Your Cash Is Trash: 2 REITs That Should Soar With Inflation
Summary
- It is very tempting to move into cash during times of market volatility.
- But timing the market isn't possible, inflation is at a 40-year high, and "cash is trash."
- We highlight 2 "top picks" for times of high volatility and inflation.
- Looking for a portfolio of ideas like this one? Members of High Yield Landlord get exclusive access to our model portfolio. Learn More »
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With volatility on the rise, I increasingly have seen many investors turn to cash to protect themselves. I see it in the comment sections of various Seeking Alpha articles.
People are selling stocks (SPY) to get out of the market, hoping to get back on board at lower prices after the market crashes.
I don't blame them for fearing a potential market crash. After all, we are living in a world of extreme uncertainty with a huge war in Europe, a raging pandemic, rising interest rates, and the threat of a recession in the near term.
Despite that, I think that it is a big mistake to move your portfolio into cash and I am here to encourage you to remain invested. There are two main reasons for this.
Reason #1: timing the market is impossible
It has been proven time and time again by various studies that it is impossible to predict how the market will perform in the short run, and attempting to get in and out of the market causes a lot more losses than gains over time.
Consider the following study by J.P Morgan (JPM) that shows that individual investors have historically earned only 2.5% per year on average, and that's mainly because of their failed attempts to time the market. If they had just held on to a passive REIT ETF (VNQ), they would have earned closer to 12% with no effort:
Timing the market isn't possible (J.P Morgan)
You may occasionally get lucky by going into cash, but more often than not, you will miss dividend payments and upside, causing you to underperform in the long run.
Reason #2: inflation is out of control
While you wait on the sidelines, your cash is also gradually losing its value because of inflation. We have printed a huge amount of currency into existence since the beginning of the pandemic and the printing isn't over:

That's why we say that cash is trash. Not only are you foregoing the gains of the market, but you are also exposing yourself to significant and predictable losses due to inflation.
Today, inflation is at a 40-year high, with the latest reported number at 8.3%, and many claim that the real number is closer to 15%. If you go into cash, that's how fast it is losing value in today's environment.
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For these two reasons, I wouldn't move a significant portion of my portfolio into cash. Many investors see it as a way to protect themselves, but I actually see it as an incredibly risky move. Cash is trash...
Instead, I am moving a larger portion of my portfolio into defensive real asset investments that are recession-resistant and inflation-protected.
You would expect such investments to trade at high valuations in today's world, but contrary to what you might think, there are some great opportunities in the REIT market right now.
Many of them are still barely getting back to pre-Covid levels, despite significant property price appreciation. In other words, the share prices of many REITs have not kept up with the appreciation of their underlying real estate. As a result, they now trade at discounts to fair value.
Moreover, rents are today growing at the fastest pace in decades. Few assets offer better inflation protection than real estate and REITs are providing today.
Currently, I have about 50% of my net worth invested in REITs, but only hold a little cash due to the reasons that I mentioned previously. While I cannot predict how REITs will perform in the short run, I sleep better at night knowing that my capital is invested in productive and inflation-protected assets. I am confident that this approach will result in materially better returns in the long run.
In what follows, I highlight two REITs that I have been buying lately.
Armada Hoffler Properties, Inc. (AHH)
Today, most high-quality apartment REITs with real estate development capabilities are priced at historically rich valuations. This is well justified because they are enjoying rapid rental growth, providing inflation protection, and also profiting enormously from new development projects since the spreads between development yields and cap rates are exceptionally large right now.
Apartment community (Armada Hoffler Properties)
AHH is the exception. It is priced at just 13.5x FFO, a 20% discount to NAV, and a near-5% dividend yield. Just for context, most apartment REITs are today priced at closer to 25-30x FFO, so there is a huge spread.
It is priced so cheaply because it is not only invested in apartment communities. Historically, diversified REITs have suffered low market sentiment due to their lack of specialization, which has most often resulted in poorer performance.
We agree that most diversified REITs deserve to trade at lower valuations, but AHH shouldn't.
First off, its apartment allocation is now already about 50% of its total assets.
Secondly, while AHH may not be specialized by property type, it is specialized by region, focusing exclusively on the mid-Atlantic / Southeast region.
Finally, and perhaps most importantly, AHH's management has proven itself. Since going public until the beginning of the pandemic, it was a huge outperformer, beating even the likes of Camden Property (CPT) and AvalonBay (AVB). It shows that the REIT is well-managed and that it has a good strategy that earns alpha-rich returns:
AHH outperforms other REITs (YCHARTS)
We think that as AHH continues to increase its allocation to apartment communities, its valuation will recover closer to that of other apartment REITs. With its apartment rents currently growing at 15%+, its allocation to apartments will rise naturally even if it doesn't buy/develop new properties.
We estimate that the company has 30% upside potential, and, while we wait, we earn a ~5% dividend yield that's growing. We think that this is very attractive coming from a defensive and inflation-protected investment in 2022.
BSR REIT (HOM.U / OTCPK:BSRTF)
BSR REIT recently reported very strong results. Shortly after, its share price rose to ~$22 per share, which made sense because it represented a ~10% premium to its latest NAV estimate.
We think that a 10% premium is well deserved in today's market for a REIT that owns mainly Texan apartment communities with rapid rent growth potential.
Texan apartment community (BSR REIT)
But then BSR announced a $100 million equity raise, and it caused the share price to drop back below $20 per share. Such dips are very common for REITs after they announce equity raises. We think that it is an opportunity for long-term driven investors, because this capital raise is likely to be accretive and will only accelerate the company's NAV per share growth going forward.

BSR is opportunistically raising capital after the recent surge in its share price and can reinvest it in highly lucrative value-add projects, new acquisitions and deleveraging. BSR's management is very well-aligned with shareholders and, therefore, we are not worried about them trying to "grow at all cost."
Typically, the selloffs that result from such capital raises are short-lived, and with BSR's rents growing at a rapid pace. We expect its NAV per share to rise closer to $23-25 by the end of the year.
That's 15-20% upside potential, and you also earn a near 3% dividend yield while you wait. This is less than what you are getting from AHH, but BSR also owns a safer and faster-growing asset base.
Texan apartment communities are today highly desirable, and we think that BSR could also become the next buyout target in the REIT world. Blackstone (BX) just recently announced that it was acquiring American Campus Communities (ACC) in a $13 billion transaction. BSR's much smaller $1 billion market cap could make it a buy-out target for many different private equity players that are looking to expand their footprint in Texas.
Bottom Line
I am today heavily invested in real assets such as apartment communities, but also farmland, grocery stores, warehouses, and so on. I believe that they provide the best risk-to-reward in today's uncertain and inflationary world.
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This article was written by
Jussi Askola is a former private equity real estate investor with experience working for a +$250 million investment firm in Dallas, Texas; and performing property acquisition in Germany. Today, he is the author of "High Yield Landlord” - the #1 ranked real estate service on Seeking Alpha. Join us for a 2-week free trial and get access to all my highest conviction investment ideas. Click here to learn more!
Jussi is also the President of Leonberg Capital - a value-oriented investment boutique specializing in mispriced real estate securities often trading at high discounts to NAV and excessive yields. In addition to having passed all CFA exams, Jussi holds a BSc in Real Estate Finance from University Nürtingen-Geislingen (Germany) and a BSc in Property Management from University of South Wales (UK). He has authored award-winning academic papers on REIT investing, been featured on numerous financial media outlets, has over 50,000 followers on SeekingAlpha, and built relationships with many top REIT executives.
DISCLAIMER: Jussi Askola is not a Registered Investment Advisor or Financial Planner. The information in his articles and his comments on SeekingAlpha.com or elsewhere is provided for information purposes only. Do your own research or seek the advice of a qualified professional. You are responsible for your own investment decisions. High Yield Landlord is managed by Leonberg Capital.
Disclosure: I/we have a beneficial long position in the shares of AHH; HOM.U; CPT; AVB either through stock ownership, options, or other derivatives. 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.
