I just finished up the August edition of the Forbes Real Estate Investor including four REIT portfolios. To compare performance, we also updated our REIT ETF Lab to include YTD ETF returns.
As you can see below, our portfolios have performed exceptionally well - 2 out of 4 beat the top ranking REIT ETF, UBS ETRACS Mthly Py 2xLvg Mortg REIT (NYSEARCA:MORL), validating the fact that research pays off. Keep in mind, MORL tracks mostly mortgage REITs that provide a monthly compounded two times leveraged. In other words, shares are much more volatile and should be monitored closely.
You may recall that I introduced a fifth portfolio just over six months ago referred to as the "Brand New High Alpha REIT Portfolio". In late December 2015 I explained the new investment vehicle,
Many of you have pointed out that several of my more recent articles have stepped outside of my comfort zone.
It's true, it's becoming more difficult to find the SWANs, but there are still opportunities and investors should continue to maintain caution and refrain from moving too far up the risk curve. The key, in my opinion, is to find the sweet spot, that is, a low to mid risk stock that can be purchased at a discount.
So the High Alpha portfolio (no longer brand new) was designed for the sole purpose of outperforming ALL other portfolios, indexes, and mutual funds, while also providing a sound margin of safety in terms of price paid and diversification. As I explained when I launched the portfolio,
"I would not invest that much capital on a higher-risk company but by employing diversification correctly, one can reduce risk."
I summed up by saying,
…if you feel lucky, the High Alpha REIT portfolio may be the perfect fit.
A Look Inside the High Alpha Portfolio
Let's take a look at the REITs that I suggested for the initial portfolio:
As you can see, there are only eight REITs in the portfolio, much less diversification as we have in our Durable Income Portfolio that has over 25 companies. One of the reasons that we decided to keep the basket small was to produce outsized returns.
Of course, it only takes one torpedo to sink a small ship so we had to be selective with our price points while making sure that there were catalysts to support capital appreciation. In other words, we did not seek to cherry pick the cheapest REITs, we filtered out the REITs that we considered were going to generate the most alpha in a reasonable time frame (it's been 6 months).
As you can see (on the above list), several REITs were beaten down back in December and in order to put the stocks in our basket we had to ignore the pundits. For example, Lexington Realty (NYSE:LXP) had been one of the worst performing Net Lease REITs in years, but we felt convicted that the market ultimate recognize the value. (See article HERE).
Another REIT that we stood by was Iron Mountain (NYSE:IRM). Somewhat new to REIT-dom, this hybrid storage company was not understood by many analysts and we recognized that the company would become a global consolidator and that the brand had value. That bet also paid off (see article HERE).
While most Lodging REITs have suffered, we were compelled to take a gamble on Chatham Lodging (NYSE:CLDT). Our fundamental research was telling us that the shares were drastically mis-priced and that limited service hotels would rebound the fastest. Again, we picked a winner (See article HERE).
Finally, our biggest outlier was CorEnergy (NYSE:CORR). We dug deep into the critical mission assets acknowledging that even bankruptcy would not stop the rent checks from flowing. While the market put a lid on energy-related stocks, we maintained calm under pressure knowing that we were investing in the real estate business, not the energy business, and that eventually the market would recognize the word REIT. We like doubles and triples, and of course, CORR was a quintessential home run.
Here's how the High Alpha REIT Portfolio has performed:
As you can see, all of our REIT picks were in the black and Ladder Commercial is the only REIT that did not return at least 23% YTD. Without a doubt, the High Alpha portfolio delivered on its promise - "to steer away from bad stocks and point you towards the great ones."
Ultimately, the real secret for seeking alpha is research and we're thankful that this website (Seeking Alpha) has provided a platform for investors to conduct the necessary due diligence so they can successfully manage risk while generating satisfactory returns.
Author's Note: Brad Thomas is a Wall Street writer and that means that he is not always right with his predictions or recommendations. That also applies to his grammar. Please excuse any typos, and I assure you that he will do his best to correct any errors if they are overlooked.
Finally, this article is free, and the sole purpose for writing it is to assist with research (Thomas is the editor of a newsletter, Forbes Real Estate Investor), while also providing a forum for second-level thinking. If you have not followed him, please take 5 seconds and click his name above (top of the page).
Disclaimer: This article is intended to provide information to interested parties. As I have no knowledge of individual investor circumstances, goals, and/or portfolio concentration or diversification, readers are expected to complete their own due diligence before purchasing any stocks mentioned or recommended.
Disclosure: I am/we are long O, DLR, VTR, HTA , STAG, GPT, ROIC, HCN, OHI, LXP, KIM, WPC, DOC, EXR, MYCC, TCO, SKT, UBA, STWD, CONE, BRX, CLDT, HST, APTS, FPI, CORR, NHI, CCP, CTRE, WPG, KRG, SNR, LADR, PEB, BXMT, IRM, CIO.
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.