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written by reader Opinions about REITs

By Anonymous Questions, January 5, 2015

I appreciate your work and I am glad to tell you that I was able to find out all the ticker symbols in the teasers but always thinking that there’s something fishy going on in the teaser emails. I am impressed by your analysis as well. I have a question, what do you think about investing in REITs? Are they safe esp the ones paying dividends? What are the basic criteria to choose a good one to buy and hold? Is there a role of interest rates on the equity REITs also?
Appreciate your reply.
Thank you,

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Travis Johnson, Stock Gumshoe
January 5, 2015 9:36 pm

There’s absolutely an impact on REITs from rising interest rates — though the impact on REITS from investor fear about future rising interest rates is perhaps even greater, which I suspect is likely to give us buying opportunities in a lot of REITs and other income investments later this year, when actual rate hikes hit or surprise in some way.

REITs are generally leveraged (meaning they have some debt), so the worry is both that rising rates will increase their borrowing costs and that higher bond yields will make bonds more competitive with REITs in investors’ minds, driving up their yield demand from REITs. REITs can’t just increase their dividends without a fundamental improvement to the business to justify that increase (at least, not for long), so the only way for the dividend yield on all REITs to rise quickly is for the stock price of all REITs to drop quickly.

That said, I am not particularly worried about REITs — I don’t think rates will rise dramatically or quickly because there appears to be no frightening inflation in the offing (particularly with oil prices cut in half), and I think most of the REITs I’m interested in will be able to raise their rents roughly in tune with any inflation that comes about. Over the long term, REITs as a group of done fine during periods of rising rates or rising inflation — but that doesn’t mean there haven’t been years when they’ve done terribly.

There are hundreds of REITs out there, and I have never looked at most of them. I own an addball assortment of three at the moment — ROIC because of great management and focused strategy and low leverage; MPW because of high yield and sustainable, almost irreplaceable assets; COR because of high yield for their niche sector and dramatically better-than-competitors growth in recent years. I can’t tell you those are the best, but they’re the ones I’ve held for a while and am comfortable with — there are probably other very interesting ones that I don’t know at all. I’d be wary of too much leverage, assets of uncertain future value (class B or C office buildings or suburban apartment buildings or regional malls), or high valuations… but almost all REITs are awfully close to 52-week highs right now after a fantastic year for the sector so they’re probably all a little scary. I probably won’t be buying much in the sector in the immediate future unless something fantastic comes across my screen — or unless we get a rate hike panic that drives them all down by 10% and makes the yields too compelling to resist. It would be surprising to me if REITs performed as fantastically this year as they did last year, but I like owning well-run REITs with compelling businesses and properties because the compounding works so well and so quickly when yields are this high and steady — they aren’t immune to shocks or market moves, and they’re probably too expensive as a sector now, but I expect I’ll always have some REIT exposure. There’s something to be said for owning the boring stuff like Telecom, REITs and utilities to offer some ballast for a portfolio, particularly if you don’t like bonds, though that doesn’t mean you have to go overboard on them. Of those three traditional income sectors I am most comfortable with the REITs I own and their ability to perform well in the coming years, but I do also own some VZ… I think I might very likely buy a discounted muni bond CEF before I got too heavily into traditional utilities.

Just my two cents without having run a bunch of numbers or anything, but that’s generally where I’m coming from on REITs.

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alainh
Member
alainh
January 6, 2015 1:12 am

Thank you Travis, that was very helpful as usual.

stockinup
Irregular
January 6, 2015 10:29 pm

Second Travis on MPW. Seems very well-run, expanded to Germany now so not all eggs in US basket. Give it a look.

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Travis Johnson, Stock Gumshoe
January 6, 2015 10:52 pm
Reply to  stockinup

My one hesitation on MPW is that they didn’t telegraph a commitment to steady dividend increases by boosting their last div — it’s been the same for five quarters now. I still expect the div to rise as they absorb their acquisitions, like the big German deal, but there’s no real record of dividend hikes yet (they also do have some currency risk now, thanks to UK/Germany expansion)

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Travis Johnson, Stock Gumshoe
January 7, 2015 11:46 pm

Dropping a bit tomorrow — MPW announced a secondary offering to help pay for their German acquisition, adds about 20% to the share count. Probably the right move since they don’t want to push the envelope on getting too levered, they have spent a couple years improving the balance sheet. I don’t expect the stock to crater on this news, particularly since the yield supports the share price, but it will probably fall by at least a few percent.

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Travis Johnson, Stock Gumshoe
January 8, 2015 12:30 pm

Or not. MPW Stock is up about 2% despite the announced offering, which is a real surprise (and a pretty good indicator of the strong bullish sentiment among investors in the stock). Could still drop when the details or pricing or announced, I guess that depends on whether they can sell the shares at above $14 — we’ll see.

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Travis Johnson, Stock Gumshoe
January 8, 2015 10:53 pm

Wow, and they got it priced at $14.50, above the high for the year as of yesterday (though below today’s close). Lots of happy happy in this stock, I continue to like it, hospitals are much more appealing than medical office buildings and senior housing assets and it’s a large personal holding, but this much enthusiasm makes me want to look for cracks in the veneer.

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