Stay On The REIT Track And Sleep Well At Night

by: Brad Thomas

If last week was an endurance race, I won. Let me tell you about it.

I started the busy week in Las Vegas and after two back-to-back conferences I headed to New York City. My flight was delayed for twenty minutes and I landed in Philadelphia at 10:15 pm. I was just one gate away from my next flight (that boarded at 10:15 pm) so I wasn't worried that I would miss the last leg of the trip to New York City.

I quickly ran over to the gate and the door was closed. I looked out the window and I saw that the plane was there and the luggage was being loaded. Besides me, around twenty other people wanted to board the plane but there wasn't an airline attendant in site. All of us were motioning to the plane pilots to open the door as we were anxiously wanting to board, but nobody responded (or at least cared to respond).

Then five minutes later an airline official walked over and handed out tickets for the next day's flight. My ticket read: Board: 8:15 am and arrive in LaGuardia at 9:15 am. That was a no starter for me. I had a meeting, or actually a video interview, scheduled for 9:00 am and I could not be late.

My only option was Amtrak. The good thing is that I have the Amtrak app on my iPhone so I quickly checked the schedule and decided that I would get a taxi over to the train station so that I could board the 12:15 am train to Penn Station. But wait, what about my luggage?

I walked over to the US Airways customer service manager and politely asked if she could help me locate my luggage. She rebutted, "It's impossible to get your luggage. It's locked up. You will have to get it tomorrow." I challenged her and demanded to get a full refund and she blasted back: "You get a credit for around $300 (of my total $600 ticket) and that is it. The luggage will have to be shipped to your final destination."

I kept moving and eventually arrived at Penn Station around 1:30 am. Then a taxi took me to my hotel where I "hit the hay" around 2:45 am. My alarm went off at 5:45 am and after showering and ironing my shirt from the previous day, I headed over to my scheduled interview. I arrived at 8:59 am, just in time.

Endurance is the Key

Last week was a painful reminder that patience always wins. I even thought about that later in the week when Uncle Ben (Bernanke) decided to announce (in congressional testimony) that the central bank might change policy sooner than predicted. Uncle Ben's "head fake" - suggesting less stimulus by cutting back on bond buying - sparking volatility as stocks slid and investors feared the Fed's support might recede.

In every misfortune there is always a "silver lining" as I explained in an article (Realty Income Is Simply A Great REIT And Nowhere Close To A Bubble) that I wrote on Friday. Some pundits have argued that REITs "bubbles" are forming and I felt compelled to separate "fact from fiction" in an article detailing my valuation strategy for Realty Income (NYSE:O), "The Monthly Dividend Company". As I explained:

I see no indication that a REIT bubble is forming and I see no evidence that indicates REIT dividends are a poor consolidation to capital growth. Quite clearly, REITs are outperforming all other sectors and, in fact, undervalued when you compare historical relationships with investment-grade and high-yield bonds…

I also explained:

Investors like REITs not just because they have strong current dividend yields relative to other income assets, but also because investors expect their operating earnings to grow strongly as the economy improves. Simply put, Realty Income is a perfect example of a sustainable fixed-income alternative that has become a mainstream dividend brand of excellence.

Many of my frequent readers know that I love "blue chip" REITs and perhaps that's also the reason that I have learned to be patient. I guess it has a lot to do with my upbringing and the fact that I have experienced adversity, yet I have witnessed patience paying off. You know the old adage, "Rome wasn't built in a day", and that also applies to an intelligent REIT portfolio.

I like what Warren Buffett said:

No matter how great the talent or effort, some things just take time: You can't produce a baby in one month by getting nine women pregnant.

Well I do have five kids and I suppose that also has a lot to do with my patience in life. However, I have found that it's important to exercise patience even in the most difficult times. Like last week, I knew that I needed to get to New York City and arguing with the customer service person at US Air would have been a waste of time. Instead, I stayed focused on the goal of getting to my hotel and preparing for the next day.

Also last week we saw market volatility as the Fed startled investors. The disruption of the market gave investors pause and signs that rates could begin to rise. But remember, after all, "blue chip" REITs should be long-term bets in which you are trying to get from A to B and the primary vehicle is the income mechanism we call dividend investing.

Accordingly, dividend investors must stay on the course and focus on the long-term road map, not just an intermediary trip. As the Legendary economist and famed investor Ben Graham once said,

A long-term investor is the only type of investor there is. Someone who can't hold on to stocks for more than a few months at a time is doomed to end up not as a victor but as a victim.

The average holding period for a common stock is only three years and there are good reasons that investors who own shares for a shorter duration experience worse results: namely unanticipated market movements and frictional costs (that eat into principal). It's important that REIT investors endure - stay on course and not get distracted from market movements no matter what.

Stay on Course with REIT Dividends

For most REIT Investors (and certainly retail investors) the most important value proposition in owning REIT shares is for dividend income. Why?

As I alluded to earlier, I was twenty minutes late for a flight last week that took me from Las Vegas to Philadelphia. That means that somewhere along the way, the plane moved off course for a few miles and that set off a chain reaction that eventually forced me to take a train, iron my shirt, and get just three hours of sleep. What happened to me was the amazingly powerful force called compounding.

In the book The Compound Effect by Dave Hardy the author explains:

If the nose of the plane is pointed only 1 percent off course - almost an invisible adjustment when the plane is sitting on the tarmac - it will ultimately end up 150 miles off course…

Hardy goes on to explain that is also the case in your habits:

A single poor habit, which doesn't look like much in the moment, can ultimately lead you miles off course from the direction of your goals and the life you desire.

Now the purpose for this article is simple: I want to help you form habits that will enable you to sleep well at night. The good thing about REIT investing is that habits can be formed with very little effort and the key is to maintain patience and consistency. You don't have to take huge risks. Just stay focused on your long term vision. Ben Graham said it best:

Can you really make money in them [stocks] without taking a serious risk? Yes indeed if you can find enough of them to make a diversified group, and if you don't lose patience if they fail to advance soon after you buy them. Sometimes the patience needed may appear quite considerable. [But] most of the bargain issues in our experience have not taken that long to show good profits.

Last week I learned that I must continue to exercise patience. Sometimes there will be corrections to a flight schedule or corrections to an investment portfolio; however, the most intelligent investors will be rewarded by maintaining consistency in the form of compounding. Here's an excerpt from a Motley Fool article by Morgan Housel:

Warren Buffett is a great investor, but what makes him rich is that he's been a great investor for two thirds of a century. Of his current $60 billion net worth, $59.7 billion was added after his 50th birthday, and $57 billion came after his 60th. If Buffett started saving in his 30s and retired in his 60s, you would have never heard of him. His secret is time.

Most people don't start saving in meaningful amounts until a decade or two before retirement, which severely limits the power of compounding. That's unfortunate, and there's no way to fix it retroactively. It's a good reminder of how important it is to teach young people to start saving as soon as possible.

Some REITs to Think About

In a Seeking Alpha article (by Regarded Solutions) last week a reader wrote:

Helicopter Ben - you've done it again! The frightening part is that these educated, powerful leaders of finance, need to test market sentiment at all. Yo Ben! Just some friendly advice - on your next fishing trip, don't pull the drain plug to see if the water comes in or goes out until you're back on shore. Ah well. I suppose I should be grateful. Once again the blue light specials are coming on and my add to - is underway.

As you we found out last week, most REITs (all but one) reversed fortune last week with pull backs in share price. I have summarized below a chart with 15 REITs that crossed over the 5% pull-back line.

Included in the same list, I have included the current share price, the current dividend yield, and the current P/FFO multiple.

Finally, I think the biggest lesson that I have learned over the course of my 25+ year career in real estate investing is to stay focused on a disciplined lifestyle. Indeed, dividend investing is part of the discipline strategy; however, the consistency that I'm referring to is to live within your means. What good is it to invest in REITs if you blow all of your money on other higher yielding (speculative) alternatives that fade into thin air? I can't speak for you, but I can speak from my own experience and I know what "protecting principal at all costs" means and why it's an important part of my lifestyle.

That's the endurance test that wins every time. Stay focused and live modestly and you are certain to sleep well at night. The legendary investor Ben Graham said is best:

I blamed myself not so much for my failure to protect myself against the disaster I had been predicting, as for having slipped into an extravagant way of life which I hadn't the temperament or capacity to enjoy. I quickly convinced myself that the true key to material happiness lay in a modest standard of living which could be achieved with little difficulty under almost all economic conditions.

Happy Memorial Day!


Source: SNL Financial

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.