REIT - dividend income from real estate

Stocks
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In the Foreign Stocks thread, there was a lot of discussion about REITs, and based on that, there is a need for a separate thread.

REITs enable passive and generally good dividend yields and diversification for a stock portfolio, which is why they are an essential part of my investment plan.

It’s not worth wondering about price movements separately, and this thread is not for daily amazement at them :pray:. REITs often move as an entire sector, and daily changes can sometimes be surprisingly large. Let’s keep the discussion more at the fundamental, operational principle, and other general levels of REITs. Good discoveries and valuations are, of course, welcome to be brought up, so everyone can benefit.

Real Estate Investment Trust (REIT)
REITs were created in the 1960s to allow every citizen to invest in real estate and earn a return from it. REITs enable the purchase of real estate through the stock exchange, similar to stocks. The most significant reason to invest is the passive rental income, which the REIT distributes as dividends to shareholders (How do REITs Work? | Nareit). This discussion will mainly focus on US/Canada REITs because they have their own special characteristics. Real estate funds or similar companies also operate elsewhere in the world (e.g., Cibus Nordic Real Estate AB, Ovaro Oyj).

REITs invest diversely in real estate with the aim of generating profit from rental income or by trading properties. With a REIT, you can easily invest diversely in multiple properties, reducing the risk associated with a single property. Additionally, by investing this way, you avoid the potential responsibilities of a landlord, such as finding tenants. REITs also offer the opportunity to invest in real estate markets in different countries. REITs are not limited to just residential properties; there are also REIT companies that invest in commercial properties or, for example, care facilities. There are many possibilities. (sijoittaja.fi)

Legislation varies slightly between countries, but in the United States, for example, it is strictly regulated what kind of firms can call themselves a REIT. A REIT operating in the United States must invest at least 75 percent of its assets in real estate and at least 75 percent of the company’s gross income must come from real estate, such as rental income, property sales, or interest income from real estate loans… …A REIT must pay out at least 90% of its taxable income as dividends to shareholders. (sijoittaja.fi). By operating according to the rules, a REIT fund is exempt from or pays significantly less tax than normal. REIT rules and more information: Search Results | Nareit

Different Types of REITs:

  • Equity REIT (REIT or eREIT): real estate funds that own properties and lease them out using various operating models.

  • Mortgage REITs (mREIT) invest in residential and mortgage loans, generating income from interest on loans and resale of loans.

  • Hybrid REIT combines the above, leveraging with loans and more complex structures.

  • ETF: specific ETF funds have also been created for REITs, which invest in the entire sector with different weightings.

  • Preferred Stocks: special listings of stocks, including REITs, that have priority or higher dividends, but also restrictions (Preferred Stocks Sorted Alphabetically - DividendInvestor.com)

REIT sectors:
REITs are divided into several different sectors according to their industry, e.g., offices, industrial, hotels, healthcare, etc. Newer ones, such as telecom towers and data centers, are also available.
Sectors: Learn about Investing and Market REIT Sectors Today

Risks:

  • REITs are heavily leveraged due to their capital-intensive nature. Interest rate markets significantly affect REIT valuations. During low interest rates, valuation increases because investors seek alternative returns to interest. At the same time, the operating conditions for funds improve when interest expenses are low. As interest rates rise, REIT valuations come down for similar reasons.
    There is also a different view on this, i.e., by arranging financing or in a rising market, the value of REITs also increases, along with other assets.
  • The liquidity of funds in the form of real estate is weak. That is, if for some reason the fund needs to convert assets into cash, properties may have to be sold on unfavorable terms.
  • Value depreciation can occur according to market conditions, but bankruptcies of REITs (specifically Equity REITs!) happen very rarely: https://seekingalpha.com/article/4359863-first-reit-bankruptcy-since-2009-new-institutional-data-source-and-updated-sector-outlook

REIT advocates and good articles:
https://seekingalpha.com/author/jussi-askola
https://seekingalpha.com/author/brad-thomas

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Asuntosijoittaminen
Ulkomaiset osakkeet
Inderesin kahvihuone (Osa 4)
:frog: Inderesin SIJOITUSmeemiketju :frog:
Inflaatio, korot ja allokaatio
Osinko-osakkeet
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Full message from the Foreign Stocks thread also here, my current REIT investments.

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Have you looked into Simon Property Group more closely? My pockets are burning with cash, but I missed yesterday’s and today’s rallies because I’m unsure about the future.

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Great that we got a thread for these too (thanks @kettunen), especially now that REITs are really hot, at least in the US. Even today, a large number of them are up +3-8%. Most of these have been booming since March (excluding those focused on data centers and the like, which are largely at ATHs).

My REIT portfolio is still a work in progress, and this past week’s rise caught me with my pants down. The portfolio is still in its infancy, but so far, these have been selected:

RioCan REIT (REI.UN) - Shopping centers, offices, homes, etc. Good monthly dividend, and in Canada, daily life is nicely returning to normal after lockdowns. The risk, of course, is a new wave of coronavirus, but according to the CEO, the company has enough cash for at least a couple of years. The price is still close to the corona bottom.

In addition, a couple of riskier mREITs were included based on Seeking Alpha articles (they now seem to be locked for subscribers, so I won’t link them here) before this latest surge, when they were still relatively cheap. These are perhaps more for a shorter hold and have risen nicely, but if it looks like dividends will hold, why not for a longer hold:

ACRE Ares Commercial Real Estate Corporation
LADR Ladder Capital Corp

In addition to these, I intend to acquire for a longer-term portfolio:

MPW Medical Properties Trust (Kettunen has good justifications)
SPG Simon Property Group (The crème de la crème of Mall REITs, which won’t go bust anytime soon and has a lot of upside potential as well as a strong dividend)
WPC WP Carey (Kettunen has good justifications)
STOR STORE Capital Corporation (https://seekingalpha.com/article/4366828-store-capital-tide-is-turning)

Also under investigation:
IRM Iron Mountain
STAG Stag Industrial, Inc

Edit: I forgot to mention Hannon Armstrong Sustainable Infrastructure Capital Inc (HASI) separately, which is also under investigation. It focuses on energy-efficient properties and renewable energy projects. This nicely combines REIT and energy/renewable investing. If anyone has more detailed information about this, it would be great to hear their thoughts.

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Regarding SPG, @Vodel1 already answered. I already had Mall REIT in the form of BPYU, so I haven’t included SPG. They are somewhat comparable as competitors and also cooperate with each other: 2 Top Mall REITs Might Buy J.C. Penney Out of Bankruptcy | The Motley Fool

BPYU was the first REIT I added to my portfolio a couple of years ago. Mainly, the BAM support in the background has helped me keep it in my portfolio even during the corona era, even though it has suffered a lot like many others. However, the dividend has remained at the same level with BAM’s support despite problems with rental income. With small adjustments, I also reduced losses due to the decrease in value - and simultaneously got tax losses :slight_smile: .

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Thanks for opening the thread :folded_hands:

Currently, I have the following in my portfolio:

-Simon Property Group SPG
-Omega Healthcare Investors OHI
-Ares Commercial ACRE

And I intend to hold these for the long term and enjoy the dividends.
RioCan would be a nice addition, but I can’t buy it through Nordea, so I’ll probably stick with these and grow my holdings when opportunities arise.

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BPY’s stock performance hasn’t been very flattering - even with “BAM” managing in the background. It seems to generate more returns for BAM itself than for its shareholders. The number of shares also seems to be on an upward trend in the long term. (Of course, some REITs intentionally issue shares, e.g., “Realty Income” - when valuations are high - it’s easy to create shareholder value when those funds are used to acquire more properties.) They have, of course, paid dividends.

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The stock prices of BPY and BPYU practically move 1:1, so it doesn’t matter which one you look at.

In my opinion, these REITs fit Buffett’s thesis very well:

“It’s far better to buy a wonderful company at a fair price, than a fair company at a wonderful price.”

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I need to challenge this initiation a bit. Especially in the “risks” section, there’s a common myth.

REITs are not particularly sensitive to interest rates. When there are sudden interest rate movements, you always read great headlines about how the REIT sector will crash, but that’s where it ends. If you go back over ten years, the best returns have been made during periods of rising interest rates, for example, in the early 2000s.

This is very much based purely on fundamentals. Rising interest rates usually mean a healthy economic upturn, which improves the operating conditions for all companies. At the same time, we are also in a situation where inflation adjustments very quickly increase business revenues, but the rise in interest expenses lags far behind, because no credible REIT uses variable-rate loans; instead, durations run far into the future. The spread between loans and rental income thus grows, and business is doing more than well.

I’ve been investing in these for a pretty good while. There are many other options than just properties, such as data centers, telecom towers, and other interesting, more modern asset classes.

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I have little experience with REITs so far. Currently, I have WPC in my portfolio with a weight of about 5% and sometime “back in the day” a REIT ETF with the ticker REM. However, I am following several companies:

DLR/Digital Realty Trust - A REIT that leases data centers, which unfortunately did not drop at all in March.
AMT/American Tower - A REIT that leases cell towers, which mostly rose in March.
O/Realty Income Corp - A REIT that leases properties to stores and other small businesses and pays monthly dividends.
BEP/Brookfield Renewable Partners - Owns renewable energy. LP (Limited Partnership) structured. I recall there being some tax trick? Also, there was some corporate restructuring that I haven’t delved into. Clearly, it’s the least researched one.
CIBUS - Buys and leases primarily stores to K- and S-groups. Also plans to switch to monthly dividends. Listed in Stockholm, so it’s not suitable for OST (Owner-operated stock market) even though it pays dividends in euros.

Can anyone tell me more about Iron Mountain? It has a juicy yield, but there must be some threat priced into it.

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One could also add preferred stocks to the list, which REITs, alongside banks and insurance companies, list quite often.

These are then more sensitive to interest rate movements, as the dividend remains constant.

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Please do share more of your insights and the contents of your own portfolio regarding these lesser-known REIT asset classes, I’m very interested :slight_smile:

In the “Foreign Stocks” thread, I already wrote that it’s worth looking carefully at the gearing level and credit rating when going shopping for REITs. I’m generally quite bullish on quality REITs at current prices, but I also share a slightly contrasting view regarding shopping malls / retail: https://seekingalpha.com/news/3603101-warning-real-estate-and-reits-from-famed-hedge-fund-manager-seth-klarman-of-baupost

Shopping malls are, if I recall correctly, divided into A - D classes, and I believe that all but A-class malls will take a hit. I believe that open-air malls and outlets, where people want to go to spend time in good cafes, shop on the side, and experience things, are the ones that will do well in the post-corona era. For this reason, currently the only mall REIT in my portfolio is Simon Property Group.

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Yes, it dropped to good prices, back then you still got Interxion as a bonus to the business. (it’s in my portfolio) DLR is priced expensively for a good reason.

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IRM is not a “Blue chip” REIT, but I have it in my portfolio. It practically holds companies’ papers for a long time. It’s slowly buying data centers and moving towards them. That Project Summit is indeed interesting.

https://seekingalpha.com/article/4367029-iron-mountains-dividend-is-not-sustainable-might-change

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RioCania apparently managed to get displayed in Nordea through some trick or via customer service, at least. However, it’s not worth taking it from there, because through Nordea, 30% of dividends from Canadian companies are deducted, even though it should be 15% according to the agreement.

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Everything seems a bit pricey now, but if I had to pick something…

National Storage Affiliates Trust (NSA) is a quality company. It focuses on self-storage and the management’s track record has been very convincing for a long time.

Store Capital (STOR) is like a mini-Realty Income. The company is newer, but CEO Chris Volk is one of the top names in the industry and has outperformed indices in his previous roles time and again.

W.P Carey doesn’t seem badly priced. The company has clarified its corporate structure in recent years, which is not yet fully reflected in its valuation. The asset class is relatively defensive, and interest rates haven’t had much impact on the business, at least not yet.

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Yes, but everyone still needs some land to lease, forests, etc. Telecom towers and data centers are priced sky-high – but they also held their value extremely well in the spring when others dropped 40-80%.

At least within the last couple of years, there has been movement in opposite directions when interest rates changed. This is at least in the shorter term. Of course, in the long run, in a rising market, all assets generally move in the same direction unless there’s a fundamental problem.

Thanks for the comments, I’ve added a Preferred Stocks link and an addition to the risks section in the opening post.

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A very short timeframe, but you can try to draw some conclusions from these if you wish. There might be volatility, but fundamentals are largely decisive, and interest rate movements remain as background noise.

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If one looks at the “P/E ratio” of REITs, the price peaked precisely when interest rates were at their highest level, almost 15 years ago. At that time, for example, the average yield of REIT firms versus the 10-year Treasury even turned negative, which it has rarely ever done. If the spread to the risk-free rate were slavishly followed, the P/FFO should have been at the millennium lows, but the markets instead valued rapid earnings growth. Naturally,

I wouldn’t harp on this otherwise, but the correlation between REIT firms and interest rates is overemphasized. It’s better to focus on the business fundamentals.

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There’s a clear short-term correlation between these. Interest rate movements are shown here:

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In the long run, fundamentals naturally have a greater impact; I strongly agree with this.

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Great to have a REIT chain. I personally moved 10% of my portfolio into REITs this Corona spring (10 different companies). The goal was to get more diversification, i.e. more dollars and real estate on the side. Since then, prices have risen and there’s no longer a rush to buy, but they’re still not exactly sky-high if you consider the 10y spread. Of course, I regret not having been even bolder with my investments.

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Yes, BPYU hasn’t been a very good investment in terms of appreciation, but in just a couple of years, it has brought a reasonable return in the form of dividends. The corona dip was incredibly deep; even before that, the stock had been trading fairly flat.

My original entry points, however, were at the bottom of the dips, so in that regard, it has gone quite reasonably with this.

BAM/BPY also currently has a rather large share repurchase offer underway at a price of $12.