It was March 18, 2020, when I published “Now Is Not the Time to Be a High-Yield REIT Investor.”
Most places across the country had either shut down or were in the process of shutting down for their supposed two-week stint to “slow the spread.” We still had no idea how bad it was going to get.
And indeed, it was going to get worse.
March 18 was a Wednesday. And the S&P 500 wouldn’t bottom out for another three trading days. On March 23, it marked a 35% fall from its February throne.
Charts of 2020 across the board paint quite the picture so far: A craggy mountain range, with January and much of February climbing ever upward. There was really only a little dip at the end of January.
And then, of course, after Feb. 20, it was all downhill from there.
We’ve climbed since then, of course. Today, the S&P is very close to reclaiming everything it lost. And though the Dow is recovering more slowly, the tech-heavy Nasdaq has clearly surpassed itself.
Knowing all that opens up one of those moments – the kind when one person can easily see the glass as half-full while another can see it as half empty. There’s also the completely disheartened who still haven’t re-entered the markets, too busy waiting for the next wave to crash.
And then there are those who are all in – a mentality I would strongly caution against.
In, But With Extreme Caution
Clearly, since I’m still here and still recommending stocks, I’m not in the “glass-is-completely-empty-tipped-over-and-broken-beyond-repair camp.”
I’m pleased with the gains so many of iREIT on Alpha’s portfolio picks have made so far in the pandemic. Very pleased, in fact. Thanks to our careful research and caution, some of them have done phenomenally.
But that’s the keyword right there: Caution.
Perhaps even extreme caution.
My regular readers might very well be scratching their heads in confusion, hesitantly raising their hands. “Umm… But Brad, don’t you have speculative buys?”
That’s a very good point and a very accurate one too. There definitely are real estate investment trusts (REITs) I’ve been recommending that are labeled as such. I have good feelings about them, backed by solid research and experience.
However, these companies – such as Empire State Realty Trust (ESRT), Broadmark Realty (BRMK), and yes, Tanger (SKT) too – aren’t our standard buys for a reason. Under most other circumstances, I would be more than happy to put my strong stamp of approval on them.
But these aren’t “most other circumstances.” They’re COVID-19 circumstances, which include economic shutdowns, population shifts, and societal sentiments that aren’t easy for businesses to handle.
For most REITs, it’s been much more of a struggle. That’s what happens when businesses can’t even open. They don’t make money, or not nearly as much.
Which means they’re going to have a much harder time paying their rent.
Which means their landlords aren’t going to make money, or not nearly as much.
Quality First – Always
We’ve been overall very pleased with REIT earnings so far for Q2. But that doesn’t mean most of them aren’t somewhere behind the eight ball to some degree or another.
To be clear: REITs are still a worthwhile category to consider.COVID-19 hasn’t changed that fact.
Again, our portfolios show that very clearly. But that’s in part because we’re being so cautious.
Also to be clear, this advice doesn’t just apply to REITs. I wouldn’t recommend going wild on any stock at the moment. The situation we’re in is still too precarious.
Could we experience a second wave of COVID-19? Some experts are predicting yes.
Will we experience another round of shutdowns? Depending on the place and industry, the answer already is yes. We are.
Which means unemployment is still an intense issue. And when unemployment is an intense issue, even surviving businesses’ profits are at risk.
So are their stocks.
That’s why, in an article entitled “Cash Is King” that I wrote on March 19 – just a day after “Now Is Not the Time to Be a High-Yield REIT Investor” – I made these following points:
- “Our primary objective is to be tactical REIT investors, and that means we will not be rushing out to deploy capital just to get exposure to cheap REITs.”
- “We will be stress testing each prospective REIT in granular detail to determine whether it’s worthy of ownership.
- “Now is not the time to become a high-yield REIT investor. Always focus on nothing less than quality, quality, quality.”
- “Future investment decisions should be made on data, not emotions. The only way to navigate these periods with sanity and resilience is to have a very long-term view.”
That’s precisely what we’re doing with REITs like the ones below.
No High-Yield Investments Here
In the March 18 article, I provided the following list of 10 REITs to avoid:
- Preferred Apartment Communities (APTS)
- UMH Properties (UMH)
- Ashford Hospitality (AHT)
- Hersha Hospitality (HT)
- Whitestone REIT (WSR)
- Bluerock Residential (BRG)
- Diversified Healthcare (DHC)
- American Finance (AFIN)
- Braemar Hotels (BHR)
- PREIT (PEI).
As it turns out, eight out of those 10 have since cut or suspended their dividends. And their performance has been terrible even beyond that.
I warned folks in March that most of them were highly levered. Moreover, at the time:
“Only two have a debt and preferred to EBITDA (earnings before interest, taxes, depreciation, and amortization) ratio under (8x). This means they could face troubles faster than other REITs as growth slows and makes capital harder to access.”
As the pandemic unfolded, we knew in the early innings that dry powder would be a must. That’s the primary reason we decided to launch the Cash Is King Portfolio in mid March.
By carefully selecting the highest-quality REITs, we recognized that there would be a once in a lifetime opportunity to build wealth by “avoiding yield” and “ALWAYS focusing on nothing less than quality, quality, quality.”
Cash Is “Always” King
If, as they say, the proof is in the pudding, then here’s your desert: The Cash is King Portfolio has returned 32.7% since March 16.
Keep in mind, the portfolio now has 34 names – and only three companies in the red. The top 5 REITs include:
- Ladder Capital (LADR) – 95.3%
- Four Corners Property Trust (FCTPT) – 85.6%
- Hannon Armstrong (HASI) – 83.4%
- Essential Properties (EPRT) – 60.0%
- Arbor Realty (ABR) – 56.8%.
To generate super-charged alpha, we knew we had to focus on property sectors that were resilient. That and those whose underlying sources of rental income would last.
This strategy meant we had to keep retail exposure modest, with only 1.6% in malls and 5.8% in shopping centers. However, we’re overweight on:
- The net lease subsector (23.5%)
- Healthcare (16.3%)
- Commercial mortgage (16%)
- Industrial (8.5%).
We also have exposure in gaming (3.3%), data centers (4.1%), and office (4.7%) – which means the portfolio has more than 60% exposure to long-term leased properties.
These are solid plays offering solid returns, hardly high-flying fools.
As tempting as it may be to invest in high-yielding REITs right now, we’re sticking to the plan. That means being laser focused on quality sources of income.
Again, we’re not out of the woods yet. Fully recognizing that, we’re maintaining our defensive posturing.
We’re also keeping an even closer eye than usual on our what’s working and what’s not. This is true when it comes to both larger subsectors and specific stocks.
This, of course, means keeping our fingers on the pulse of the economy, the coronavirus situation, and so much more. It’s a lot of work, but fortunately we have the tools to do it – and do it right – at iREIT on Alpha.
This isn’t the time to play around in any way, shape, or form. And so we’re not.
We strongly suggest that you follow suit.
Author’s note: Brad Thomas is a Wall Street writer, which means he’s not always right with his predictions or recommendations. Since that also applies to his grammar, please excuse any typos you may find. Also, this article is free: Written and distributed only to assist in research while providing a forum for second-level thinking.
We Can Help You “Put REITs in Retirement”
At iREIT, we’re committed to assisting pre-retirees and retires navigate the REIT sector. As part of this commitment, we decided to provide our readers with a 10% discount to our service and we will also be included a copy of my book, The Intelligent REIT Investor. Don’t miss out on the opportunity as we are limiting the 10% discount to our first 25 new members.
Disclosure: I am/we are long ABR, BRMK, EPRT, HASI, LADR, SKT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.