EPR - Important Message For REIT Investors

2023-05-01 08:05:00 ET

Summary

• REITs can be very rewarding investments.
• But many investors fail to fully appreciate their returns.
• I share three easy-to-implement tips to get more out of your REITs.

REITs can be incredibly rewarding investments.

Over the long run, they have compounded investors' capital at 13% per year on average and they have often beat the returns of the S&P 500 ( SPY ) and even Tech Stocks ( QQQ ) despite being a lot safer investments:

But answer this question honestly:

Did you really earn a 13% average annual return from your REIT investments?

Most likely, you didn't.

It seems to me that most REIT investors here on Seeking Alpha have underperformed the returns of the market averages ( VNQ ) because of three key mistakes that they make in their selection process.

I don't claim to be perfect as I often make mistakes myself, but I have managed to outperform over the long run, and in today's article, I want to give you simple tips that should help you get more out of your REITs:

Tip #1: Pick the Right REIT. Then Go Fishing

This first one is very important: Most investors are way too active.

They think that they should react to every new piece of information and they end up fixating on daily quotes, wondering what to do next.

I think that this is counter-productive.

If you retain any information from this article, it should be this: REITs, just like real estate, are long-term investments that generate steady cash flow, and therefore, their value should be based on decades of expected future cash flow and the impact of a quarter or two should be very minimal.

Yet, despite that, REIT investors will spend countless hours trying to determine if a REIT will beat or miss its quarterly expectations and buy or sell stock based on that.

This is the main reason why REIT share prices have become so volatile despite owning assets that are very stable in nature.

My tip here is to do less... a lot less. You need to realize that short-term news, even disappointing news, is rarely a big deal in the long run. Over time, the assets will keep producing cash flow, the value of these assets will likely keep on growing, and short-term news will eventually be forgotten.

But if you sell, you will lock in a loss, break the compounding effect, and never get ahead. So you need to build the discipline to stop fixating on daily quotes and go fishing instead.

You will do less effort and likely earn better returns over time.

Example: I owned a position in Big Yellow Group ( BYLOF ), a peer of Public Storage ( PSA ), going into the pandemic. At one point, its share price was down by 50% because of near-term concerns. But two short years later, its share price was pushing new all-time highs. Many sold at the bottom, but those who went fishing are today sitting on large gains.

Tip #2: Pick the Right REIT. Then Buy The Dips

This takes the first tip a bit further.

Going fishing is always a good idea if you feel like you are about to do something stupid... like sell your REITs due to short-term news/volatility.

But an even better idea could be to buy the dips.

That's because good REITs almost always eventually recover.

REITs have gone through countless crises in the past, some worse than others, and yet, they have always recovered from every crash in history:

This isn't really surprising when you consider that:

1. Most REITs own properties that are essential to our society.
2. These assets are only becoming more expensive to build.
3. We are not making any more land and good locations are limited.
4. These assets generate cash flow that's growing steadily over time.
5. And most REITs are well-managed and use limited leverage.

With that in mind, it isn't surprising that good REITs almost always recover and so buying REITs when they are heavily discounted is generally a very good idea.

Example: Early into the pandemic, REITs ( VNQ ) crashed by 43% even as the value of their real estate remained stable. Suddenly, they were priced at large discounts to their fair value and so we bought a lot of them. Some of our largest investments back then were EPR Properties ( EPR ) and Independence Realty Trust ( IRT ), both of which tripled in the following years.

It was painful to see all the red color in the short run, but this crash ultimately benefited us because we took the right actions.

Tip #3: Pick the Right REIT. Then Avoid Selling

Finally, and perhaps importantly, if you have the right REITs, just hold on to them and never sell.

The right REIT will have a business model that will create a lot of value but it takes time for this value to be created and for the market to recognize it.

So don't give it just a year or two. Give it a decade or two.

Do the hard work to make sure that you have the right REIT and then never sell.

A great example of that would be Alexandria Real Estate ( ARE ). The REIT went public a few decades ago and despite going through many crises/market crashes, its share price has always recovered and reached new highs because its business model is so powerful. The REIT is able to build life science properties at a ~6-7% stabilized yield, but these properties are really worth a ~4-5% cap rate. As such, it is creating a lot of value by building these properties. It can then sell them or refinance to build new ones. Rinse & repeat.

Here are its results. It has even beat Warren Buffett's Berkshire Hathaway (BRK.A) ( BRK.B ) in the long run:

Yet, most REIT investors wouldn't have held it for more than a few years.

Be patient and loyal to your REITs.

Once you have the right one, don't let go of them.

Bottom Line

In short, you should pick the right REIT and then ignore the noise, buy the dips, and never sell.

You may think that picking the right REIT is the tough part, but it really isn't. The tough part is the psychological aspect of investing: ignoring the noise, buying the dips, and never selling because it is going against the crowd.

Most REIT investors do this wrong and end up earning much lower returns because of it.

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