At the start of 2013, I revealed the entirety of my investment portfolio and did the same at the start of the second quarter. In each article, I claimed that the portfolio was well-positioned for outperformance, so let's see how I did. We will begin by reviewing the portfolio's performance so far and continue with a detailed description of my entire portfolio going forward. Ideally, this article will provide insight on an approach to outperformance that can be adapted to meet the needs of any investor.
Performance thus far in 2013
REITs had a rough second quarter with most putting up losses. However, careful selection of fundamentally strong REITs with cheap valuations afforded substantially better performance. As of 6/30/2013 my portfolio appreciated as follows:
- Gain of 26.172% year to date
- Gain of 7.267% in 2Q
As my portfolio consists almost entirely of REITs, the most accurate basis for comparison would be the RMS which is the US REIT total return index. The RMS returned 6.36% YTD and -1.58% in the second quarter. Based on this, my portfolio delivered 1,981 basis points of alpha YTD and 885 bps of alpha in the second quarter.
Strong fundamentals and cheap valuations were the primary drivers of success and are the basis of selection for the current portfolio.
While anyone is welcome to copy my portfolio, I strongly believe that investors should perform their own research. It should also be known that this portfolio may only be suitable for risk tolerant investors who can adjust their holdings with reasonable frequency.
Holdings and weights are derived almost exclusively from a bottom-up approach. The further a stock's market price is below what I believe to be its stabilized intrinsic price, the greater size position I will take. At the start of the 3rd quarter (7/1/13), my entire portfolio was as follows.
Market Price 6/28/13
Price/ 2014 FFO
American Realty Capital Properties (ARCP)
Triple Net Lease
Associated Estates (AEC)
Brandywine Realty Trust (BDN)
CorEnergy Infrastructure Trust (CORR)
Gladstone Commercial (GOOD)
Triple Net Lease
Lexington Realty Trust (LXP)
Triple Net Lease
MannKind Corp (MNKD)
Medical Properties Trust (MPW)
NorthStar Realty Finance (NRF)
NorthStar Realty Finance Preferred B (NRF-B)
Omega Healthcare (OHI)
Sotherly Hotels (SOHO)
Driving forces of outperformance
As suggested by the title of this article, I have designed this portfolio to outperform. Clearly I cannot predict the future nor guarantee success, but there are numerous fundamental reasons to believe that these holdings are well positioned to outperform.
- Extremely low aggregate P/FFO: While US equity REITs average a trading multiple in excess of 15X, the weighted average P/FFO of the portfolio is only 9.95. This translates to an implied cap rate of 10.05% which is more than 50% higher than that of the broader REIT market. Superior fundamental earnings relative to cost afford the next catalyst.
- High dividend yield: While the broader REIT market averages a 3.91% dividend, this portfolio pays out 5.99%. It should additionally be noted that several of the companies appear likely to raise their dividends in the near term.
- Bottom-up selection: Asset allocation requirements are a drain on performance. If certain stocks have superior fundamentals, these should be prioritized without regard to nominal diversification. Each stock was individually selected for its own ability to outperform. While the portfolio is fairly diversified with exposure to a broad range of properties, that goal is secondary to picking the best stocks. In other words, the portfolio is diversified among a pool of the best individual stocks rather than the stocks being selected from a perfectly diversified pool.
- Superior management: After following each stock closely and developing a familiarity with the decision making process of each management team, it is clear which ones have the tools to succeed. The management teams of the companies in this portfolio have demonstrated superior alignment with shareholders and solid decision making
I have talked a lot about how I selected each stock individually for outperformance. When presented as a broad statement, it means almost nothing as deeper analysis is required to show why these stocks should outperform. While I encourage investors to conduct said deeper analysis independently, I will share my analysis.
Unfortunately, providing the requisite depth of analysis on each position would be far too lengthy to include here, so I will provide the reference. I have written full focus articles on every single one of the major holdings of my portfolio. These contain the requisite in depth analysis and are available in my article archives. While only a couple of the articles are publicly accessible, full access is granted with a Seeking Alpha Pro subscription.
Disclaimer: The presented portfolio represents my personal portfolio and is not necessarily reflective of the holdings of 2nd Market Capital. This article is for informational purposes only. It is not a recommendation to buy or sell any security and is strictly the opinion of the writer.