The REIT Sheet: What REITs’ Q4 Earnings Portend for 2023 Returns
Editor’s Note: Welcome to the February 2023 issue of The REIT Sheet. This month’s top picks are Mid-America Apartment Communities (NYSE: MAA) for the more conservative, and Hannon Armstrong Sustainable Infrastructure Capital (NYSE: HASI) for the more aggressive. Please join us for this month’s live webchat on Tuesday, February 28. 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
So far in 2023, REITs are off to a flying start. The average year-to-date return for my 19 Recommended REITs listed in the table at the end of this report is 8.27 percent, as of the February 16 close. The S&P 500 Real Estate Sector Index is up 7.7 percent, narrowly ahead of the S&P 500’s 6.8 percent and substantially better than either the Dow Jones Utility Average’s -2.1 percent and the benchmark iShares Select Dividend ETF (NYSE: DVY) at 3.2 percent.
I continue to recommend a REIT investment strategy based around following three rules:
- Stick to the best in class. Always move on when the underlying business of a particular REIT weakens and never overload on a single REIT.
- Invest fresh money only when prices are below my highest recommended entry points. Also, consider taking positions in increments rather than all at once and look to load up on dips to Dream Buy levels.
- Be willing to take profits occasionally, if a REIT’s price rises 25 to 30 percent above my highest recommended entry point.
REITs’ ability to build on early 2023 gains depends on business quality. And no single factor is more important than what happens to dividends. Will management be able to build on the increases of the past couple years? Or will souring economic conditions force the even better run REITs to throttle back, and the weaker to cut as they did in 2020?
The answer to what happens to dividends obviously will depend heavily on…
The REIT Sheet Update: Navigating the REIT Selloff of 2022
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….
Issue #83: Where’s the Bottom?
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…