Are You A REIT Timer Or A REIT Investor?

Includes: ESS, KIM, O, OHI, SKT, VTR
by: Brad Thomas

Yesterday I wrote an article that compared the performance of Equity REITs and Mortgage REITs over several periods in time. In hindsight, I should've left out the words "I Told You So" as these four words sparked some controversy with a few die hard Mortgage REIT Investors. When I got home last night and read over many of the comments, it became clear to me that there are definitely two schools of thought when it comes to REIT Investing: market timers and investors.

I liked what REIT expert Ralph Block had to say on that subject (in his book Investing in REITs) when he responded to the question of timing and getting in (or out) of REITs:

That question seems never to go away…I believe this is due to the persistence of yet another myth that is often encountered with respect to REITs; that they are, like many commodities, best traded in and out of, stocks that must be market-timers if one is to make any money in them.

Block insists that "although some speculators are probably capable of doing this (market timing) on occasion, the belief that REIT stocks are best traded, rather than owned, is a dangerous myth." Block went on to cite three erroneous assumptions - many of which were revealed in the comment stream in my article yesterday:

MYTH 1: REIT Stocks Must Be Bought and Sold at the Right Time If One is to Do Well

Block wrote: "REIT stocks needn't be bought and sold frequently; indeed, they are the ultimate "buy and hold" investments. Their total return performance is certainly competitive with the broader equities markets. And over any meaningful time periods, REITs total returns have averaged double digits…REITs are truly attractive investments for the patient, long-term investor."

MYTH 2: Real Estate and REIT Stock Prices, Market Conditions, Interest Rates, Capital Markets, and Investor Psychology Can Be Successfully Anticipated and Timed By Astute Investors

Block wrote: "It is probable that the most wealth has been created by investors who buy and hold stocks of excellent companies…There is little evidence that traders or market timers have been able to make money consistently in the stock market. And this is certainly true in the REIT world. To successfully time the purchase and sale of REIT stocks, one must be able to forecast accurately the direction of interest rates, real estate markets throughout the US, capital floes of both institutions and individuals, rates of inflation and unemployment, and all of the other factors that determine real estate prices. This cannot be done consistently and, for 99% of all investors, isn't worth the effort."

MYTH 3: The Objective of Buying and Selling These "Risky Little Devils" Is to Score Big Wins and to Avoid Equally Large Losses.

Block wrote: "Wrong, Wrong, Wrong. Most serious investors do not invest in REIT stocks for quick and sizable capital gains, as one might seek to do in technology, biotech, or natural resource stocks. REIT stocks are best suited to those seeking dividend income and modest price appreciation, over time, corresponding with increases in cash flows and asset values, and they have only modest correlations with other asset classes."

Finally, Block spoke the words of a SWAN (sleep well at night) investor when he wrote:

The investors who do best with REIT stocks are those who have the most patience, are willing to ride out the occasional bear market, and are not expecting to hit home runs.

Management, Management, Management

A few weeks ago, I wrote an article on Kimco Realty (NYSE:KIM) and I thought a quote from the company's co-founder and Co-Chairman was worth repeating (source earnings call):

As I've said before, I believe the REIT is nothing more than a common stock that must comply with certain tax requirements. And in evaluating common stock, the most important metric is management, management, management. And management must understand the importance of maintaining a balance sheet that always has access to capital.

As I have heard Mr. Cooper say to me in the past, "If you can't agree on management, move on to the next choice." In other words, smart and capable management is what separates a mere collection of properties from superior businesses whose stock-in-trade just happen to be real estate. The true test of quality comes when difficult property markets return - that means building sound portfolios with only modest debt.

I know that some people (especially those who invest in mortgage REITs) get agitated when I say that "mortgage REITs don't belong in retirement accounts." I know that's stereotypical and I'm sure that there are plenty of retirees today who own mortgage REITs. However, I believe that mortgage REITs are risky and there is undue pressure to "time the market."

In the article I wrote yesterday someone stated (in the comment section):

If you are unlucky and pick the wrong mortgage REIT, your retirement account might end up with a complete wipeout in share price if the management fumbles the ball. If MREITs were safe investments, you'd see many famous risk-averse "value" stock managers owning them because of the high yield.

Well said.

Some of the Best Managed REITs

As alluded above, management is essential and some of favorite (and most trusted) management teams include Realty Income (NYSE:O), Ventas, Inc. (NYSE:VTR), Tanger Factory Outlets (NYSE:SKT), Kimco Realty, Omega Healthcare Investors (NYSE:OHI), and Essex Property Trust (NYSE:ESS). I have previously written articles on these REITs and the common thread for these leading "blue chips" is their proven track record for managing risk.

So Milton Cooper, a legend in his own right, is absolutely right, "the most important metric is management, management, management." I would add one more rule since this metric has been the most essential element for Ben Graham and Warren Buffett, that is, be patient and protect your principal AT ALL COSTS. Ben Graham summed the argument as follows:

If an investor places his emphasis on timing, in the sense of forecasting , that person will end up as a speculator and with a speculator's financial results.


Note: 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.

Source: SNL Financial and Investing in REITs

Disclosure: I am long O. 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.