Becoming An Intelligent REIT Investor

Real Estate


Today I’m putting the final touches on the October 2019 edition of the Forbes Real Estate Investor (monthly newsletter) and with three-quarters of the year in the rear-view mirror, I’m excited about sharing REIT performance with my subscribers.

To give you a taste of the success, all four of our customized REIT portfolios have performed well, especially the lower-risk Durable Income Portfolio that has returned 27% year-to-date. The top holdings include CyrusOne (CONE), returned 40.5% (annualized since inception), Store Capital (STOR) +31.5%, Kimco Realty (KIM) +24.1% and Realty Income (O)+21.4%.

The Durable Income Portfolio (our model newsletter portfolio) was so-named for its very stable and predictable dividend growth attributes, essential to the everlasting model of repeatability that REITs demonstrate.

Much like ever-lasting gobstoppers, REITs are designed to provide their investors with the combination of high dividend yield (around 3.5% in the equity REIT sector) and predictable income, that is translated into dividends (as REITs are required to payout at least 90% of their taxable income in dividends).

2018 was not so exciting for REIT shareholders, due to their sensitivity to interest rates. However, beginning in 2019, REITs began to exhibit a momentum trade in which income and safety became the magnet for drawing capital towards blue chip names.

Fortunately, our Durable Income Portfolio is highly-weighted with SWANs (an acronym for sleep well at night) and this flight-to-quality trade served as a catalyst to drive performance onward and upward.

With this past week’s outperformance, with gains of more than 24% so far this year, the broad-based REIT ETFs (VNQ and IYR) continue to outperform the S&P 500, which has climbed roughly 18%. Not all REITs are seeing the windfall, however, exhibited by the 55% performance gap between the best- and worst-performing REIT sectors.

As Hoya Capital Real Estate explains, “the US Housing sector has climbed 27% this year led by the 50% surge in Homebuilders. At 1.68%, the 10-year yield has retreated by 101 basis points since the start of the year and is roughly 160 basis points below peak levels of 2018 around 3.25%.”

Our top picks in the Durable Income Portfolio include Hannon Armstrong (HASI) +56% YTD, CyrusOne (CONE) +49% YTD, City Office (CIO) +47% YTD, W.P. Carey (WPC) +42% YTD, and Store Capital (STOR) +35% YTD.

By carefully balancing the portfolio, and maintaining adequate diversification, we have been able to deliver strong results, in the midst of these laggards: CoreCivic (CXW) -6.6% YTD, Tanger Outlets (SKT) -5.1% YTD, and Taubman Centers (TCO) -3.4%.

There will always be winners and losers in a portfolio, and it’s virtually impossible to eliminate all risk; however, by carefully filtering out harmfully positioned stocks early, the intelligent investor can reduce stress and sleep well at night. Pat Dorsey, founder of Dorsey Asset Management, and author of two books — The Five Rules for Successful Stock Investing and The Little Book that Builds Wealth – said,

“To me, the core insight of Benjamin Graham is that you view a stock as a piece of a business and, by doing so you remain focused on the cash the business will generate and on its balance sheet as opposed to the opinions of other investors in the market. The importance of that hasn’t changed since Graham’s time.”

By adhering to the “durability” concept, the Durable Income Portfolio has delivered consistent results with lower volatility.  That is the secret sauce that drives performance, and what makes this particular basket of stocks an “intelligent REIT portfolio”.

Brad Thomas is the coauthor of The Intelligent REIT Investor (2016) and he and his coauthor are currently writing a second edition (to be released in the summer of 2020).

I own shares in HASI, CONE, CIO, WPC, STOR, CXW, SKT, KIM, O, and TCO.

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