2 High-Yielding REITs With Upside Potential

Market Overview - The market is currently trading at 21x forward EPS, which is 1.2 standard deviations above its 30-year average, indicating it is one of the most expensive markets excluding the pandemic period [2][5] - Historically, higher valuations correlate with poorer returns, with the implied five-year annualized return expected to be below 5% at current valuations [5] - The market anticipates S&P 500 EPS growth to accelerate from 11% in 2024 to 15% in both 2025 and 2026, providing a rationale for continued investment despite elevated valuations [5] Investment Opportunities - Finding deep-value ideas is becoming more challenging as the market is not cheap, with previously undervalued sectors like real estate, consumer staples, and utilities showing significant capital gains recently [5] - NewLake Capital Partners, a REIT focused on the cannabis sector, has a market cap of $410 million and owns 32 properties across 12 states, with a 100% occupancy rate and a weighted average remaining lease term of 14 years [6][8] - NewLake Capital Partners expects 10.5% annual growth in the cannabis industry through at least 2027, positioning itself well for continued growth [11] - Apple Hospitality REIT, with a market cap of $3.4 billion, owns 224 hotels and has a strong focus on room revenue, achieving a 99% occupancy rate and a 13.2% increase in net income in the second quarter [21][23] - Apple Hospitality REIT pays a monthly dividend of $0.08 per share, translating to an annualized yield of 6.7%, with a healthy AFFO payout ratio of 72% [24] Valuation Insights - NewLake Capital Partners trades at a blended P/AFFO ratio of 9.9x, below its long-term average of 13.8x, with expected per-share AFFO growth of 8% this year [16][18] - A conservative P/AFFO ratio of 12x for NewLake would indicate a fair stock price of $27, representing a 37% upside from the current price [18] - Apple Hospitality REIT trades at a blended P/AFFO ratio of 10.7x, slightly below its long-term average, with expected per-share AFFO growth of 3% in both 2025 and 2026 [26]