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There Might Not Be Another Chance Like This For Years - Revisited

May 01, 2021 9:00 AM ETMPW, O, WPC143 Comments


  • We believe that we are still in the early innings of a multi-year repricing that will push REITs to new all-time highs.
  • This repricing is the result of yield compression which we expect to occur in the aftermath of this crisis.
  • We present our two favorite property sectors for a yield compressing environment and highlight three of our favorite individual opportunities.
  • Looking for more investing ideas like this one? Get them exclusively at High Yield Landlord. Learn More »

Yellow opportunity ahead road sign with sky
Photo by Lurin/iStock via Getty Images

In a recent article, I explain that REITs are still in the early stages of a multi-year repricing that will push REITs to new historic highs.

Put shortly, there are a lot of investors who

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This article was written by

Jussi Askola, CFA profile picture

Jussi Askola is the President of Leonberg Capital, a value-oriented investment boutique that consults hedge funds, family offices, and private equity firms on REIT investing. He has authored award-winning academic papers on REIT investing, has passed all three CFA exams, and has built relationships with many top REIT executives.

He is the leader of the investing group High Yield Landlord, where he shares his real-money REIT portfolio and transactions in real-time. Features of the group include: three portfolios (core, retirement, international), buy/sell alerts, and a chat room with direct access to Jussi and his team of analysts to ask questions. Learn more.

Analyst’s Disclosure: I am/we are long O; MPW; WPC. 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.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (143)

RandomWalkie profile picture
Thanks Jussi, always great to read your analysis. I believe many of us agree with your 5-10 year view but we all know Fed is likely to increase interest rates in 2022 or so. When that happens, the whole market including all REITs will dip. Therefore, why do we say there might not be another chance?
Jussi Askola, CFA profile picture
@RandomWalkie Note that REITs have historically outperformed during times of rising interest rates and generated high total returns. More here: seekingalpha.com/...
@Jussi Askola

I have been following you and taking recommendations since May last year. Admittedly, I don't understand the "numbers" and what they mean but I know you make good recommendations and in a general sense, may people generate a lot of weath in the RE sector and since I do understand, in some part, that investing in quality REITs like you suggest are a better alternative to the traditional 80/20 equities/bonds that many financial advisors recommend.

I guess I still don't understand the basic concept of how "yields" at 4-6% will drop to 2-3% going forward. Why is that going to happen?

1. Are yields different than dividends? If so, what's the difference?

2. How does this compression you mention unlock upside potential in REITs?

I'm looking for a fundamental understanding of these questions, not specifically to the aforementioned stock recommendations.

Do you have a free open source reference that can further explain this or if you will, write an article just on these fundamentals in REIT investing, please?
Well the crystal ball isn't working. 10 days later and prices are down, down, and down. Not escaping the inflation coming.
Jussi Askola, CFA profile picture
@charmion This is not a 10 day prediction. It is a 5-10 year prediction. Anything can happen in the short run. The entire market is selling off right now.
ftsfredave profile picture
Jussi, I enjoy your articles and advice. I'd like them more if you'd venture a guess on how long you think it will be before realizing ~40% price appreciations on O, MPW, and WPC. Thank you. David
Jussi Askola, CFA profile picture
@ftsfredave Thank you for your question. Note that we discuss such topics in more detail at High Yield Landlord: seekingalpha.com/...
InvestRite#1 profile picture
Jussi, when you say "We think that REITs that currently offer 4%-6% dividend yields will soon reprice at closer to 2%-3% dividend yields. Investors who buy today still have the chance to get high yields and position themselves for significant upside as REITs get bid up and yields compress." are you meaning
that YOC is the key factor? If so I've always had trouble buying that. I mean once a yield is lowered, that's all one gets, unless I'm missing something
Jussi Askola, CFA profile picture
@InvestRite#1 No, that is not the point here. The point is simply that the entire financial market is repricing at lower yields, which all else held equal, results in higher share prices (=appreciation). This has already happened for most of the financial market, but REITs are still behind.
Jussi Askola, CFA profile picture

Thanks for reading!

We just published our monthly portfolio review for members of High Yield Landlord. You can read a portion of it for free here: seekingalpha.com/...

Have a great day!

soleprop profile picture
If I had read only the title, I would have thought it was going to be an article about shorting the stock markets. That's probably the best play to be watching out for -- it's not a matter of "if", it's a matter of "when".

REITs are almost in a class by themselves and can represent a decent place to preserve some of the capital in one's investing accounts and hopefully stay ahead of inflation. That said, in the coming crypto explosion even normal value plays like REITs may be babies that get thrown out with the bathwater.

I disagree that the vacancy risk is small and that long-term leases are a significant factor in risk reduction. When a tenant goes bankrupt, the lease goes with it. There's going to be a lot of that going on. We see some of that tendency being offset by conversion of properties to different uses. Amazon, for example, is using some former malls as warehouse and distribution centers -- it can represent a cheaper way to expand their footprint than purpose-built buildings. Amazon isn't likely to go bankrupt anytime soon, but the mall property owner won't receive anywhere near the rent revenue that was formerly provided by a collection of smaller tenants. Many of the buildings can be gutted and much of the parking used for expansion at a lower cost than buying the land and purpose building a similar facility. The electrical power is already in place and there is a large area of rooftop just begging for solar panels to power the new fleet of delivery trucks. Once the trucks are driverless, the hub-and-spoke delivery model will cut their costs radically.

That said, for every conversion as described above there will be dozens of malls that are surplus. Maybe some can be converted to warehouses for the expanding homeless population. Some converted to special medical care facilities for epidemic care (COVID is going to be with us like the yearly influenza as far into the future as can be seen). A lot of that care will be robotic.

US manufacturing is dead. The US doesn't graduate scientists and engineers anymore (we steal some from places like India, along with a lot of MDs). The US graduates "touchy-feely" humanities folks who are only temporarily needed to flip burgers, sell life insurance, or sell foreign-made products. It's temporary because automation will wipe all of that non-producing activity off the plate.

I bought some ARR today. I'm always late to the party it seems, but this one looked to me like it still has a long way to go. The dividend is outrageous, but I see it likely to fall as it is far too high to be warranted by cash flow. But even if it is chopped in half, it will still be well ahead of present inflation and likely to keep abreast of the coming inflation rate. The day it gets chopped in half will be a bad one for the underlying, but the pendulum will swing too far, presenting an opportunity to add more. It always does.

My take is that the US is over-built and real estate prices are in a bubble (the boomers are dying off and the millennials can't afford what their properties are supposedly worth -- something's got to give!). The worst aspect is that the existing commercial structures are ill-suited to what is going to be needed. But hey, it's land! They ain't making any more of it.
Jussi Askola, CFA profile picture
@soleprop You sound like someone who sold during the pandemic, missed the recovery, and now complain about it and encourage people to go short on public forums.

Most leases remained intact even in 2020. These net lease REITs like NNN, WPC, O, etc. just reported results and guided for record-high cash flow and dividends in 2021. That's even higher than pre-pandemic. As I have said before, the fears are overblown and the resilience of net leases are underestimated by people who have never invested in these assets in the past.

Cheer up. This is not the end of the world. I get it that large parts of the stock market is today expensive, but that's not the case of REITs. Don't go short. Many made that mistake over the past year.
@soleprop With inflation seeming inevitable to me I'm bullish on the RE sector's prospects. The gorilla in the room however is the proposal to screw with the stepped up basis which while equitable with other forms of investment would be devastating to all forms of RE. That's risk #1 at the moment.

We can argue why it's somehow fair for RE to have a unique deferral of taxes while I have to pay them on my stock gains but giving the devil his due there's a real issue of fairness involved.
New to reits (and investments in general) and this has peaked my interest in terms of passive income. What is your stance on investing in reits in a taxable portfolio as opposed to something like a roth?
Jussi Askola, CFA profile picture
@iamtony You can hold them in a tax-deferred account, and even if you don't they are very tax-efficient vehicles. REITs only distribute a portion of their cash flow, generally 50-70% in dividends. Only that is taxable. Then a portion of that is generally return of capital. Not taxable. Finally, you also get a 20% deduction. Remember that REITs also have a greater growth/capital appreciation component to their returns which isn't tax until you sell.
@Jussi Askola Thanks Jussi! And in what environment would you want to sell these? I'm looking at them as long term holds
As a former developer of Triple net leased properties I know a lot of pitfalls that have not been mentioned. For example, you can pass the property expenses and even property taxes to your tenants. Only problem is the municipalities get greedy and jack up the property taxes. Sooner or later this puts a squeeze on your tenants to afford these increases. This translates to lower rent.

Another thing is that not all tenants are the same. Plenty of franchised operations fail and the franchiser doesn’t alway take them over. Their are plenty of businesses that are tough like Beauty salons, gyms, and even grocery chains like Wynn Dixie that went bankrupt. We are also looking at an “Amazon” environment that people shop from home. This is a much tougher business then
Is implied in this article.
Jussi Askola, CFA profile picture
@Swimbrett That is precisely why you need to invest in net lease REITs instead of net lease properties. Net lease REITs own 1000s of properties, which diversify these individual risks.

These net lease REITs like NNN, WPC, O, etc. just reported results and guided for record-high cash flow and dividends in 2021. That's even higher than pre-pandemic. In other words, the crisis only caused a one-year setback. Occupancy rates are in the 99-99% range.
Wright on with Mpw and Wpc, yields are consistent and look great for the future.
Jussi Askola, CFA profile picture
@Michael Tremper Thanks for sharing your thoughts
Isn't this ordinary income? Also ordinary income if sold at a profit?
@bn_k - O and MPW are ordinary dividend. WPC is qualified dividend, I don't know why.
If sold at a profit, it's capital gain.
Seth Yar profile picture
A part of most REIT dividends are not taxed annually because depreciation expense on real estate improvements are considered a return of capital. When you sell your REIT shares, you have to recapture this depreciation and it is treated as ordinary income, not capital gains.
Retired Securities Attorney profile picture
Nice job, Jussi. Complete and very readable. Thank you.
PeterPunk profile picture
Do you recommend any REIT ETFs?
Jussi Askola, CFA profile picture
@PeterPunk Generally speaking, I prefer to invest in individual REITs. ETFs own everything: the good, the bad, and the ugly. Most of them are also market-cap weighted, which means that most of the capital goes into the mega-cap expensive REITs. With that said, if I invested in an ETF, I would go with VNQ, the lowest cost option.

Feel free to join us for a 2-week free trial to access all our Top Picks: seekingalpha.com/...

Have a great day!
Great article @Jussi Askola
Lately I have been adding some SRET due to its strong chance of recovery back to its 5 years MA. What do you think of SRET in general?
Jussi Askola, CFA profile picture
@ozhabesh Thank you for your interest. I personally wouldn't invest in it. It is full of garbage that will underperform in the long run. Feel free to join us for a 2-week free trial to access all our Top Picks: seekingalpha.com/...

Have a great day!
@Jussi Askola appreciate the response. When I look at the 10 years graph, it just seems like it will definetely make it back to 12-13 area + the dividents. Ill reconsider my case.
Jussi Askola, CFA profile picture
@ozhabesh It sure could. But the average yield of the REIT sector is 2x lower than what SREIT offers. The higher yield is achieved by investing in highly leveraged, poorly managed, speculative REITs. There is no selection since it is an ETF.
There are some inflationary signals that are difficult to ignore - the Personal Consumption Expenditure Index being up, what is going on with home pricing and labor shortages.... What is your opinion on hospitality/hotel REITs in an inflationary environment? My ignorant reading of it is that it will take the market a year or perhaps more to recover from COVID but with inflation and the market repricing quickly it seems interesting.
Jussi Askola, CFA profile picture
@LBusby I believe that hotel REITs are today fairly valued or even overvalued. There are better opportunities out there.
Greetings from Finland! Nice article. Im long and with heavy weight in all of these REITs. Also long with STAG. Any tought about STAG?
Jussi Askola, CFA profile picture
@ZRA1000 Moi :)

We are bullish on STAG and own a position in our Core Portfolio at High Yield Landlord: seekingalpha.com/...

jrpspamm profile picture
REITs seem a great asset class, but at what % of total investments do you limit your REITs? I assume you do not put all your eggs into REITs. What do you balance that with?
Jussi Askola, CFA profile picture
@jrpspamm Personally, I invest 50% of my net worth into the REITs recommended at High Yield Landlord: seekingalpha.com/...

How much you decide to invest should depend on your personal tolerance for risk, return objectives, etc.
Whee!! I own all three! (somewhat thanks to your prior recommendations). They are all keepers, thanks.
arewolfe profile picture
How does a decrease from 4.2% to 3% dividend represent an upside? I can see the 40% difference, but I don't follow. Thanks in advance.
EliteAvocado profile picture
@arewolfe Because the share price will increase and therefore the yield percentage will be less. The upside is in share value, not the dividend.
Jussi Askola, CFA profile picture
@arewolfe Please see the response from EliteAvocado.
arewolfe profile picture
@EliteAvocado Why would the share price increase based on a diminishing dividend? Thanks for tolerating my novice REIT questions.
"Medical Properties Trust is the only REIT that specializes in hospital properties"

who owns the remaining hospitals in the US ? ie is there another way to invest in hospital properties ?
Jussi Askola, CFA profile picture
@gutcheck It is mostly the operators of the hospitals. MPW is the only pure-play hospital landlord in the US.
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