve the tough challenges that governments face in flexible, cost-effective ways”. More precisely, I would refer to the company as a “critical mission infrastructure” REIT that invests primarily in prisons.
On the surface, many investors consider the company risky, due to its moral and political implications. However, based on fundamental analysis, I consider the company safe, given the low payout ratio (65%), access to capital (company recently arranged a $250 million loan after Bank of America and other banks cut ties with the private prison sector), and steady pipeline of new projects (multiple state-level contracts awarded and continued expansion on other properties).
Shares have been hammered (down 31 percent) over the last several months after political tensions escalate. The debate as to whether private prisons (like CXW) are necessary has put CoreCivic and its closest peer, Geo Group (GEO), in the spotlight.
Regardless of who wins the presidential election, we consider CoreCivic a sustainable business and the 10.7 percent dividend yield attractive. We believe there’s a good chance that shares could return as much as 25 percent over the next ten months.
Keep in mind, shares could be volatile at times, but that’s why we call this the ”battleground” series.
Tanger Outlets (SKT) is another “battleground pick” that has seen enhanced volatility. The company recently released its Q4 2019 and year-end earnings (earlier than expected) due to the fact that the fact that the company was hoping counteract the news that the S&P is dropping it from its High-Yield Dividend Aristocrats Index (on Monday).
The good news is that the Q4 earnings were better-than-expected: Funds from operations (FFO) was $0.59 per share, for instance, and adjusted funds from operations (AFFO) was $0.64 per share. On the earnings results, Steve Tanger, CEO at the company (in a press release) said:
“Better than anticipated performance in the fourth quarter and throughout 2019 enabled us to surpass our expectations. With strong leasing execution, we ended the year with consolidated portfolio occupancy above that of the prior year at 97.0 percent, contributing to better than expected same center net operating income. Increases in traffic and sales validate consumers’ ongoing desire for the best brands, prices and shopping experience at Tanger Outlets.”
However, the “not so good” news was that Tanger’s 2020 guidance was worse than expected: It’s Funds from Operations per share was targeted to be $2.17 (consensus) and is now $2.00 – a 12 percent decline and 8 percet more than analysts expected. The company painted a less than rosy picture for 2020 as more store closures will put further pressure on malls and outlets.
Yet, Tanger continues to “battle” through the “retail apocalypse” by utilizing its strong balance sheet (BBB rated by S&P), low payout ratio (65 percent based on FFO), and disciplined risk management practices. As evidence of that, the company also announced a dividend increase of a penny per share, which makes 28 years of dividend increase in a row (there aren’t too many REITs with the record).
Tanger’s dividend yield is now 9.3 percent and shares are trading at the lowest range since 2009. The company has already telegraphed weak earnings in 2020, but we believe that the potential for outlets is promising, as more department stores shutter, the outlets should see better market share.
Again, retail may not be for everyone, so investors should be prepared for enhanced volatility.
Iron Mountain (IRM) is our final “battleground pick”.
This particular REIT is unique because it really has no direct peers, since the company has multiple business lines including records and information management (the core business), data management, data centers, and secure shredding services. Iron Mountain’s well-balanced platform consists of more than 225,000 organizations around the world, with over 85 million square feet of real estate, and over 1,400 facilities in over 50 countries.
Back in October 2019 (Halloween day) the company held its Q3-19 earnings results conference call and announced Project Summit, which is a transformational program that will leave Iron Mountain with “a simpler and more dynamic management structure, better supporting (its) future.”
Specifically, Iron Mountain is combining its core records and information management (or RIM) operations under a single global leader to eliminate “unnecessary work in rebalancing resources.” The company is also streamlining its support structure (reducing VP-level positions by ~45%, thus eliminating ~700 positions).
The goal is for the company to reduce debt and grow earnings in 2020 and beyond. We expect to see 9.5 percent combined growth (4 percent expected growth and 5.5 percent related to Project Summit) starting from the 2019 normalized adjusted EBITDA. The dividend appears safe, based upon Adjusted Funds From Operations, and the yield is now 7.8 percent.
Risks include higher leverage, volatile paper prices, and of course integrating the recently announced “Project Summit” initiatives.
The upside is appealing to us, as Iron Mountain could generate meaningful growth, that translates into ongoing dividend increases. We are forecasting shares to return 25 percent per year.
I own shares in CXW, SKT, and IRM.