Editor’s Note: Welcome to your regular January 2023 issue of The REIT Sheet. This month’s top picks are Kimco Realty Corp (NYSE: KIM) for the more conservative, and Artis REIT (TSX: AX-U, OTC: ARESF) for the more aggressive. Please join us for this month’s live webchat on Tuesday, January 31. We start at 2 pm and continue so long as there are questions left in the queue. It’s your best opportunity to ask about all things REITs.
Thanks for reading!–RC
January 2022 was a decidedly sour month for REITs, as the S&P 500 Real Estate Sector Index skidded -8.5 percent. And that proved to be an ill portent, as the sector finished the full year under water by roughly -26 percent.
So far in 2023, REITs are off to a decidedly better start, with the index closing this week with a positive total return of 6.21 percent. That’s solidly ahead of the S&P 500’s 3.47 percent. And it tops other high yielding stock sectors as well, including the Dow Jones Utility Average’s -0.7 percent and the benchmark iShares Select Dividend ETF (NYSE: DVY) at 1.8 percent.
Can REITs sustain that outperformance in a year where interest rates and recession risk continue to rise? The answer is likely to depend heavily on what happens to dividends. Will the sector be able to build on the growth we saw in 2022? Or will worsening macro conditions force management to retrench, shelving increases and in some cases cutting payouts?
Last month, I highlighted our databank…
Editor’s Note: Welcome to the end 2022/beginning 2023 issue of The REIT Sheet. This month’s top picks are Mid-America Apartment Communities (NYSE: MAA) for the more conservative, and Farmland Partners Inc (NYSE: FPI) for the more aggressive. Farmland is a new addition to our recommended list. The farming landlord replaces Medical Properties Trust (NYSE: MPW), which we exited per the December 30 TRS update.
This issue of TRS contains the updated version of our entire REIT databank, which currently tracks 86 companies. It’s still in build mode and I continue to welcome reader suggestions for inclusion. Thanks for reading and here’s to a year of opportunity! –RC
The S&P 500 Real Estate Sector Index finished 2022 underwater by -26 percent including dividends paid. That was basically the same performance as the popular real estate investment trust ETF, iShares US Real Estate ETF (NYSE: IYR). Our REIT Sheet Recommended List came in at loss of -13.22 percent.
The REIT Index lagged the S&P 500’s -18 percent return. That’s a stark reversal from 2021, when the sector’s 45.6 percent return handily beat the S&P’s 28.5 percent. And that year in turn was also a turnabout, as in 2020 the S&P gained better than 18 percent versus a more than -2 percent loss for the REITs.
Following that pattern, REITs could be expected to outperform the market averages in 2023. Unfortunately, as I pointed out in the December 30 update, the sector faces the same economic headwinds it did in 2022. In fact, they could get a good deal worse before they subside, as the Federal Reserve continues to push benchmark interest rates higher to rein in what last year was the highest inflation in 40 years.
Through the first half of 2022, for example, most REITs were able to keep a lid on debt interest costs by minimizing refinancing activity, selling properties and throttling back on CAPEX. But as my REIT databank comments indicate, that changed with a vengeance for some in Q3, particularly as the cost of carrying variable rate debt surged. And with large debt maturities approaching for many, rising rates will take a bigger bite out of the Q4 results we’ll start to see later this month—and especially guidance for 2023
China now accounts for more than half of global demand for commodities. That makes correctly assessing the direction and the magnitude of Chinese economic growth the biggest piece of the investing puzzle for metals.
Up until the latter part of October, China’s outsized role in global demand had been mostly a negative for metals prices and mining stocks in 2022. But peering into 2023, the country is likely to be the only major economy engaged in meaningful easing of fiscal and monetary policy, while much of the world is tightening.
That’s a very big positive for metals investing. In fact, the expectation here is that the Chinese economy will be in a position to support global growth, domestically picking up speed in the second half of the year as overall consumption accelerates.
One reason we see this as a high probability bet is for the past two years locked in Chinese households have not been spending much. As a result, household bank balances have increased by more than 40 percent since 2020. In terms of dollars, this increase is around US$4.8 trillion—or more than the entire GDP of the United Kingdom.
Editor’s Note: Welcome to the November Edition of The REIT Sheet. This month’s top fresh money buys are Boston Properties (NYSE: BXP) for conservative investors, and National Retail Properties (NYSE: NNN) for the more aggressive. I’ve also restored Hannon Armstrong Sustainable Infrastructure Capital (NYSE: HASI) to a buy at 35 or less. Medical Properties Trust (NYSE: MPW) remains a hold. Thanks for reading!–RC
A month ago, the S&P 500 Real Estate Sector Index was underwater by -31.4 percent year- to-date, including dividends paid. Seven of my Recommended list REITs traded below Dream Buy prices: Alexandria REIT (NYSE: ARE), Artis REIT (TSX: AX-U, OTC: ARESF), Canadian Apartment (TSX: CAR-U, OTC: CDPYF), Equity Lifestyle Properties (NYSE: ELS), RioCan REIT (TSX: REI-U, OTC: RIOCF) and SmartCentres (TSX: SRU-U, OTC: CWYUF).
What a difference a month can make! Only Artis still sells for less than its Dream Buy price, mainly because the Canadian dollar has remained weak. And most of our favored REITs have rallied hard, several including Alexandria REIT, Prologis Inc (NYSE: PLD) and Simon Property Group (NYSE: SPG) quite robustly.
The S&P REIT sector index is still well underwater for the year, as are many of our holdings. But for the past month at least, REITs have actually outperformed a somewhat resurgent S&P 500.
Federal Reserve Chairman Jerome Powell commented yesterday that he didn’t want to crash the economy through rate hikes. That was enough to set off a sharp rally in the stock market including REITs, as investors took it to mean the central bank would begin tapering off on increases possibly as soon as December.
But the main reason for REITs’ strength over the past month has been on the ground level. Mainly, solid Q3 operating results combined with steady guidance for the rest of the year and beyond have calmed investor fears that the sector could be headed for another 2020 magnitude collapse.
With the Fed driving up interest rates at a breakneck pace to combat a 40-year high in inflation, its no wonder recession risk has been on investors’ minds this year. And memories of the sector crash of 2020 are still quite fresh.
Pandemic pain was felt unevenly across the REIT universe. Industrial REITs actually benefitted from an explosion of e-commerce. But shut down shopping malls triggered a swell of unpaid rents and tenant bankruptcies. Hotel REITs saw traffic evaporate in a matter of weeks. And even historically resilient residential and storage REITs were hit by a flood of vacancies and unpaid rents, coupled with government moratoriums on evictions.
The result was a REIT meltdown that hit nearly every sector and took until mid-2021 to fully recover from. And it included a wave of deep dividend cuts and several bankruptcies.
Count me skeptical that the Fed has tamed inflation, yesterday’s big stock market rally notwithstanding…
Editor’s Note: Welcome to the October Edition of The REIT Sheet. This month’s top picks are W.P. Carey Inc (NYSE: WPC) for conservative investors, and Gaming and Leisure Properties Inc (NSDQ: GLPI) for the more aggressive. I’m rating Hannon Armstrong (NYSE: HASI) and Medical Properties Trust (NYSE: MPW) “holds” ahead of their Q3 results and guidance updates.
Please join us for the Capitalist Times monthly webchat Thursday, October 27 starting at 2 pm. It’s your opportunity to ask about anything to do with REITs, including what I haven’t covered here. My partner at CT Elliott Gue and I will also be presenting at the Orlando MoneyShow on Monday, October 31. I hope to see you at these special events. –RC
Real estate investment trusts took another hit last month, largely following the downdraft in overall stock and bond markets. As of the October 19 close, the S&P 500 Real Estate Sector Index is underwater by -31.4 percent year to date, including dividends paid.
If that number holds or worsens over the next 10 weeks or so, it would be the worst annual performance by property stocks since 2008. And while there are half a dozen names in our REIT Sheet coverage universe still in the black, more than twice as many are sitting on year-to-date losses of close to 50 percent.
The bad news is there’s a high probability REIT share prices will sink further this year. And for a good many, the slide may continue well into 2023.
Count me a skeptic of any economic model that forecasts a “100 percent” probability of anything. But Bloomberg Intelligence’s recently issued recession prediction isn’t without reason.
Since the start of Q3, for example, there have been some pretty clear signs that activity is slowing across our coverage universe of 85 leading REITs. So far, they’re mostly showing up in sharply curtailed capital raising activity, with implications for slower growth next year.
In late September, data center REIT leader Digital Realty (NYSE: DLR) issued $550 million of bonds maturing January 15, 2028 with a coupon interest rate of 5.55 percent. Since then, their price has slipped to a discount to par value, with a yield to maturity of 6.1 percent.
A couple weeks later, office property REIT Highwoods Properties (NYSE: HIW) inked a two-year unsecured bank loan at a yield to maturity of about 5 percent—with the potential for up to a percentage point reduction in the rate if certain “sustainability” criteria are met.
Editor’s Note: Welcome to the September Edition of The REIT Sheet. This month’s top picks are Boston Properties Inc (NYSE: BXP) for the more conservative, and Prologis Inc (NYSE: PLD) for the more aggressive. Both are new additions to our recommended list.
Also, please join us for our monthly Capitalist Times live webchat on Tuesday, September 27 starting at 2 pm Eastern. It’s your opportunity to ask about anything to do with REITs, including what I haven’t covered here. — R.C.
Shares of best in class real estate investment trusts are back on the bargain counter. As of last week’s close, the S&P 500 Real Estate Sector Index is underwater by nearly 26 percent year to date including dividends paid.
That’s actually a good deal worse than the S&P 500 itself, which is down roughly 21.5 percent. In fact, the biggest REIT ETF—iShares US Real Estate ETF (NYSE: IYR)—now has a total return of -1.8 percent since The REIT Sheet launched at the beginning of 2020.
My handpicked list of recommendations is still up a little over 34 percent since inception. But they’ve also taken a big hit this year. And the average yield of the now 20 REITs has risen above 5.2 percent. That’s the highest level to date, and it includes half a dozen paying out well more than 6 percent.
The question is this: Do these lower prices mean signal a buying opportunity for investors in an increasingly battered market? Or are they a sign of worse to come for property, which is clearly perceived by investors as being in the cross hairs of inflation, recession and rising interest rate risks?
The case against REITs and the stock market as a whole now lies largely with the US Federal Reserve. The US central bank—as well as several of its key counterparts around the world—appears to have made a calculated decision that “going Volcker” is its best course to tame the highest inflation in 40 years. That is, following the example of the legendary Fed Chairman of the late 1970s/early 80s– increasing benchmark interest rates at an unprecedented pace and accepting whatever damage there is to the economy and investment markets…
Editor’s Note: Welcome to the June Edition of The REIT Sheet, with current buy/hold/sell advice for our updated databank of 88 individual REITs. Don’t forget our monthly
webchat is June 29 starting at 2 pm. It’s your opportunity to ask about any and all REITs, including any I’m not covering here. Thanks for reading!
So far this year, the benchmark iShares US Real Estate ETF (NYSE: IYR) is underwater by nearly -21 percent. That’s an even worse performance than the largest, most efficient ETFs set up to track the S&P 500, which the popular investment media now proclaims is in a bear market.
In my view, every real bear market in stocks has two salient features. First, losses destroy enough wealth to hit the broad economy. And second, the losses are long lasting enough to cause a meaningful change in investor behavior.
The Financial Crisis and subsequent so-called “Great Recession” of 2007-09 certainly qualified on both counts. So did the bear market that preceded it, which lasted from early 2000 through early 2003.
What we saw in spring 2020 most certainly did not. Mainly, though broad sectors of the economy struggled in the wake of steps taken to control the pandemic, stocks’ steep losses of late February and early March were entirely erased less than two months later. And the only lesson investors “learned” from the experience was to resolutely
What we’ve seen so far this year doesn’t really qualify either, though it certainly could in coming months…
Editor’s Note: Welcome to the May Edition of The REIT Sheet. Thanks for reading, and don’t forget our monthly webchat on Wednesday May 25. It’s your opportunity to ask about any and all REITs, including any I’m not covering here. –RC
REITs’ 2022 selloff has picked up speed since our April update. Thus far in 2022, the iShares US Real Estate ETF (NYSE: IYR) is now underwater by -17.3 percent, or -17 percent including dividends paid.
Here’s how the 10 largest holdings in the iShares ETF have fared year-to-date, along with their most recent weightings:
- American Tower Corp (NYSE: AMT)—8.421%, down -14.25%
- Prologis Inc (NYSE: PLD)—6.706%, down -27.97%
- Crown Castle Int’l (NYSE: CCI)—5.961%, down -10.57%
- Equinix Inc (NSDQ: EQIX)—4.442%, down -20.82%
- Public Storage (NYSE: PSA)—3.614%, down -14.01%
- Realty Income Corp (NYSE: O)—2.912%, down -4.72%
- Welltower Inc (NYSE: WELL)—2.903%, up 3.69%
- Digital Realty (NYSE: DLR)—2.816%, down -23.82%
- Simon Property Group (NYSE: SPG)—2.707%, down -31.52%
- SBA Communications (NSDQ: SBAC)—2.69%, down -13.75%
This ETF is structured to mirror the performance of the Dow Jones’ U.S. Real Estate Capped Index. And as is generally the case with proprietary indexes, components and weightings shift throughout the year. That’s why the ETF’s actual performance is several percentage points worse than the year-to-date average of its top 10 holdings.
The clear takeaway from results so far is the worst damage in 2022 has been in the larger REITs included in popular sector indexes and therefore ETFs. That’s been the rule for selloffs in this heavily segmented, indexed and ETF’d stock market. And it’s why we’ve been so cautious this year up to now on entry points for the biggest REITs on our recommended list after 2021’s big run-up.
Blue chip apartment REIT AvalonBay Communities (NYSE: AVB), for example, reached a high point of over $259 last month. Last week, shares actually dropped below our highest recommended entry point of $200.
Almost all REITs this year have to some extent been victims of the same narrative: That rising recession risk in the US will derail the past few quarters’ surge in property rents, occupancy and collection rates. And the selling has extended to the less picked over REITs on our recommended list posted at the end of this report, which though faring better than the iShares ETF are nonetheless underwater this year by about -12 percent….
Before I delve into this week’s issue here’s a quick update for the model portfolio and some new recommendations:
Actions to Take:
- Gold miner Newmont Corp. (NYSE: NEM) triggered our recommended stop on close level on April 25th, so as per our methodology in this service, you should be out of the stock as of the morning of April 26th. Based on the volume-weighted average price on the morning of the 26th of $73.05, this sale represents a gain of 19.93% or $735.80 since recommendation on January 24th.
- The iShares Russell 2000 Value ETF (NYSE: IWN) triggered our recommended stop on close on May 9th, leading to its sale on the 10th at a volume-weighted average price of $145.26. The loss since recommendation here is 12.71% or $1,601.92.
- As per my late April flash alert, you should also have booked a 52.10% gain on half your position in the Tuttle Capital Short Innovation ETF ($1,560.20) and you should have added 200 units to the recommended position in the ProShares Ultra Short QQQ ETF (NYSE: QID) at a price of about $22.81.
- Our remaining open recommended positions in both inverse ETFs –QID and SARK referenced above – are now showing sizable gains of 83.4% and 31.1% respectively since initial recommendations in early December of 2021 however, as I explain in this issue, I see the potential for more short-term downside, and I am not recommending you take additional profits on either ETF at this time. Please be prepared, however, as I will likely issue a brief flash alert when the time comes to make an adjustment and book gains.
- I am recommending you add 25 shares to our recommended position in frozen potato company Lamb Weston (NYSE: LW) and 25 shares to your position in Molson Coors (NYSE: TAP) at prices under $70 and $60 respectively, bringing these positions to 100 and 125 shares respectively.
- I am recommending you buy 100 units of the iShares 7 – 10 Year Treasury Bond ETF (NYSE: IEF) at any price under $105.
The S&P 500 is now down about 18% from its all-time high set on January 3rd while the Nasdaq has plummeted just under 30% from its own peak on November 19th and more than 27% year-to-date…
The Information Age has transformed the impossible to the possible and even likely. But even the most sophisticated 3-D printer can’t create out of thin air the metals that are essential to the transforming 21st century global economy. And therein lies the long-term bull case for key resources from iron ore and copper to lithium, nickel and battery materials.
We don’t expect the Chinese economy to deliver the “around 5.5 percent” economic growth rate that the country’s leadership had hoped for this year. In fact, the country’s GDP growth should be at least a percentage point lower, even if there are no further negative surprises.
When it comes to metals demand, nothing is as vital as the health of the Chinese economy. And this year, the country’s lockdowns to control a suddenly acute wave of COVID-19—especially stepped up restrictions imposed in Shanghai and neighboring cities—are already taking their toll on both the domestic economy and industrial production.
At this point, it looks like Chinese authorities will stick with the “Zero Covid” strategy for the foreseeable future. The main reason is it’s become clear that Shanghai’s attempt to deal with the outbreak in a more “surgical” way did not produce the desired results.
To put what’s happening in perspective for metals demand, Shanghai is a city of 25 million people and China’s financial center with the busiest port in the world. The cities adjacent to it are the world’s most important manufacturing hubs for a wide range of vital components for a massive range of products including all things electronic.
Editors’ Note: 2021 was a great year to be invested in stocks. But can investors expect a repeat of last year’s gains with inflation on the rise, the coronavirus raging again and the US Federal Reserve apparently ready to start tightening again? Here in brief is our roundtable discussion of how we editors of Capitalist Times see the big picture this year. We hope you enjoy it! Also, please make plans to join us at this month’s live web chat on Thursday January 27, starting at 2 pm.
Q: 2021 was a big year for stocks. Can 2022 possibly measure up?
Roger Conrad (RC): I think it’s unlikely the S&P 500 will approach the 28.5 percent total return we saw in 2021. It’s true that valuations are not a great tool for market timing. But the higher they are, the more difficult it is for actual developments to live up to investors’ expectations, which are extremely high right now.
- Currencies around the world are being debased as central banks increase money supply to stimulate economies. This is a strong positive for hard assets.
- There’s a lack of visibility in the Chinese policy making process. China is the world’s largest market by far for most metals, making sector investing a tricky game short-term.
- The Chinese economy has slowed from its immediate post-pandemic recovery pace. That makes demand for steel, iron ore, copper, and aluminum highly uncertain for at least the next three months.
- Global Electrification is driving demand for a wide range of metals, particularly those used in batteries. That has strongly bullish implications for copper, nickel, aluminum, lithium and steel as the main drivers of global decarbonization.
I’m going to start this issue with a simple-yet-powerful chart. In fact, as I’ll show you in just a moment, this one chart has “explained” about two-thirds of stock market returns since January 1949. You could say it called the “Lost Decade” for US equities from 2000-10, a decade when the S&P 500 fell 9.75% even including dividends. And it flashed a warning sign for stocks back in the late 1960s, ahead of the stagflation of the 70s and negative inflation-adjusted real returns from equities. Here’s what really has me worried – this indicator currently projects stock market returns of just over 2.4% annualized for the coming decade.
Don’t forget, that’s in nominal terms – with headline inflation running +4.3% in the month of August 2021, the highest in 30 years, I believe your actual, real returns from owning stocks could be negative over the next 7 to 10 years.
Strategy Update for High Yields and Reliable Growth
Sticking to Strategy in a Market Meriting A Bit More Caution
The S&P 500 is up more than 18% year-to-date and the largest correction so far this year has measured just 4.2% from closing high to closing low. However, the broader market isn’t as healthy as it might seem since market breadth has been deteriorating since early June and the rally is increasingly powered by a handful of large-cap technology and growth stocks.
Historically, rallies on deteriorating market breadth such as we’ve seen this summer end with at least a modest market correction.
Narrow market breadth also reflects a rotation out of value stocks and small caps, which led the market higher for the first 5 months of the year. Since value shares and small caps are considered more economy-sensitive and cyclical, this rotation signals the market is in the throes of a classic growth scare this summer.
Mining is an expensive business: The annual tab for producing the copper, iron ore, nickel, rare earths and other vital resources needed to run the world is estimated at $1 trillion. It’s also a highly capital and energy intensive industry that leaves significant environmental and climate footprints.
That makes cost control a critical element of mining companies’ success. And finding new ways to improve operating efficiency and diminish environmental impact is a central objective of management teams around the globe, especially for the large global mining companies that increasingly dominate this business with scale.
Deep Dive Investing members know the view here: These companies have dramatically improved environmental practices in recent years. And as the hunt for the growing pile of dollars invested on environmental, social and governance criteria heats up, they’ll continue the push, which will remain the main way of extracting resources from the earth in order to fuel economic growth, green or otherwise.
If you haven’t hit the road yet this summer, take my word for it. After a year of pandemic-related lockdowns, Americans are on the move again with a vengeance. And so are the real estate investment trusts that own the restaurants, resorts, hotels, casinos, campgrounds and other properties we’re now frequenting is growing numbers.
Americans on the move are also turning the spotlight on infrastructure, from roads and bridges to giant wireless towers, data centers and renewable energy generation facilities. And increasingly REITs are major players there as well, sharing the wealth with investors as generous, safe and rising dividends.
At first blush, the May Employment Situation report released by the US Bureau of Labor Statistics (BLS) on Friday looks weak with total non-farm payrolls up +559,000 compared to the +675,000 the consensus had expected before the report.
However, while that’s a big miss in absolute terms – 116,000 fewer jobs than expected – it pales in comparison to the magnitude of the April shortfall when the US created more than 700,000 fewer jobs than economists had expected.
Moreover, as I’ve explained in prior issues, the BLS Employment Report is prone to large subsequent revisions, so it’s quite possible this month’s “miss” could be revised away over the next few months as more complete data comes available.
In addition, last year’s coronavirus-related business disruptions are wreaking havoc with BLS’ seasonal data adjustments. As I noted, BLS reported that US non-farm payrolls grew by 559,000 in May; however, the raw data shows the US actually created +973,000 jobs last month.
President Biden’s infrastructure plan has been revealed, and now Congress will have its say. As we noted here almost a year ago, an infrastructure plan has been on everyone’s agenda, with the main disagreement being how it would be financed. The secondary issue was what part of the infrastructure was to be improved or build anew.
As expected, the Biden plan is to be financed from higher corporate and other taxes. The plan has also modernized and expanded the definition of infrastructure as was understood until now. The chart below shows the breakdown of how the money is to be spent.