Editor’s Note: Welcome to the July REIT Sheet. This month’s focus is on July reporters of Q2 results and updated guidance from my Recommended REITs list, attached to this report. And as you’ll see, the news was favorable, despite recession risk, inflation pressures and above all elevated interest rates. My top fresh money buys are Kimco Realty (NYSE: KIM)) for the more conservative and Equity LifeStyle Properties (NYSE: ELS) for the more aggressive.
You’ll note that both REITs actually stack up as “Conservative” in terms of risk under my REIT Sheet ratings system. That makes either one a suitable portfolio addition for everyone. Thanks for reading!–RC
The S&P 500 Real Estate Investment Trusts Sector Index is up 4.4 percent for calendar year 2023, including dividends. That’s well behind the S&P 500’s 20.4 total return. But it’s still a better performance than most income generating alternatives, including benchmark iShares Select Dividend ETF’s (NYSE: DVY) with a -0.8 percent return and the Dow Jones Utility Average at -1.8 percent.
Our Recommended REITs list is now back in the black year to date with a 0.82 percent total return. That performance lags the S&P REIT Index for three main reasons.
First, I’ve been generally wary this year of the relatively high valuations for data center REITs, as well as skeptical of the thesis they’re locked-in beneficiaries of rapid adoption of artificial intelligence applications. Second, I’ve attempted to bottom fish a few REITs coming off of meaningful losses, which have instead lost more ground. And third, my focus on yield means the Recommended List is more exposed than the index to REITs considered cyclical and thereby exposed to economic weakness.
Ironically, these are the kind of tactics that have enabled The REIT Sheet to substantially outperform the S&P REIT Index since the inception of this service—39.18 percent to 3.37 percent. And this group of 19 REITs has an average yield of 4.68 percent, compared to 3.9 percent of the S&P REITs and just 1.81 percent for the iShares US Real Estate ETF (NYSE: IYR)—which has roughly the same portfolio.
Moreover, the IYR’s quarterly payout history can be accurately described as a study in volatility. Going back over the past 12 months, they’ve ranged from as little as 39.6 cents per share this past June to as much as 89.3 cents last September. That contrasts with the average 12-months distribution growth of 5.4 percent for these 19 stocks, with no dividend cuts.
Bottom line: I’m not inclined to change anything I’m doing now in this portfolio. And in fact, we are seeing a dramatic turnaround in several holdings that were at sizeable year-to-date losses as of the June REIT Sheet.
Editor’s note: Welcome to the June REIT Sheet. This month’s top fresh money buys are Kimco Realty Corp (NYSE: KIM) for the more conservative and Gaming and Leisure Properties (NSDQ: GLPI) for the more aggressive.
Please also make plans to join us on Thursday June 29 starting at 2 pm for our monthly Capitalist Times webchat. It’s your best opportunity to ask about all things REIT!–RC
The S&P 500 Real Estate Investment Trusts Sector Index is back to breakeven for calendar year 2023. That’s well behind the S&P 500’s 13.6 total return. But it is better than most income generating alternatives, including benchmark iShares Select Dividend ETF’s (NYSE: DVY) with a -5.8 percent loss and the Dow Jones Utility Average at -4.5 percent.
Most REITs posted strong operating and financial numbers in Q1. And management guidance indicates more of the same for Q2 results we’ll see starting in late July. The primary headwind for this capital intensive sector, not surprisingly, has been rising interest rates. Industrial properties owner Highwoods Properties Inc (NYSE: HIW) is the latest otherwise healthy firm to take a big hit to FFO. But with rates remaining elevated, it’s unlikely to be the last. And Redwood Trust Inc’s (NYSE: RWT) -30 percent dividend reduction demonstrates the still-building pressures on financial REITs.
Other REITs are feeling pain from weaker business conditions. Office Properties Income Trust (NYSE: OPI), for example, cut its dividend by -55 percent and Vornado Realty Trust (NYSE: VNO) eliminated its payout entirely in the last month—just the latest victims of what’s become an historic realignment in the office property market.
I’ve generally recommended avoiding the office and financial REIT sectors for some time, with the notable exceptions of life-sciences-focused Alexandria REIT (NYSE: ARE), high-quality Boston Properties (NYSE: BXP) and energy niche financial REIT Hannon Armstrong Sustainable Infrastructure Capital (NYSE: HASI).
But even the highest quality REITs would likely head lower in a general stock market selloff. And that will almost certainly be the result if the US economy slides into a recession.
To be sure, the global economy including the US has been very much a half empty/half full proposition this year. On the one hand, there’s been no full-on collapse. On the other, there are multiple signs of weakness, including in the commercial real estate sector as recently noted in comments by Federal Reserve Chairman Powell. Also worrisome: The less than stellar data coming out of China.
Despite these warning signs, the Fed has made it quite clear…
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…
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…