Urgent Warning To REIT Investors

Summary

• Volatility is back in a big way.
• Before you panic and sell, we suggest that you read this article.
• Our accumulation strategy remains intact. We continue to buy more shares of discounted REITs, week after week.
• Looking for a portfolio of ideas like this one? Members of High Yield Landlord get exclusive access to our model portfolio. Get started today »

After a strong recovery from late March until Mid-September, REITs sold off by nearly 10% over the past few days:

That's the average performance of a market-cap weighted REIT ETF (VNQ), so you can imagine that many individual REITs did even worse.

For instance, the already beaten-down mall, office, and hotel REITs dropped by 15-20% in just a few days:

• Simon Property Group (SPG): down 15%
• SL Green (SLG): down 15%
• Host Hotels (HST): down 15%
• Kite Realty (KRG): down 16%
• RLJ Lodging (RLJ): down 21%

Even the highest quality blue-chips are suffering significant volatility. Most notably, Federal Realty Trust (FRT) dropped by nearly 10% in a single day on Monday.

This is an A-rated REIT with a 52-year track record of rising dividends and resilient fundamentals for those of you who don't know FRT. It has historically served as a "Safe-Haven" during times of volatility. So it sure isn't reassuring to see it drop like a rock. Many of you may ask yourself what's happening.

We wish we had the right answer for you, but the reality is that there isn't much news. We are still going through a pandemic. Covid cases are still on the rise. And the vaccine still isn't ready for mass distribution. Nothing that we wouldn't know already. REITs can go up and down by large amounts without any underlying reasons in the short run. The next question is, how should we approach this recent sell-off?

It may be very tempting to sell now to avoid any further pain. This is particularly true when everyone else appears to be panicking. How often have you seen the following comments on Seeking Alpha?

REITs cannot collect rents. Sell!

REITs are going much lower. Sell!

REITs will go bankrupt. Sell!

And that's what we want to warn you about in today's article: don't let panicked people and emotions dictate you what to think.

We think that selling now would be a very poor investment decision. In fact, we are doing the opposite at High Yield Landlord. We keep buying more and more week after week.

Before you panic and sell your holdings, we urge you to read this article. Below we lay out all the main reasons why now is not a good time to sell your REIT holdings.

"Time in" The Market, And Not "Timing" The Market

We wish we could predict what will happen in the near term. Then we could sell ahead of a collapse and buy back right before the recovery.

If that was possible, we would all become billionaires and earn far superior returns than the average of the market.

But as you already know: timing the market is not possible. You may succeed a few times, but eventually, you will fail, and it will cost you all your previous successes and more.

A research study by JPMorgan (JPM) has shown that individual investors who attempt to time the market have earned 2.6% per year over the past 20 years.

If that's not discouraging enough, consider that passive investors who simply put their money in a REIT Index Fund earned over 3x higher returns over this time period.

They took fewer risks, and yet, they still enjoyed much higher returns. REIT investors who stayed in the market earned more than 5x their money over this time period, despite suffering intense volatility in 2000, 2008, and 2009.

All studies tell you to stay invested. The worst thing you could do is sell during a bear market. It would be best if you held on to positions... which brings us to the next topic:

Hodl Your REITs, Just as You Hodl Your Bitcoin

If there is one thing to take away from the cryptocurrency, it is the idea behind "Hodl" - a slang word to describe the process of holding through volatility - no matter what.

“Hodl your Bitcoin (BTC-USD)!”

source

Cryptos and REITs are two different things, but the concept applies to both.

REITs have always fully recovered, and therefore, holding them through crises has always been the right approach. REITs have a 50+ year history of going through troubles and still bouncing back.

If you had sold your REITs, you would have always left a lot of money on the table. Holding and buying more has always paid off handsomely.

This time is very unlikely to be different. Fundamentals remain surprisingly resilient despite all the negative headlines:

A Few REITs Are Struggling. Most Are Doing Just Fine.

The fear-mongering media has painted a very gloomy picture of REITs, harming their market sentiment.

Investors today believe that REITs cannot collect rents. That they are overleveraged. And that the advancement of new technologies will lead to the demise of the REIT sector.

In reality, it is only a few sub-sectors of the REIT market that are struggling: mall, office, and hospitality.

All the other REIT property sectors are doing just fine: apartment communities, manufactured housing, single-family homes, student housing, hospitals, medical office buildings, warehouses, distribution centers, cell towers, data centers, farmland, timberland, prisons, net leases, ground leases, self-storage, specialty infrastructure...

Most REITs continue to enjoy near 100% rent collection rates. Balance sheets are the strongest they have ever been. And they are not being replaced by technology. In fact, some of these sectors even benefit from it. As an example, the demand for warehouses is booming due to the rapid growth of Amazon (AMZN) like companies and the return of on-shoring:

source

Yet, most REITs have all sold off because of all the negative headlines. So when you hear that REITs are in great danger, remember that it is only a few property sectors that are struggling. The others are doing just fine.

As it was true in every past crisis, the market appears to have overreacted:

Buy Low. Sell High. And Not the Other Way Around.

The world's most successful investors would tell you to Buy From The Pessimist, Sell To the Greedy.

In other words, buy low and sell high. Right now, there is a lot of pessimism in the REIT sector, and valuations are at a near 10-year low.

Ignoring the expensive large caps, most REITs are valued at just 6-8x FFO:

Based on P/NAV, they are valued at 20-40% discounts to NAVs:

And most importantly, with interest rates now at 0%, the yield spreads are the second highest they have ever been:

If you believe that this is a severe, but temporary crisis, which we think it is, then this is a once-in-a-decade opportunity to buy REITs at low prices ahead of a recovery. When prices are so low, the last thing you want to do is to sell.

Right now, many individual REITs are priced at up 50% discounts to fair value and offer the potential to double or even triple in the recovery. We recently highlighted two of them in a separate article: Empire State Realty (ESRT) and Urstadt Biddle Properties (UBA).

Sounds too good to be true? Consider that REITs nearly tripled in the following two years after the last crisis:

That's the average performance of the entire sector. Today, many REITs are just as cheap or even cheaper than they were back then.

Therefore, now is not the time to sell. It is time to buy.

How We Deal With Sell-Offs at High Yield Landlord

At High Yield Landlord, we do three things differently from most other investors:

• Buy in many phases: Instead of attempting to time the market, we make small weekly additions to our Portfolio to take advantage of the volatility. We believe that discipline and consistency will allow us to outperform in the long run.
• 5-10 Horizon: Every investment that we make is expected to be held for at least 5 years. This long-term mindset allows us to identify opportunities that others are missing. Some things are hated and undervalued today, but most likely won't be in a few years from now.
• Due Diligence: Finally, we invest in one REIT out of 10 on average. We put a lot of work in our selection, and this allows us to remain confident and average down during times of volatility:

Finally, we always encourage our members to think like landlords. This means that we invest in REITs as if we were buying rental properties. We focus on income. Ignore the volatility. And wait patiently for long-term appreciation.

This psychological preparation helps us to remain calm, even as the rest of the market is panicking.

You Have Been Warned:

I understand that it can be frustrating to see red color in your brokerage account. REITs are down substantially over the past days, but this is not a good reason to sell.

Opposite of that, we believe that now is a great time to load up on REITs while they are heavily discounted. Anything can happen in the short run, but we are confident that our holdings will be worth much more in the long run, and this is really what should matter to you.

Disclosure: I am/we are long SPG; UBA; ESRT;. 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.