华尔街不想让你知道的关于REITs的事情

It is not all sunshine and rainbows in REIT world.

Overpriced IPOs, questionable spin-offs, greedy managers, and other landmines should be avoided at all cost.

Our strategy to outperform consists of focusing on internally-managed, equity REITs that are on sale.

That's a tricky question, but those looking for above-average current returns, along with reasonably good price appreciation prospects over time - and with only modest risk - will certainly want to consider apartment communities, office and industrial buildings, shopping centers, and other similar real estate investments. While some time ago, these highly profitable investments may have been reserved to high net worth individuals and institutions, it is today easier than ever before to invest in real estate through high-yielding real estate securities or REITs.

Today, an estimated 80 million Americans own REITs through their retirement savings and other investment funds. Unfortunately, the vast majority of these REIT investors are highly unsophisticated and have little expertise or resources to conduct due diligence. While REITs may be very rewarding, they can also be very punishing and return disparities from one company to another can be massive.

Example: Realty Income (O) vs. Wheeler REIT (WHLR)

Making it even more difficult for individual investors is that Wall Street is full of sharks looking to make a pay day off your name. Conflicts of interests can be very significant and you must know how to identify them to save yourself from big losses.

Here are three things that Wall Street does not want you to know about REITs…

IPOs have the reputation of being overpriced, highly volatile and lack transparency. We have found over the years that in the REIT field this is especially true.

Wall Street is doing its best at promoting a new exciting opportunity to you, but the reality is often that the business and management are yet to prove themselves at successfully running a public company.

Moreover, Wall Street is great at timing the IPO right so that the new REIT gains an often more and reasonable valuation at the initial offering. After all, why would you go public if you could not gain a more than fair price?

The same applies to REIT spin-offs. Too often, the management and Wall Street know something that you don't.

We recommend staying out of REIT IPOs and spin-offs to focus instead on established companies with a track record and more reasonable valuation. There is no need to rush into the new and exciting REITs. It can pay off big sometimes (IIPR up over 300% since IPO in 2016), but it is much riskier and more often than not, the results have been rather disappointing.

REITs can be managed internally or externally, and this seemingly unimportant issue can lead to massive return disparities.

Most equity REITs are today managed internally, and this is the preferred option by large institutions and professional investors.

However, there are still plenty of externally managed REITs (and new ones emerging) which are mostly targeted at individual investors.

Exceptions exist, but more often than not, externally managed REITs suffer from greater conflicts of interest, have higher G&A cost, and shareholder returns have been significantly lower over time.

Source

The main issue with the external management structure is that it will often incentivize "growth at all costs" and result in "empire building" behavior. The management team will seek to maximize the "size" of the portfolio rather than its "performance" to increase their management fees (which are tied to the volume of assets under management).

Wall Street will often seek to hide the conflicted interests by showing off an elevated dividend yield which quickly seduces unsophisticated individual investors.

In reality, even if an externally-managed REIT is very cheap and paying a high yield - it is likely to eventually disappoint if you cannot rely on the management and its integrity. This has allowed us to avoid numerous serial underperformers such as the RMR (RMR) managed entities: Senior Housing Properties (SNH), Hospitality Properties (HPT), Industrial Logistic Properties (ILPT), Office Properties (OPI) - which cannot be trusted.

Last but not least, there are a lot of REITs which may not exist a few decades from now - simply because their business models may prove to be unsustainable.

As an example, mortgage REITs have a very poor track record with 0% total returns over the past full cycle:

Source

This sure does not look like a sustainable business model. A large portion of mortgage REITs are highly risky, conflicted, overleveraged, and you guessed it: unsustainable.

Wall Street is not showing you the above table when it raises new equity capital for mortgage REITs… Don't ask me why…

Now that the untold truth of REITs has been told and everyone is aware of their flaws, it is important to recognize that not "all" REITs are bad.

In fact, Equity REITs have historically outperformed almost all other asset classes with spectacular returns over many market cycles. They provide consistent high income along with market-beating total returns in the long run:

Source

Even better, those investors who

avoided the overpriced IPOs, conflicted management teams, and unsustainable mortgage REITs

could have earned even greater returns with lesser risks. The best active REIT investors have managed to reach up to +22% annual returns over the same time period:

Source

This is what we aim to achieve by specializing in REIT investing. We want to maximize our chances of generating high total returns with only limited risk, while earning high income from our real estate investment.

We believe that the best way to achieve this is by investing in undervalued, internally-managed, equity REITs - not in IPOs, externally-managed REITs, or mortgage REITs.

Most investors would likely be better off to avoid these altogether and focus on quality REITs instead. We get the appeal of earning a high yield, but you really do not need mortgage REITs or conflicted REITs to achieve that. By being opportunistic and combining REITs with MLPs, infrastructure investments, and other real assets, we are able to earn a close to 8% dividend yield that is safely covered at High Yield Landlord.

A Note about REIT Investing:

To succeed as a REIT investor and earn high consistent income, we recommend to:

I am/we are long UNIT.

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.