Wall Street investors hate real estate stocks right now…
If you’ve been with us for some time, you’ll know we love REITs (real estate investment trusts) here at the Cut.
As income investing expert and friend of Legacy Research Brad Thomas has been showing, they allow you to invest in income-producing real estate through your regular brokerage account.
And they’re a twofer…
You make gains as the value of your REIT shares rise.
You also collect a stream of lifetime income. REITs are required by law to pay out 90% of the rent they collect to shareholders.
But right now, investor sentiment is in the ditch.
Wall Street investors are fleeing the sector at the fastest pace in more than a decade.
But as Brad has been showing his readers, the negativity is overdone.
Combined with bargain valuations and the highest yields in five years, this sector is a screaming contrarian buying opportunity right now.
REITs haven’t been this out of favor since 2008 real estate meltdown…
That’s going by the latest Bank of America Global Fund Manager Survey. It goes out to roughly 300 fund managers every month.
Together, these investing pros are responsible for $1 trillion in assets.
And you can see from the chart below, they haven’t been this underweight REITs in their portfolios since 2008.
As you’ll recall, that was right in the middle of the worst real estate crash in U.S. history. Millions of homeowners went into foreclosure, property values plummeted, and it had a cascading effect on the global economy.
You can see why investors are so bearish right now…
Since the Fed started jacking up interest rates in March 2022, the yield on the 10-year Treasury note has more than doubled from 1.7% to 4.3%.
This makes the income you can earn buying REITs less attractive on a relative basis.
Meantime, the news headlines have been filled with scary stories about empty office buildings thanks to the work-from-home trend.
Plus, we’ve had a flurry of predictions about the coming collapse of the real estate market due to spiking mortgage rates.
Another effect of the Fed’s rate hiking has been a near doubling of the average rate on a 30-year fixed-rate mortgage from 3.7% to 7.1%.
We love it when mainstream investors are running scared…
As the father of value investing, Benjamin Graham, put it…
The intelligent investor is a realist who sells to optimists and buys from pessimists.
Right now, investor pessimism is at an extreme. So, you want to be a buyer of what they’re selling.
Besides, these folks are making the mistake of lumping different types of REITs together.
Over to Brad for more on that…
It’s easy to see a stock drop and assume there’s something wrong with the company. Sometimes, there’s a genuine issue. But it’s not the case for many REITs right now.
True, office REITs are down in the dumps. And for good reason. In the aftermath of the pandemic, millions of workers have opted to work from home instead of in an office. So previously packed office towers have emptied out.
But the sector covers a lot more than just companies that rent out office space. And REITs that own other types of properties are perfectly healthy.
In fact, occupancy rates in parts of the sector are at record highs. Brad again…
Digital Realty (DLR) is a REIT that owns data centers. It has customers knocking on its door asking for computing power for artificial intelligence systems such as ChatGPT.
Prologis (PLD) is the world’s largest REIT. It owns and manages warehouses and other industrial properties. And its CEO, Hamid Moghadam, recently told investors he’d like to see his occupancy rate drop.
Many of the company’s tenants have leases that are 30% to 50% below today’s market rates. So, if current tenants left, the company could charge higher rents to new tenants.
And for the past three quarters, my favorite REIT, Realty Income (O), has reported a 99% occupancy rate. It rents out a wider range of retail, commercial, and industrial properties to well-known companies. These include McDonald’s, Taco Bell, CVS, Safeway, and Planet Fitness.
And that’s just on the demand side.
New real estate supply is also tight…
Cohen & Steers is an investment management company that focuses on real estate.
It says new real estate supply grew by 1.3% in 2021 and 1.7% in 2022. That’s well below the average of 2.6% growth in supply going back to 1996.
Part of that is due to supply chain issues and shutdowns due to the pandemic. It’s also partly due to the spike in inflation we got in its wake.
This has led to rising costs and limited product availability of key materials such brick, blocks, ready-mixed concrete. It’s also led to rising builder’s wages.
Real estate is more expensive to build as a result. This increases the value of older buildings and allows their owners to charge more rent.
And now is the perfect time to buy…
Back to Brad for more on that…
Cohen & Steers looked at every cycle of interest rate hikes since 1990. It found that REITs returned an average of 15.8% in the six months after the Fed stopped raising rates. That’s nearly double the 8.4% return for the blue-chip S&P 500 during these periods.
And we may already be there. The CME FedWatch Tool estimates the chance of more rate hikes from the Fed. Right now, it’s showing a less than 40% chance of one more hike in November or December. And the market is betting the Fed will start cutting rates early next year.
It all adds up to the perfect time for REITs to shine.
As part of his mission to help readers set up rising streams of stock market income, Brad has recommended eight best-in-breed REITs at his Intelligent Income Investor advisory.
It’s hard to think of a more qualified person to help you profit. He used to run a successful real estate empire before launching his investment research advisory business, Wide Moat Research.
And last year, he teamed up with multinational book publisher Wiley to write the book on REIT investing for the For Dummies book series.
Brad also teaches at NYU and guest lectures at Cornell, Penn State, and Georgetown on real estate investing.
And Forbes, Kiplinger, US News & World Report, Fox, CNN, and NPR have featured his research.
So, if you’re not already a subscriber and you want to take advantage of this setup using Brad’s top recommendations, you can go here to learn more about his portfolio of top-performing REITs.
If you’re not yet a Brad subscriber, there’s a “one-click” way to play this setup…
You can buy shares in the Vanguard Real Estate Index Fund ETF (VNQ).
This exchange-traded fund (“ETF”) tracks the returns of the largest, best-known REITs across the different subsectors in this market.
Just remember that, with VNQ, you’ll be buying bad real estate – like offices – along with the good properties like data centers, warehouses, and commercial properties.
And if you want to follow along with Brad’s research for free, you can follow him over at his Intelligent Income Daily e-letter here.
Regards,
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Chris Lowe
Editor, The Daily Cut