The last few days have been a blur, I was in Delray Beach on Tuesday and Fort Lauderdale on Wednesday, meeting with area chapters of AAII (American Association of Individual Investors). Now I’m up in New York City, planning to meet a few REITs and tour a few properties (including Omega Healthcare Investors’ new senior housing project located on the Upper East Side, where Second Avenue meets 93rd Street).
I also finished up the December edition of the Forbes Real Estate Investor, that is jam-packed with content. With around 30 days left in the year, I was anxious to see how our various model portfolios have performed, especially after the last 60 days.
As I began assessing the performance of our my most popular REIT Index, we refer to as ‘DAVOS’, I could not help to notice the performance of these ‘flight to quality’ names. Remember that DAVOS stands for Digital Realty (DLR), American Tower (AMT), Ventas, Inc (VTR), Realty Income (O), and Simon Property Group. Take a look:
If you want to talk about the “flight to quality” just take a look at these five bellwether REITs, and boy have they clawed back some of the price erosion generated in the first quarter of the year. Heck, we have 30 days to go (in the year) and we could see the DAVOS generate 10% annual returns.
But as I warned the audience at AAII earlier in the week, the DAVOS is simply an Index, and investors need more diversification than just five of the most popular REITs. Someone in the audience asked me about investing in the Vanguard Real Estate ETF (VNQ) and I replied,
“VNQ is certainly a diversified basket of REITs, but remember, you also get the good, the bad, and the ugly. And with only a limited research team (if any) to provide a filter, if you want to buy VNQ and be done with it, you are getting that basket of the good, the bad, and in some cases, the ugly.”
But given the under-performance of VNQ year-to-date, shares have declined -2.3%, and I told the crowd that VNQ may not be a bad bet right now. When comparing REIT returns with the S&P 500, we can see that REITs are still trading at a wider discount, with room for multiple expansion. (the dark line represents All Equity REIT P/FFO and the light blue line represents P/E of the S&P 500).
I’m pleased to say that all of our model REIT portfolios have crushed the VNQ, which they should (validating fundamental analysis pays more than dividends), but VNQ – the proxy for REIT ETFs (in my opinion) – is still spooked by rate fears, and we believe it could be an opportunistic time to consider allocating capital. I told the audience at AAII, “it really boils down to risk tolerance”, or what Warren Buffett was attributed to saying,
“Wide diversification is only required when investors do not understand what they are doing.”
Let’s Look At VNQ
Vanguard manages the largest portfolio in the REIT market, Vanguard Real Estate ETF (ETF), with current assets under management of $30,522.0 M. The fund currently has 384.70 M shares outstanding and trades in the range of $80 per share. Since the fund’s inception in 2004, the fund has generated an average annual return of 8.43%.
According to Vanguards’ fund management team, the intent of VNQ is based on “an indexing investment approach designed to track the performance of the MSCI US Investable Market Real Estate 25/50 Index1.”
From an investors’ perspective, the intent of Vanguard is to provide a high level of income and moderate long-term capital appreciation, which to date has yielded a return on equity of 6.0% and an earnings growth rate of 13.7% over the past 5 years (as of 10/31/2018). The portfolio currently consists of 184 stocks with 41% of the total net assets invested in the fund’s 10 largest holdings (below):
For a more in-depth view of this fund, consider our analysis of these top VNQ holdings that drive ETF’s overall performance.
#1 REIT Holding: American Tower Corporation (AMT): 5.94% of Total Holdings
YTD Total Return: 15.44%
Stock Profile: Ranked #4 on the Boston Global 2013 Globe 100 list, an annual list of the top companies in Massachusetts. A global REIT as an independent owner, operator and developer of multitenant communications real estate. American Tower’s tallest broadcast tower property in the United States is located in Alvin, Texas.
Stock Strengths: Portfolio comprised of 170,000 communications sites, including 41,000 US properties and 129,000 international. Other major assets include 1,700 Distributed Antenna System (DAS) Networks Diversification in the portfolio based on varying geographies, property types and classes including both wireless and broadcast, and custom-build assets
Stock Cautions: valuation, we have a HOLD on AMT.
#2 REIT Holding: Simon Property Group, Inc. (SPG): 4.9% of Total Holdings
YTD Total Return: 12.9%
Stock Profile: Real estate holdings primarily malls, outlets and mixed-use retail / restaurant destination. Properties located in North America, Europe and Asia
Stock Strengths: Investments for Sustainability and reduction of environment footprint of its large-scale properties, including energy use reduction and water management. Offers comprehensive set of business services for its tenants to support business growth
Stock Cautions: Holdings primarily located in North America, limited presence in international markets. Limited diversification in real estate type with nearly all holdings in retail spaces
#3 REIT Holding: Crown Castle International Corp (CCI): 3.89% of Total Holdings
YTD Total Return: 3.99%
Stock Profile: US company based in Houston, Texas and established in 1994; largest US provider of cell towers; fiber networks and fiber technical solutions; established as a REIT in January 2014
Stock Strengths: Doubled size of the organization in the last 5 years, including addition of 1,000 employees in 1,000 to bring total size to 4,500 employees across its US offices. Consistent corporate growth strategy by acquisition of strong regional tower and fiber operators to expand its total network and service capacity across the US
Stock Cautions: No plans to grow beyond US. Dependent on leasing agreements with larger tel-com companies, including AT&T Mobility.
#4 REIT Holding: Prologis Inc (PLD): 3.50% of Total Holdings
YTD Total Return: 6.74%
Stock Profile: Global organization with $92B assets under management; including 771M sq-ft; focused in logistics real estate in high-barrier, high-growth markets
Stock Strengths: Geographic diversification operating in 19 countries. 97.5% global occupancy. Largest provider of industrial warehouse and distribution facilities in the America
Stock Cautions: Recent major sell of regional properties in CA for $43.8MM; important to watch its reinvestment plans. Highly competitive market with key players including Agility, duke Realty, GLP, and Public Storage
#5 REIT Holding: Public Storage (PSA): 2.78% of Total Holdings
YTD Total Return: 3.60%
Stock Profile: Based primarily in US with some property holdings in Europe; focused on commercial and industrial space with rentable square feet to corporate and individual tenants. Strong balance sheet rated A by S&P.
Stock Strengths: Industry leader in self-storage and ranked in S&P 500 band FT Global 500. Steady growth stock with low-to-moderate risk. Experienced management team in place.
Stock Cautions: Concerns over supply, but PSA is a vest-in-class self-storage brand.
I own shares in SPG, CCI, and VNQ.
