Seeking Alpha

Reliable Income REIT Portfolio Update: Macerich Continues To Be Volatile

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Includes: MAC
by: Mark Roussin
Summary

After leading our portfolio in the prior month up 13.2%, MAC continued to be volatile with the stock down 14.9% during the month of October.

Bankruptcy news from Forever 21 will put downward pressure on mall REITs, but of the ~200 store closures announced, 16 belong to MAC, eight to BPR, and one to SPG.

Looking to add healthcare exposure to the portfolio via possible names such as VTR, MPW, or DOC.

The current yield on cost is 7.84%.

In January 2019 I launched the Reliable Income REIT Portfolio, for investors to follow and align their investments with me as we near the end of this historic bull run. The idea behind the portfolio is to invest in high-quality companies that provide high-yield and reliable dividends. There are not too many worse situations than a dividend investor seeing one of their investments cut a dividend they are relying on, especially those in retirement. Thus, a well-built REIT portfolio can be trusted to provide you a safe income stream even when times are tough.

As such, in order to help those looking to add high-yield REITs to their portfolio, look no further than the Reliable Income REIT portfolio as we grow it together. As the economy, both here in the US and globally, begins to show signs of a slowdown, I am suggesting to my followers to begin to re-position some of their investments in defensive names, such as the REITs in the portfolio below. Before we get into the performance of the portfolio thus far let’s quickly remind you of the blueprint for the portfolio and give you a little more insight into why REITs deserve a spot in your portfolio. If you are new to REITs, feel free to take a look at one of my more recent articles, “Passive Income The REIT Way”, which goes into further details.

Photo Credit

Portfolio Blueprint

Let’s take a look at how our Reliable Income REIT portfolio will be constructed:

  • High-quality companies paying reliable dividends
  • Invest only in REITs
  • Target portfolio yield of 6+%
  • Include a combination of both common and preferred shares

Here are the rules we will be sticking by for this portfolio:

  • I start by making a $2,000 initial investment in each stock as it joins the portfolio.
  • Additional investments of $1,000 will be made if any initial investments remain a compelling buy.
  • Dividends will be collected until we collect $1,000 before making another investment
  • Only sell if the thesis breaks (dividend becomes unsafe, negative changes take place within the company, or strategy changes for the company).

Why Invest In REITs?

Investing in real estate is a tried and true method of successful investing that created many of today’s richest people in the world. In fact, a study done by Forbes in 2018 listed Real Estate as the industry having the third most billionaires in the world, at 220, or 10%.

What attracts people to real estate is the fact that the industry is usually a predictable business thanks in part to rental income, which makes this kind of investment highly attractive to long-term investors.

REITs tend to payer higher dividends than non-REIT stocks in part to their tax structure. REITs are required to pay out 90% of their otherwise taxable income to investors in the form of dividends in order to keep their REIT status. This structure forces REIT management teams to make the most of their capital as they do not have the luxury of investing back into their company through income as much as non-REITs do, but they gain tax advantages through their REIT status.

Being that real estate is vital to both people and businesses, the demand for properties is always there, regardless of economic conditions.

REITs can be a solid defensive play for investors in the event the economy begins to slow as well, which has been a hot topic of discussion of late. In a recession, REITs have the ability to decrease rents for tenants who may be struggling in order to keep properties filled. In return, income streams tend to remain relatively resilient and consistent over the full cycle.

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October Performance Update

After posting a flat month in August, the S&P 500 has pushed higher in back to back months. October was a key month for the market and the economy in general as many large US companies reported their much anticipated third quarter earnings.

What we have seen thus far has been rather encouraging as far more companies have beat earnings that expected going into the earnings season, which backed up some of the positive economic reports we got during the month, from higher jobs, to GDP growth and manufacturing.

At the conclusion of the month the Fed decided to once again cute rate, which is the third such rate cut this year, and some are predicting one final cut at the end of the year, which I do not see happening myself. The rate cut will further help boost the end of this bull market, but one thing in the REIT world is it make the lure for yield even more attractive. REITs have been on a strong run for much of the year, which has made finding high-quality REITs trading at a discount for our portfolio a challenge.

During the month of October, the S&P 500 gained 2% with the real estate ETF VNQ gaining 1.1%. Our portfolio on the other hand fell 2.3% during the month, largely due to the volatility we continue to see in Macerich (MAC) and the retail sector. I am still very confident in MAC as a long-term play, but we knew going in volatility would be a factor. As I am writing this now, MAC stock is up 4% trading at $29.41, so it really just comes with the territory of retail.

Spirit Realty Capital (SRC) was the strongest gainer on the month, up over 4% during October. They continue to have a stellar year as the further strengthen their portfolio for the long-term.

The invested value of the portfolio did remain the same for October, as I did not initiate any new positions, however I am looking at a couple names that I may look to buy in November. My goal is to invest $25,000 by the end of 2019, but only if opportunities present themselves. REITs as a whole right now have been on a solid run of late, and many names appear stretched right now, so it is imperative to dig deep to find value.

Here is a look at the portfolio performance through October 2019:

Chart created by author

October Highlights

  • Received $81.41 in dividend payments during the month
  • Current yield on the portfolio is 7.59%
  • Yield on Cost for the portfolio is 7.84%
  • Total gain on portfolio (with Dividends) is 6.2%
  • Total Dividends expected for 2019: $618

Portfolio Activity

The month of October was kind of a stand still month for the REIT industry and our portfolio, as MAC continued to be the wild card. In September we saw the stock rise 13.2% only to fall in 15% in October, and is now again off to a hot start in November, up roughly 7% thus far.

Macerich has seen volatile moves for much of 2019 on continued news surrounding retail bankruptcies. The latest retail bankruptcy, which is what resulted in a sell-off in MAC surrounded the news that Forever 21 is going bk.

Simon Property Group (SPG) Brookfield (BPR), and MAC are three of Forever 21’s largest landlords, and all have a home in the portfolio. Both SPG and BPR looked into possibly taking a stake in the company as part of a restructuring deal that never came to fruition. According to court papers, SPG is owed $8.1 million, BPR is owed $5.3 million, and MAC is owed $2.7 million. Forever 21 is MAC’s second largest tenant in terms of percentage of rent.

The Forever 21 bankruptcy will put added pressure on our retail related REITs, given that they are direct landlords with the company, but I am still confident in all three companies outlooks going forward. The worry comes if any nearby tenants have clauses that provide a release cause in the event Forever 21 closes. On a more positive note, only about a third of the company’s store locations are expected to close, at this time.

Based on the roughly 200 store closures announced by the company, 16 locations are Macerich locations, 8 BPR locations, and only one SPG location, which is good news for those REITs.

I did not make any new additions to the portfolio in October due to valuations looking pricey for many in the industry. However, a favorite of my Ventas, Inc. (VTR) reported Q3 earnings that beat both on top and bottom, but tightened guidance and low performance from their Senior Housing segment resulted in a sell-off of the stock. VTR stock dropped roughly 15% over the course of the last two weeks. I know supply issues have been a problem for the senior housing segment for a few years now, but construction starts have slowed, which should lead back to growth in demand in the next 12-18 months. I have owned the stock for a long-time but sold many of my shares in the past and I have been waiting for a better price. Now that the stock has fallen so hard, I am taking a closer look.

Another couple of names I am looking at to possible add to our portfolio is Physicians Realty Trust (DOC) and also Medical Properties Trust (MPW). I would like to add some healthcare exposure to the portfolio, so I have these three names currently under review.

Dividends Expected Next Month

I expect to receive $29.40 in dividends for the month of November.

  • $29 expected from SPG

Looking Ahead

It is hard to predict how we will close the remainder of the year due to the fact earnings have been solid thus far and the economic reports have been rather encouraging. These factors have me believing in a market melt-up to close the last two months of the year, but everything turns back to the China trade deal. We recently got news of a so-called “agreement” for phase I of the deal, but no details have been released and nothing has been signed, so until we see word of what that agreement is, the market will be held in balance.

Other areas of uncertainty include trade with Europe, global economic weakness, and rising tensions with Iran and possibly North Korea again, not to mention the beginning of the 2020 election season hitting stride. A lot of uncertainty to say the least.

Now that you have had a chance to digest the portfolio results to date, I look forward to hearing your thoughts on the portfolio and hearing some of your ideas for any changes to be made. Good luck to everyone and happy investing!

Note: I hope you all enjoyed the article and found it informative. As always, I look forward to reading and responding to your comments below and feel free to leave any feedback. Happy Investing!

Author’s Disclaimer: This article is intended to provide information to interested parties. I have no knowledge of your individual goals as an investor, and I ask that you complete your own due diligence before purchasing any stocks mentioned or recommended.

Disclosure: I am/we are long SRC, BPR, PEI.PC, MAC, AHT.PH, SPG, IRM. 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.