Lately, the REIT market has been surging to the upside and it’s attracting a lot of new interest from non-REIT investors:

ChartData by YCharts

We think that now is the best time in 10 years to invest in REITs because:

  1. Valuations are low.
  2. Interest have hit 0%.
  3. We are gradually reopening the world.
  4. Rent collection rates are already surging.
  5. Suspended dividends are slowly returning.

It’s a very bullish set up for REIT investors going forward, especially those who know how to sort out of the worthwhile from the wobbly.

We expect some REITs to double or even triple in the recovery and we are buying as many shares as we can at the moment. Yet, a lot of investors are completely missing out on this opportunity because they suffer investing biases that keep them away from REITs.

Before you blindly say no to REITs, we suggest that you take a short moment to read this article, especially if you are a new REIT investor. It will help you correct some REIT investing biases and set you up for stronger results.

Bias #1: “REITs are Just Retail and Office”

The first misconception that we see almost on a daily basis in comment sections is that REITs will do poorly going forward because Amazon (AMZN) is killing retail properties and remote working technologies (e.g Zoom (NASDAQ:ZM)) are killing office buildings.

The issue with this comment is that only a small portion of REITs invest in mall and office buildings. REITs invest today in every imaginable property sector and most of them are not greatly affected by the crisis:

  • Industrial
  • Apartment
  • Net Lease
  • Hospital
  • Medical Office
  • Manufactured Housing
  • Single Family Rental
  • Student Housing
  • Self Storage
  • Timberland
  • Farmland
  • Prison
  • Billboard
  • Data Centers
  • Infrastructure
  • Ground Lease

Which commercial property market sub-sectors will shine in 2019? - iproperty.com.my

source

So yes, some REITs are struggling right now, but most of them aren’t. Yet, the entire REIT sector gets a bad rep because of retail and office REITs.

Don’t fall for this bias. Most property sectors are much more resilient than the market appears to understand. They enjoy long lease terms that protect landlords during times of crisis and rent collection rates are near-100%.

Bias #2: Technology Will Kill Real Estate

We also often hear that technology is changing the world and that there will be a “new normal” with less need for real estate going forward. It’s built on the narrative that “this time is different” and therefore, you shouldn’t invest in real estate, despite the low prices.

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We strongly disagree. You shouldn’t ignore technology and new innovations, but it does not hinder the prospects of most property sectors.

We always will need high-quality, well-located real estate from the day we are born in a hospital (owned by Medical Properties Trust (NYSE:MPW)) to the day we move to a retirement community (owned by Ventas (NYSE:VTR)).

In between, we also will need to rent an apartment (owned by Equity Residential (NYSE:EQR)). Get a hair cut at a barber shop (owned by Taubman (NYSE:TCO)). Eat food at a Chipotle restaurant (owned by Agree (NYSE:ADC)). Spend a day at an amusement park (owned by EPR (NYSE:EPR)). Travel the world and sleep at hotels (owned by Host Hotels (NYSE:HST)).

Even for an Amazon order to take place, you need a distribution center (owned by STAG Industrial (NYSE:STAG)) and an Internet connection, which also requires real estate.

You get my point. REITs own properties that touch all facets of our lives. These properties are absolutely essential to the well being of our society and they cannot all be replaced by technology.

Changes occur, but good real estate can always adapt. Bought at a large discount to fair value, real estate always has been a strong investment. With interest rates recently hitting 0%, we believe that this is particularly true in today’s yield-starved world (more on this in our upcoming Market Update).

Bias #3: Malls Are Dead

How often have you heard that malls are dead? The fear-mongering media likes this story because it gets a lot of clicks.

Yet, the reality is that high-quality, class A malls posted new record high sales per square foot and rents in 2019.

That’s despite Amazon. By now, everyone knows how to use Amazon and e-commerce is a massive market. Yet, high-quality malls are more productive than ever before.

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MAC mall sales and rents show that Class A malls are not dying:

source 1; source 2

Why is that?

High-quality malls are located in some of the best locations in the world. Moreover, successful malls have adapted to the growth of e-commerce by diversifying uses. Finally, as hard as it may seem to believe, most goods are better bought in store than online. I’m a millennial and I much rather buy clothes inside a malls so that I can actually see them, touch them, and try them on.

So when you hear that “malls are dead,” remember that malls were hitting new record high numbers in 2019. Malls will suffer a lot due to the COVID-19 crisis, but high-quality malls will adapt and thrive again.

We think that a select few mall REITs offer great upside potential because they are priced for dead. However, if you don’t buy into the recovery of high quality malls, you can skip in this sector and invest in other REITs. Mall REITs are just ~5% of the REIT market.

Bias #4: REITs Are Overleveraged Time Bombs

Many non-REIT investors also appear to believe that REITs are highly leveraged, and therefore, they are at risk of bankruptcy.

It’s actually the opposite. Leverage is very low and bankruptcies are very rare in the REIT sector. We only count one major equity REIT bankruptcy in the past 30 years.

REIT balance sheets are today the strongest they have. Leverage is very low with the average LTV at below 40%, maturities are well staggered, and liquidity is very significant.

source

As such, REITs are much more defensive than your average real estate investor who commonly takes on much more leverage. As some of these overleveraged owners become distressed sellers, REITs will be there to pick up the pieces at attractive prices.

Bias #5: REITs Can’t Collect Rents

Finally, another big lie is that REITs cannot collect rents. In reality, nearly all REITs enjoy close to ~100% rent collection rates.

Retail is struggling, but that’s only one property sector:

source

To this table, you could add many other property sectors that also are close to 100% (data centers, cell towers, farmland, timberland, manufactured housing, single family housing,…).

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Only retail currently has low collection rates. Yet, all REITs get a bad rep because of them.

Bottom Line: Be Greedy When Others are Fearful

There’s a lot of fear mongering at the moment and it leads to costly investing bias.

However, if you put emotions aside and look at the facts only, this is a historic opportunity to invest in REITs at exceptionally low valuations.

We are now in a 0% interest rate world, and in this context, even a 4%-5% yield is very attractive. In fact, REITs currently offer the largest yield spread in over 10 years.

If you are a selective, there are a number of blue-chip REITs with safe dividends and steady growth that yield more than 6% at the moment. As they reprice at more reasonable yield spreads in the future, they offer significant upside potential.

Most individual investors do so poorly because they think that the best time to invest is when everything is sunshine and rainbows (tech*). In reality, the best opportunities emerge when there is blood in the street and it looks like the world is coming to an end (REITs*).

Today, there exists historic buying opportunities in the REIT market and we are buying more, week after week, and think that you should too.

What Are We Buying?

We are sharing all our Top Ideas with the 2,000 members of High Yield Landlord. And you can get access to all of them for free with our 2-week free trial! We are the #1 ranked real estate investment service on Seeking Alpha with over 2,000 members on board and a perfect 5 star rating!

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Disclosure: I am/we are long MPW; STAG; EPR. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.



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