Skip to main content
No. of Recommendations: 57
Old time REITSTERS will certainly recall REITNUT, aka Ralph Block. For anyone new to this board, Ralph wrote the seminal book on REITS: "Investing in REITs." (1) Ralph was one of the original expert contributors to this board.

In 2013, we collaborated on a post "Portfolio for the next 50 years." https://boards.fool.com/portfolio-for-the-next-50-years-3059...

I reported the results last year (2) when they were impressive. The results this year are UGLY but as part of the marriage vows, I still report them. I never want to be accused of only reporting good news and NOT reporting bad news. I am sure Ralph would agree.

The concept was to create a portfolio for a young person just starting out that was in a low tax bracket by setting up a ROTH IRA account. Recall that ROTH accounts grow tax free and can be withdrawn tax free in retirement. (3) You might review the original post to get the full story. The post was written with an initial investment target of $2,000.

REITNUT chose 4 individual REITS that he thought would do well over the long term. The goal was that the investor would NOT have to make any sell/buy decisions over the next 50 years. Yes, it was a pretty ambitious goal that REITNUT accepted.

The four REITS he chose were:

Avalon Bay- AVB- High end apartments
Extra Space Storage-EXR- Self storage rentals
Simon Property- SPG- High end shopping malls
Ventas-VTR-Senior communities

I personally helped setup five ROTH accounts with these four REITS. Here are the results to date for one of the accounts. It had an initial investment of $2,500 and has had no funds added or withdrawn. (4) So this is a very pure look at how the portfolio has done:

June 6, 2013- $2,500 account value, AVB, EXR.SPG, VTR purchased in ~ equal dollar amounts
April 17, 2020- $3,719.38

50 year portfolio IRR= 5.95% down from 11.81% last year
VNQ- Vanguard REIT ETF= 5.44% down from 8.42% last year
SPY-Standard and Poor’s 500 ETF= 10.82% down from 12.65% last year

The 50 year portfolio outperformed the REIT index by 0.51% which is OK, but not great. It did underperform the SP500 by 4.86%. Clearly REITS in general have suffered greatly in the latest downturn. The FANG stocks continue to power the SP500 higher.

The annual income has increased from $83.84 to $185.65 which is a 121% increase. The IRR of the income stream is an impressive 12.27%. This verifies one of REITNUTS fundamental teachings: buy high quality, high growth, LOW dividend yield REITS to maximize the total return. REITNUT would often caution against buying lower quality, higher yielding REITS which is often the path that new investors are drawn to. High yield REITS in general have performed much worse in the downturn. All four of these REITS were considered low yielding when they were chosen. It is important to note that all of the dividends were reinvested back, so the increased share counts compounded with the per share dividend increases.

Here are the results for the four REITS from 6/6/13 through 4/17/20:


REIT Total Dividend Reinvested
Return Per Share Dividends
IRR IRR IRR

AVB 6.67% 5.9% 9.4%
EXR 15.9% 12.5% 16.5%
SPG -11.4% 9.2% 13.5%
VTR -7.0% 2.5% 7.7%




Clearly the star of the group so far is EXR which is the same story from last year. Not surprisingly Simon (SPG) being in the shopping mall sector has been crushed. It is the Bluest of the Blue in malls, but all mall REITS have dramatically underperformed. Greenstreet is reporting that mall rental payments for April are running at 30% to 50%. The weakest sisters, CBL and WPG are priced for bankruptcy. At a minimum we should expect common stock dividends AND preferred stock dividends to be halted. Simon has closed 100% of their US properties. They cannot expect retailers to continue paying rent in this situation. Clearly their top line revenue will be off. Will it will be down 25% or 75% for Q2? Nobody knows. Simon has not announced their common and preferred dividend policies, but my pure guess is that they will be paid on time and not reduced. Long term, I think Simon will survive and thrive so I would continue holding the stock.


Ventas is in another REIT sector, senior living, that has underperformed. It was doing poorly before the virus hit, so kind of a double hit. Once again, I think it is the Bluest of the Blue in a poor sector. The virus has taken a heavy toll on many senior living facilities in the US. Nobody knows how long it will take to return to normal operations, but long term the US still needs a lot of senior living facilities so I think Ventas will survive.

It is hard to say anything positive in the current environment. The pain and suffering of everyone without income is unfathomable. (BTW, if you have ever had to layoff anyone, you know how miserable it is, particularly if the employee had not done anything wrong to deserve it.) And nobody knows how long it will last, how it will end and what the employment world will look like when it ends. My opinion is that stocks in general are “priced to perfection.” You can point to a few sectors that you think have minimally disrupted business, but that is a pretty short list.

Amongst REITS, the standout sector has been data centers. CONE, COR, EQIX, DLR and QTS are all up on the year. The story is clear, much higher internet bandwidth demands because of the work at home movement. But you have to think that some percent of their customers will NOT be paying their bills.

For many years, the Bluest of the Blue in self-storage has been Public Storage (PSA). You have to expect that some percent of their customers also will NOT be paying their bills. So it would not surprise me if they report a slight revenue drop for Q2. Will they survive and thrive long term, yes.

You can make a case for the majority of REITS and companies in general that their top line revenues will drop in addition to their earnings. And lord knows when both will recover to pre-crash levels. We can stipulate there are many small businesses that will not survive the downturn. They will fill up the bankruptcy courts for a long time. I think we have to assume that some amount of REITS will also declare bankruptcy. Our long term caution on owning ANY hotel/hospitality REITS has been borne out. How would you like to own a hotel right now that required ~ 65% occupancy to break even? Pick a guess- 6 months, 12 months, 24 months before that happens. Do you have the balance sheet to pay the fixed costs for that duration? If you can “mail in the keys” on a specific property, you would do that. OTOH, if you have senior unsecured debt, aka bonds, go ahead and start preparing the bankruptcy filing.

At the end of the day, I am NOT making any changes to the 50 year portfolios. We are 7 years in and have 43 years to go. While SPG and VTR have performed poorly, in fact losing money, long term I think they remain viable. I don’t think American’s addition to shopping will be cured in this downturn. Muted, yes, cured no. And recall that SPG broadly caters to “rich people” with their “high end” malls. Rich people own the majority of the stocks and broadly are sitting pretty well. SPG is counting on the rich people to pick back up their shopping habits when the malls reopen.

Like I said previously, it is hard to say anything positive. If you are a youngster AND still have a job, this is a great environment to be buying stocks. The SPG and VTR dividends are being reinvested at much lower stock prices, so they are buying more shares. Long term that should be a positive. Some of the the youngsters these portfolios were created for still have their jobs, others have been laid off. So it is a mixed message.

I so wish REITNUT was here to give his current updates. He used to tell me that that industry was constantly changing. That is why he agreed to do subsequent revisions of the book. He did not want REIT investors reading out of date info, so he devoted an enormous amount of time revising it. All for our benefit. In addition to his book, his numerous posts on this board, his love of golden retrievers, the 50 year portfolio is another contribution to his legacy. I remain eternally thankful.

Thanks,

Yodaorange

PS: Personally I epically failed on this downturn. Old time REITsters might recall that I manage most portfolios on an “absolute return” basis. The goal is to have positive returns every years. We did that in 2008, 2009 up through 2019. I think that some of the portfolios will lose money in 2020. I had a clear cut, well defined mathematical signal that told me the downturn was coming. I chose to ignore it. That said, broadly speaking I have made almost no changes to any of the portfolios. I expect most of the holdings to recover, but it might take a few years. Preferred stocks in general got crushed, many of them strictly due to illiquidity reasons. If they continue to pay dividends on time, they will come back. If they suspend dividends, it is less certain.



(1) Investing in REITS, Fourth Edition
https://www.amazon.com/Investing-REITs-Estate-Investment-Tru...

(2) REITNUT 50 year portfolio review 4/13/2019
https://boards.fool.com/reitnut-50-year-portfolio-review-341...

(3) Current tax law allows ROTH IRA's to be withdrawn tax free. There have been proposals that either the account balances become taxable and/or the withdrawals are. If you think forecasting REIT values in 50 years is hard, try forecasting US tax policy.

(4) The portfolio is not as "pure" as original. VTR spun off Care Capital Properties (CCP) which later merged into Sabra Health (SBRA). SPG spun off Washington Prime Group (WPG.) So the portfolio has small amounts of these stocks, which have NOT been sold. Their value was included in the portfolio total return, but was NOT included in the dividend return calculations.
Print the post  

Announcements

What was Your Dumbest Investment?
Share it with us -- and learn from others' stories of flubs.
When Life Gives You Lemons
We all have had hardships and made poor decisions. The important thing is how we respond and grow. Read the story of a Fool who started from nothing, and looks to gain everything.
Contact Us
Contact Customer Service and other Fool departments here.
Work for Fools?
Winner of the Washingtonian great places to work, and Glassdoor #1 Company to Work For 2015! Have access to all of TMF's online and email products for FREE, and be paid for your contributions to TMF! Click the link and start your Fool career.