First, let me offer up my thanks. It’s been over a week since my introductory article appeared here, and I’ve been hearing the response was very good. I’m so grateful. Thank you.
This week I want to touch on “risk” … when investing in REITs (Real Estate Investment Trusts).
As a long-time, U.S.-based commercial real estate developer, investor, analyst and writer, I encounter risk daily and have learned much about risk during the past three decades of my career. I’m sure that what I’m about to share will greatly help any “Intelligent REIT Investor.” (Coincidentally – the title of my 2016 book, with co-author Stephanie Krewson-Kelly.)
Risk tolerance is crucial in your investing process – being realistic about your ability and readiness to stomach big swings in the value of your investments. Key: Assess the returns you expect, and time horizon you have to invest. Then protect your principal at ALL costs. Best: Research every pick, top to bottom. Focus on fundamentals, then management, then big picture, then valuation.
Investments don’t pay 8% and higher in this environment unless there’s risk. However smart the investor – the more aggressive you are, the more you must double-down on knowledge about the prospective company. Look into financial statements. Question if the dividend can be maintained. Look at management’s track record paying dividends.
As valued readers & subscribers know, I’m a conservative investor, and had my share of losses. I’ve bet big on leverage and higher-yielding investments, but those instant gratification days are over. Let the high rollers play the dangerous tables. I shall sit back with my balanced approach and intermediate-term time horizons of five to 10 years.
Valuations are meaningless without a strategy. Determine the intent of your investments, and choose wisely (even when it’s not your money). No strategy? – Sorry, no valuation. Pick and choose the best categories, the best property sectors, the best REITs of the bunch. (Consider over 150 choices in the Lab section of my Forbes Real Estate Investor newsletter.)
At the beginning of 2018, REITs sold off around 9%-10% in direct response to the 10-year U.S. Treasury rate and conservative earnings guidance from most REITs. However, REITs have since snapped back in the second quarter, delivering around 10% returns.
When I recently interviewed Evan Serton, portfolio manager at Cohen & Steers, he explained, “We’ve been talking about the divergence of performance between the equity market and REITs and we believe this is one of the most favorable levels we’ve seen.”
Here are 5 of the best blue-chips you might consider for your portfolio – from the stress-free REIT category I call SWANs, which stands for “sleep well at night.”
Simon Property Group (SPG): Mall owner well-diversified by geography, tenants, and real estate sector revenue perspectives. Properties in Florida, Texas, and California deliver over a third of Net Operating Income (NOI). Tenant pricing power, given its high-quality properties. Reasonable debt levels and a balanced debt maturity schedule. Strong balance sheet – and the only Mall REIT with A & A2 rating. Owns 21.1% of Klépierre (shopping centers in 16 European countries).YTD price (including dividends): +8.6%. Dividend pays 4.34%, and is well-covered.
Ventas, Inc. (VTR): Champion diversified healthcare REIT with deliberately constructed portfolio of over 1,200 assets. Focus on high-quality real estate, well-located in attractive markets in U.K., Canada, U.S. Portfolio includes Senior Housing, Medical Office, Life Science, Health Systems. Skilled Nursing’s just one percent of NOI. Sustainable, growing cash flow during strong economic cycles, with resilience during downturns. Best credit profile & balance sheet. YTD price (incl div): +2.4%. Strong dividend performance & growth with 5.3% current yield.