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Investing Goals, Allocation Framework, And Focus/Interests

I recently posted the following in a private reit service and thought I might put it in a blog, primarily so I could refer back to it easily, and perhaps evaluate and modify it as time passes. Secondarily, if others may benefit by it is as well, whether they may learn from it, or if they agree or disagree, all the better. Note that some of the wording addresses reits, but the principles apply to all investments.

Tom

1) GOALS

Consistent, dependable growth of both dividends and share price, favoring the reits which have a record of and future opportunity for, reliable monthly rent income. As a retiree, I primarily want secure and growing dividend income through all types of markets, plus an allocation for potential growers.

2) ALLOCATION to portfolio tiers (approximate)

a) TIER 1: ~ 60-70% to Core 'Resilients': companies which held steady or grew dividends during the last one or 2 recessions. The tradeoff for perhaps larger companies with proven steady cash flows which grow more slowly than startups is the sleep well benefit that dividends keep rolling in. Reits include O, DLR, PSA, FRT, SKT, etc. Resilient, because they have proven their ability to pay during recessions, and are the types of companies I want to own as the foundation of the portfolio.

b) TIER 2: ~ 20%-30% to 'Growers', those reits which started after the 2001 or 2008 recessions which have the greatest likelihood of growing dividends and sustaining them during a recession. For example, some data centers, to a lesser extent, maybe self-storage: tier 2's may not be proven during 1 or 2 recessions, but due to the importance of the cloud, DCs are likely to retain tenants due to the importance of the cloud.

c) TIER 3: ~ up to 20% in Super-Growers - smaller reits with greater opportunity to grow both share price and dividend. May be more susceptible to a downturn in the economy, such as the industrials, LXP and STAG, or some recession unproven new retailers or similar. (Since the original publication, I have sold these two). This tier also includes STWD and HASI for growth in an expansionary economy with rising interest rates. But I watch this tier more closely, and it may be more susceptible to trimming or selling prior to a recession. (This will depend on many factors at the time.)

d) SPECULATIVES: ~ 0%-3% in startups or reits (or companies) with great potential but greater risk accepting full well these could result in losses, so monitored closely. While I have invested in a few in the past, I am not currently in an nor am considering any.

3) FOCUS AND INTERESTS

- Reinvestment in the roth and rollover accounts, spending some dividends from the taxable account. Running the numbers out 10-30 years demonstrates the exponential and unmatched potential from dividend reinvestment, particularly in the Roth account (no taxes).

- In choosing reits, strong future runway for tenant's revenue growth ranks in the top criteria for evaluation. It's far too overlooked: any LT sustainable AFFO growth ultimately must come from consistent tenant top-line growth. The underlying tenant base's LT runway for revenue growth will greatly influence the reit's success. Hence, economic-cyclical reits require closer monitoring relative to the economy, and retail reit tenants future revenue growth is challenged on many fronts. Health care reits face LT future revenue growth challenges because of the Medicare deficit issue, and the only other payer is either the government (subsidies in some form) or the individual (via both OOP and premiums as insurance companies are merely conduit payers funded by premiums).

- I'm constantly seeking new learning regarding investments. At the time of writing this comment, I'm focused on the top 3 specific characteristics (perhaps 5-7, but not 20: which ones matter most?) which make a reit most successful, or, separates the great from the good. A low WACC must rank high because it increases the margin (maybe its #1?). It would seem that generally any reit whose Cap rate-WACC spread is consistently below 80% WACC or less of the best reit in its category will have to make it up otherwise if it is to attain LT AFFO margins equal to the reit with the lowest WACC. Realty Income is evidence of this. (Offsets to this would be small cap reits with a bit higher WACC due to their size, but with greater multiple of growth off a smaller base, and the lender reits.)

Additional disclosure: Because this is a LT strategy and not specific stock recommendations, specific disclosure on holdings is irrelevant.