Talking Investors Down Off the REIT Wall of Worry

Advice to the Advisors

Woman climbing a Wall of Worry | Sheaff Brock Institutional Group on REITs

Talking Investors Down Off the REIT Wall of Worry

Is the current market uptrend simply a function of investors’ “Wall of Worry,” that significant uncertainty about stock price sustainability? But what about REITs? “Long before investors fell in love with Facebook and Amazon.com or even the hot stocks of past generations such as utilities and railroads, real estate inspired dreams of wealth,” writes John Coumarianos. “Some financial advisers and pundits helped fuel the love affair, suggesting that investors could reduce volatility and boost returns by adding real-estate investment trusts, or REITs, to portfolios in an amount exceeding their representation in broad market indexes,” he adds. But today, are these stock/real estate hybrids just more bricks in that “Wall of Worry”? 

Real Estate Investment Trusts offer both conservative and aggressive investors the potential for income and capital appreciation, in addition to providing portfolio diversification through the addition of real estate, Sheaff Brock Senior Portfolio Manager JR Humphreys explains. As advisors, though, given the newest “Wall of Worry” built on inflation and rate fears, it’s important to for us to explain to investors that REIT returns have been positive during 87% of the periods of rising interest rates between 1992 and 2017, as shown in the chart below.

REITs Positive Returns between 1992 and 2017 | Sheaff Brock Institutional Group

Significantly, while REITS trade on major exchanges like stocks and bonds, in terms of income, Real Estate Investment Trusts have outperformed both, as is shown in the chart below on comparative yields. And, while fixed income investments generally tend to be hurt by increasing interest rates, REIT rates have increased. The point: real estate owners are able to increase rents in an inflationary environment. Due to the fact that the structure of REITS require them to pay out 90% of income to investors, in periods of economic growth REITS have historically increased payouts.

Comparative Yields as of 05/24/18*

REITs Comparative Yields as of 05/24/18 | Sheaff Brock Institutional Group

In the Sheaff Brock Real Estate Income & Growth Portfolio, therefore, a “top down” approach is used, the Senior Portfolio Manager emphasizes. Macroeconomic research and sector trend analysis is done first, and only then are individual Real Estate Investment Trusts chosen for the portfolio. Examples include:

  • Retailers are being hurt by e-commerce, negatively affecting brick-and-mortar retail space, and so Sheaff Brock managers avoid shopping mall properties. At the same time, server farms (housing for the “cloud technology” that supports e-commerce) and warehouse buildings for inventory storage and fulfillment continue to grow more valuable.
  • Healthcare facilities are increasingly in demand, and REITs owning hospitals, medical centers, nursing facilities, and retirement homes are therefore weighted in the Sheaff Brock portfolio.

Based on history, Humphreys opines, REIT valuations today look especially promising in terms of the potential for both rising income and price appreciation. So, while there are certainly investor concerns making up the “Wall of Worry” right now, the effects of rising interest rates on REIT valuations needn’t be one of the bricks in that wall.

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