REIT Model Portfolio October Update

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Includes: AMT, CCI, IYR, MAA, NSA, TRNO
by: Brad Kenagy

Summary

This is my overview and update for my model REIT portfolio for October.

So far, my model portfolio has slightly underperformed its benchmark.

5 new positions were added to the model portfolio during October.

This is my October update for my model REIT portfolio that I started at the end of May. For those who this is their first time viewing my model portfolio, you can find my portfolio selection process here. I did not write updates for this model portfolio in August or September because there were no new positions added to the model portfolio for those months. Then here comes October and the market correction, which provided the opportunity to add to existing model portfolio positions and add many new positions to the model portfolio.

Performance & Yield

Since my model portfolio is not fully invested, the performance obviously lags my benchmark, which is the iShares U.S. Real Estate ETF (IYR). However, with the market decline, the performance of IYR fell enough to get near to where my model portfolio was at by the end of the October. Since inception, my model portfolio has returned -1.06% and IYR has returned 2.73% and my model portfolio selections are yielding 3.70% compared to IYR, which is yielding 3.90%. Since my focus is on high quality REITs, many of my REIT selections have low yields because of their popularity. Over time, as I continue building the model portfolio, I expect that the model portfolio yield will get to the same level as IYR or higher.

*Data in table and chart as of October 31st

IYR Return

Model REIT Portfolio Return

2.73%

-1.06%

IYR Yield

Model REIT Portfolio Yield

3.90%

3.70%

Data from Sharewise

Previous Positions Added To

During the month of October, additional shares of Apple Hospitality (APLE), Douglas Emmett (DEI) and Empire State Realty (ESRT) were added to the model portfolio. In addition, multiple times during the month of October more shares of Weyerhaeuser (WY) and Potlatch (PCH) were added to the model portfolio.

New Portfolio Selections

During the month of October, five new positions were added to the model portfolio. The new additions to the model portfolio were American Tower (AMT), Crown Castle (CCI), Mid-American Apartment Communities (MAA), National Storage Affiliates (NSA) and Terreno Realty (TRNO).

American Tower

American Tower was added to the model portfolio because it is the largest global player in the cell-tower space. The largest driver for growth is the continued explosion of the amount of data because of the increase in the number of mobile-connected devices. The first chart from an American Tower investor presentation shows that just in the United States, mobile-connected devices are expected to double by 2023. Because American Tower is globally focused, I included the second chart also from the American Tower investor presentation that shows data usage estimated for various countries around the world. As you can see, data usage will continue to spike and will be a driver for American Tower going forward because of the launch of 5G in developed markets and the continued growth in mobile-connected devices around the globe.

American Tower investor presentation

American Tower investor presentation

Crown Castle

Crown Castle was added to the model portfolio because it is a large player in the cell-tower business focusing on the United States. Crown Castle benefits from the same secular trends that also benefit American Tower; however, Crown Castle is United States-focused and has made investments in small-cell technology. Small-cell technology helps improve coverage in high traffic areas and as is shown in the image below, can be placed on streetlights, utility poles or slim line poles.

Crown Castle investor relations

Mid-American Apartment Communities

Mid-American was added to the model portfolio because it is a large player in the apartment market in the United States. The thing that makes Mid-American different from other apartment companies like Equity Residential (EQR) and Avalon Bay (AVB) is Mid-American does not focus exclusively on the west coast and east coast. The first chart shows that Mid-American stays true to its name with its focus on the middle of the United States. The second chart from Equity Residential shows the coastal focus they have and the Avalon Bay map looks the same. It is interesting that Mid-American makes a point on the slide I provided to show they have no exposure to California and they point out their focus on states with favorable taxes and a business friendly environment. The coastal states are democratic strongholds that tend to have higher tax rates, more regulations, etc, and thus make them less appealing for Mid-American.

Mid-American investor presentation

Equity Residential investor update

National Storage Affiliates

National Storage was added to the model portfolio because of their focus on large metropolitan areas and their size, which could make them an acquisition target in the future. National Storage is a growth focused REIT who has been acquiring many storage companies. The image below, with focus on the left chart, shows the significant increase in the number of properties that National Storage has added in the last few years. When you look at the self-storage space, Public Storage (PSA), Extra Space (EXR), CubeSmart (CUBE) and Life Storage (LSI) all have a market cap above that of National Storage, which brings up the possibility that National Storage could be a target sometime in the future given the fragmentation in the market.

National Storage investor relations

Terreno Realty

Terreno Realty was added to the model portfolio because the majority of the industrial properties they own are warehouse and distribution facilities located in high volume markets. The first chart below shows they are exclusively focused on these six coastal markets, which are hubs for massive amounts of volume. There are other companies that obviously also focus on these same markets because of the high volumes, but Terreno appears to have a quality position of being in these high concentration areas, which is shown in the second chart below.

Terreno Realty investor presentation

Terreno Realty investor presentation

Current Portfolio Holdings

The table below shows all the current model portfolio holdings along with the performance of each. Weyerhaeuser and Potlatch have been the big losers because of the decline in timber prices and Potlatch paid a large special dividend, so the share price fell in association with that, but the dividend was added to the cash balance for the model portfolio. Since the end of the month:

*Table data as of October 31st

Sharewise

Closing Thoughts

In closing, so far the performance of my model REIT portfolio has lagged the performance of its benchmark. My model portfolio still has a long way to go until it is fully invested and I am in no rush to get to that point as I am methodically building the model portfolio. As my process has shown, when REITs were going up in August & September there were no attractively priced REITs to pick up. When there was a market correction, five new positions were added to the model portfolio. This shows the part of my process focusing on performance and oversold technical metrics is helpful at picking potential spots to add to a position.

Disclaimer

Disclosure: I am/we are long WY.

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.