Reits touchscreen is shown by businesswoman.
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In a recent research paper, Thomas Bohjalian, Head of U.S. Real Estate and Senior Portfolio Manager at Cohen & Steers explains said that “REITs have proven resilient amid escalating trade tensions between the U.S. and China, even delivering a slight gain in the U.S.”
He went on to explain several key reasons to own shares in U.S. REITs including (1) the hometown advantage or what Bohjalian refers to as “domestic businesses” that “earn the majority of their revenues from properties within their home market, limiting the direct impact from tariffs”. He cited the fact that “among the 11 sectors in the S&P 500, real estate is tied with health care for the second-lowest international exposure”.
Bohjalian also wrote that “REITs tend to generate relative steady, growing cash flows from owning and operating high-quality real estate, and they typically pay out nearly all their net income via tax-advantaged dividends”.
We have certainly seen that flight-to-quality trade in the REIT sector as shares have become increasingly bullish as a result of the predictability of dividends, especially during a “time of increased economic uncertainty”.
Another quality indicator that Bohjalian referenced is strong fundamentals, citing “a strong job market and rising wages” that “are supporting demand for many types of real estate”. While there have been pockets of oversupply in certain markets, he wrote that “new construction has remained generally in balance with demand and most REITs have been disciplined with their use of leverage”.
Bohjalian also referenced “record dry powder in private real estate funds” that “have been raising capital faster than they can put it to work, creating a bottleneck of capital”. He wrote that “private equity funds are currently sitting on more than $300 billion in dry powder targeting real estate” and he believes “this could provide support to REIT valuations”.
Speaking of “dry powder”, what does an ordinary investor do during periods of uncertainty? While the big private equity players like Blackstone (BX) and Brookfield Asset Management (BAM) have billions in cash, how can Average Joe or Average Jane tap into the high-yielding asset class?
A Few Ideas
First off, on July 1stBlackstone Group (BX) converts to a C-Corporation, thereby removing restrictions for a long-only market. This means the private equity form is eliminating the cumbersome K-1, allowing shareholders to receive 1099s instead. This also makes the stock eligible for inclusion on CRSP, MSCI, and Total Market indices.
But Blackstone is not a REIT and this means that earnings and dividends aren’t as predictable, so maybe investing in private equity is a bit risky.
Another idea then is to invest in a portfolio of high-quality A-rated REITs.
Source: iREIT
One of the things we like about A-rated REITs is that they enjoy a low cost of capital advantage. By utilizing their healthy balance sheet and their premium credit, they can acquire and redevelop cheaper than most of their peers. In addition, most of them enjoy an equity advantage as shares have accelerated lately.
Most of the A-rated REITs have become pricey, but I call attention to the last two REITs, Simon Property Group (SPG) and Federal Realty (FRT) that remain attractive based upon their current valuation. While we wouldn’t encourage you to go out and buy all of these A-rated REITs today, these two companies provide excellent purchases for an intelligent REIT investor.
Source: iREIT
Brad Thomas is the co-author of The Intelligent REIT Investor and he owns shares in SPG and FRT.