Just Another Day in REIT Paradise

Editor’s Note: The original version of this article was published in the October 2019 issue of Forbes Real Estate Investor.

It was more than 25 years ago that I began working as a real estate developer. Yet I’ll never forget how my business partner at the time would begin each workday with six specific words.

Inspired by Jimmy Buffett, he would greet me with, “It’s just another day in paradise.”

That was his opening line. Every single time. No matter whether he’d woken up on the right side of the bed or not, it was always “just another day in paradise.” Nothing more. Nothing less.

Me on the other hand? I wasn’t always so willing to agree with him back in those days. The way I saw it, if that was paradise, it looked a lot like regular life.

I wanted something more.

Times have changed though. So I can finally exclaim to my loyal REIT fans that, yes! We’re looking at a different kind of “something” – something that’s bright and shiny all around us.

If you’re a skeptic like I used to be, let me paint you a proper picture. And, to do that, I’ll have to start with 2018…

I Was Wrong. Twice.

For 2018, I boldly stated that REITs were set to return around 10% for the year. I don’t make those kinds of predictions lightly, but everything I could see was pointing to a solid 12 months up ahead of us.

Problem was, there were a few things I couldn’t see, such as the upcoming trade war. So by the end of that rough run, the Vanguard Real Estate ETF (VNQ) wasn’t up 10%.

It was down by that much.

To be fair, our Durable Income Portfolio more than managed to deal with the drama. It didn’t just hold its own; it rose a collective 2%. Which was pretty decent all things told.

That isn’t the kind of growth I look for in a normal year, admittedly. But 2018 wasn’t normal.

That December then, I went right back to analyzing – once again sans a crystal ball. (Those always seem to be out of my reach for some weird reason.) Despite how the past 12 months had turned out, I was feeling confident about the last year left in the 2010s.

That’s why, in the Forbes Real Estate Investor’s “2019 REIT Forecast” – published in January, of course – I wrote that I was liking what I saw. If we didn’t get overly spooked by any more trade war issues, our asset class of choice could perform extremely well going forward.

In fact, I was going right back to my prediction from 12 months before: total returns of between 9% and 10% all told.

Now well into the year, with just two months left, I’ve got to come clean. Because I was wrong once again.

Significantly so this time too.

These Strong Buys Have Paid Off

Using VNQ as a benchmark, real estate investment trusts haven’t returned 9%-10% so far this year. They’ve returned more than 26%.

That right there? That’s why I find myself agreeing with my old partner and his obsession with it being “another day in paradise.”

REITs have hit the ball out of the park this year, even outperforming the S&P 500.

Of course, not all REITs are actively participating in this winner’s race. To some degree, that was to be expected. Though I’ll admit that the exact difference we’re seeing is pretty big.

As of the beginning of the month (i.e., October)… there was something close to a 55% performance gap between the best-performing and worst-performing sectors.

I’m especially pleased about that considering how we were overweight in data centers in January. That was when I wrote about how the forces we were seeing at work driving them upward and onward… they weren’t going away any time soon.

We had a Strong Buy rating on CyrusOne (CONE) especially back then. The way I saw it, its wide margin of safety was way too good to pass up on.

Sure enough, it hasn’t disappointed. Its share price is up 46%.

Meanwhile, Digital Realty (DLR), another data center REIT, is up 21%. And QTS Realty (QTS) is up 39%.

Clearly then, no complaints there whatsoever. We might not have so many strong buys in our portfolio as we did before this intense run-up. But we’re hardly going to object.

More Overweight Positions Have Played Out

We were also overweight on cell towers, with plenty of positive catalysts to look forward to. Those, I said, should offset any international volatility from carrier merger and acquisition (M&A) activity.

I especially liked Crown Castle International (CCI) at the time. And I’m very happy I did, since it’s now up 33%.

We also had a Spec Buy on Landmark Infrastructure Partners (LMRK), and that one’s done even better – up 53%.

However, when it came to manufactured housing, we were much more conservative in what we picked and chose. For instance, UMH Properties (UMH). No offense to them, but investing in REITs that invest in other REITs that aren’t looking good at all…

We were going to and still will pass on that kind of play. In fact, we have a full-out Sell recommendation on the company, which has underperformed its peers by quite a bit.

Fortunately, we were much more optimistic about opportunities such as Equity Lifestyle Properties (ELS). That one’s risen 38%, while another portfolio holding of ours, Sun Communities (SUI), has jumped by 48%.

Then, last but certainly not least, I’d like to mention net lease REITs, which we were right back to favoring. In which case, we were once again spot on.

Take Essential Properties Realty (EPRT), which has since delivered 68% for the year.

That one’s worth repeating: 68%! And on a safe holding like a real estate investment trust!

That’s phenomenal.

Overall, our Durable Income Portfolio – which is my personal favorite among the many offerings we maintain – has gone above and beyond my expectations, with an average gain of 25%.

I can’t wait to see the final figures come December… when you know I’ll be working on another round of reviews for what’s still to come.

I own shares in CCI, QTS, DLR, and CONE.