EQIX - REIT Resolutions: Is The Thrill Of Victory Worth The Agony Of Defeat?
2023-12-30 07:00:00 ET
Summary
- In this article, I reflect on my investing mantra of perseverance and the challenges faced in the real estate industry.
- The Federal Reserve's interest rate hikes in 2022 and 2023 are highlighted, with expectations of rate cuts in 2024 and beyond.
- It’s truly an honor to be writing on this platform and I appreciate every one of you.
As I reflect on the last 12 months in REIT-dom, there’s one word that sticks out to me: Perseverance – the very idea that sums up my investing mantra, built on and by decades of past experiences.
A few days ago, I wrote an article describing my journey as a real estate developer. “My net worth was negative $40,000 when I graduated from college,” I wrote. But “with no silver spoon to support me (I was raised by my single mom), I grew my fortune to over $20 million.”
That took time, of course. Time and commitment – a combination I had to heavily reemploy after I saw my nest egg erode during the Great Recession of 2008-2009. As I also wrote, “I was forced to reinvent myself” altogether, since the word “developer” had become the equivalent to wearing “the scarlet letter.”
Yet even with that and the chaos that was 2020, 2022 and 2023 still manage to stand out.
How can they not when the Federal Reserve increased interest rates seven times in 2022 – starting from zero in 2021 to 4.5% – with another four hikes in 2023, pushing the fed funds rate to 5.5%?
Now, I’ve lived through multiple recessions. So it’s not the first time I’ve seen rates rise.
In 1994, for instance, when I was an up-and-coming real estate developer, I remember building new stores for Advance Auto Parts ( AAP ) and Blockbuster Video… while the Federal Reserve doubled the funds rate with seven increases.
That tightening policy lasted into the following year, working exactly as then-Fed Chair Alan Greenspan planned. He engineered a so-called “soft landing,” with strong productivity rates that kept unemployment low.
What followed was one of the most prosperous periods in my career, allowing me to amass most of my fortune.
History Doesn’t Repeat Itself, But…
The Federal Reserve cut rates three times in fairly short order after that period.
After its July 1995 decision, the Fed wrote that:
“[As] a result of the monetary tightening initiated in early 1994, inflationary pressures have receded enough to accommodate a modest adjustment in monetary conditions.”
Fast-forward to December 13, 2023, when the Federal Reserve set the table for multiple cuts to come in 2024 and beyond. Policymakers seem unanimous about keeping the benchmark overnight borrowing rate between 5.25%-5.5%.
Committee members penciled in at least three rate cuts in 2024, assuming quarter percentage point increments. That’s less than what the market had been pricing but more aggressive than previous official indications.
The committee’s “dot plot” of individual members’ expectations indicates another four cuts in 2025 for a full percentage point. And three more reductions in 2026 would take the fed funds rate down to between 2%-2.25%... close to the long-run outlook.
Rick Rieder, chief investment officer of global fixed income at asset management giant BlackRock, said, “While the weather is still cold outside, the Fed has suggested a potential thawing of frozen high interest rates over the next few months.”
That’s great news for real estate investment trusts, or REITs. They’ve suffered under the (inaccurate) assumption that they’re uninvestable with rates so high. I can’t help but liken the next 12 months to the most prosperous periods in my investing career, I already mentioned.
When I reflect on the last two years in REIT-dom, I think about this Benjamin Graham quote:
“Adversity is bitter, but its uses may be sweet. Our loss was great, but in the end, we could count great compensations.”
Then I think about persistence again, which some describe as “doing something despite difficulty or delay in achieving success.”
More REIT M&A in 2024
Along with basic share price appreciation, I expect to see some noteworthy REIT mergers and acquisitions (M&A) emerge in 2024.
In 2021, we saw Blackstone Inc. ( BX ) acquire QTS Realty for $10 billion… Realty Income ( O ) acquire Vereit for $11 billion… and American Tower ( AMT ) acquire CoreSite Realty for $10.1 billion.
Then, in 2022, we saw these deals:
- Industrial Logistics ( ILPT ) acquired Monmouth Real Estate for $4 billion.
- KKR & Co. Inc. ( KKR ) and Global Infrastructure Partners bought out CyrusOne for $15 billion.
- Blackstone purchased Preferred Apartment Communities for $5.8 billion.
- Healthcare Realty ( HR ) acquired Healthcare Trust of America for $17.6 billion.
- Blackstone took over American Campus for $12. 8 billion.
- Prologis, Inc. ( PLD ) purchased Duke Realty for $23 billion.
That was a long list! And, surprisingly or not, there was no slowdown in 2023, with:
- Ready Capital ( RC ) acquiring Broadmark Realty
- Extra Space ( EXR ) acquiring Life Storage for $12.4 billion
- Regency Centers ( REG ) buying up Urstadt Biddle for $1.4 billion
- Kimco Realty ( KIM ) purchasing RPT Realty for $2 billion
- Healthpeak Properties ( PEAK ) agreeing to take over Physicians Realty Trust ( DOC ) for $21 billion
- KSL Capital Partners agreeing to acquire Hersha Hospitality ( HT ) for $1.4 billion
- Realty Income agreeing to buy up Spirit Realty ( SRC ) for $9.3 billion.
Now that we’re starting 2024, I expect to see even more M&A activity… which could include deals in the net-lease and shopping center sectors. As my team and I scan these property sectors, we’ve identified a few possible combinations.
Net-Lease REITs
Shopping Center REITs
Don’t Underestimate Technology
As I explain in my new book, REITs for Dummies :
“One long-term trend you don’t want to ignore is the property technology, or proptech, movement. Proptech is simply the use of technology in the real estate industry.
“Proptech seeks to make buying, selling, researching, marketing, and managing real estate more efficient and effective through computerized offerings and other technological advancements.”
There are many REITs that use Proptech, and I highlight several examples in the book. Industrial REITs like Prologis use AI to address supply chains, for instance, while apartment REITs like Mid-America Apartment Communities ( MAA ) use cutting-edge technology like SmartRent to generate operating efficiencies.
Or how about how net-lease REITs like Realty Income have partnered with agricultural technology (agtech) players like Plenty to develop vertical farms?
I continue to overweight my REIT investments with companies that generate technology-driven, above-average earnings growth. This includes members of what I call the “tech trifecta”:
- Cell tower REITs like American Tower
- Data center REITs like Equinix ( EQIX )
- Logistics REITs like Rexford Industrial ( REXR ).
As you can see, these three companies are forecasted to generate outsized earnings growth in 2023 and beyond (in terms of adjusted funds from operations, or AFFO):
(iREIT®)
Always Stick With Quality
As many of you know, I created a REIT ETF index in 2023 with plans to launch an ETF in early 2024. The idea came about because of my decades-long work here on Seeking Alpha.
My first model REIT portfolio (created in 2013) was called The Durable Income Portfolio. It was designed to generate sustainable and predictable income (hence the name), holding the highest-quality REITs bought when they traded at a margin of safety.
Up until Covid-19, the portfolio returned around 12% annually.
Needless to say, the shutdowns triggered a reset for REITs and – as I mentioned earlier – their elevated cost of capital. As a result, I’ve tripled down on my search for quality.
Over the last 12 months, we’ve seen what separates the wheat from the chaff. Leveraged REITs have been forced to cut their dividends, including:
We even saw unexpected decreases from stalwarts like W. P. Carey ( WPC ).
I’m not sure anyone could have predicted that dividend cut; it certainly surprised many long-term holders. But this is why you never put all your money into a single asset.
Because you never completely know what’s going to happen.
Be Skeptical of Management
Moving on to my next REIT resolution…
Back before the housing market crashed, I had another enormous problem I had to push through. While the Great Recession was certainly a challenging period in my life, I think untangling one failed 20-year business partnership was even worse.
To put it bluntly, my business partner (and managing member) was apparently stealing. Which is why I’m so skeptical of management.
“Trust but verify” is a powerful quote from President Ronald Reagan. It represents a fundamental part of my decision-making process – and something I implemented in the hundreds of CEO interviews I’ve done over the last decade.
I consider these conversations critical to my REIT research practice. So, no softball questions allowed!
I always try to dig into the tough issues: the one’s that makes executives a bit edgy. Things like:
- Why does your company own three airplanes?
- Why doesn’t it buy back stock?
- Why is the dividend not covered?
As a general rule, giving investors more information in an honest and understandable way is good business. As Beverly Lez, author of Winning Investors Over , wrote:
“When one party to a transaction knows more than the other, someone suffers – and it’s not whom you might think. When sellers have information about the quality of a product that buyers don’t, the sellers are actually the primary losers, as suspicious buyers drive down prices or abandon the market altogether…”
I minored in psychology back in college, which I think has enabled me to be a better communicator… but certainly hasn’t allowed me to bat 1000 when it comes to REIT investing. After all, I still own shares of Medical Properties Trust months after I drove to Birmingham, Alabama, to meet the CEO in person.
By the way, I did ask him about his company’s three airplanes.
Stay Humble
And now for my last new year’s resolution…
When I was in college, I played basketball. Every time I put on the jersey, I knew that I was taking on risks to win.
I knew that there was a limited amount of time.
I knew our team needed to outperform the competition to succeed.
I knew that I could be injured or embarrassed.
But I also knew the rewards of going out there and playing the game. In the end, they were well worth it to me.
In the words of Howard Marks, “Risk is inescapable” and “managing risk is what separates the best from the rest.”
I have to do the same exact assessment every time I publish something.
This might sound contrived, but I’m extremely humbled to be the most followed writer on Seeking Alpha. It’s truly an honor to be writing on this platform, and I appreciate every one of you.
Whenever I type a new sentence on this platform, I’m reminded of the risks involved… and the opportunity I have to communicate with over 114,000 people.
I’m also well aware that I’ve become a better investor – just like I became a better college athlete – because of “playing the game,” mistakes and all. As Bill Gates once said, “Success is a lousy teacher. It seduces smart people into thinking they can’t lose.”
I’m still a work in progress. I fully recognize that.
But from where I sit, I believe 2024 is going to be a great year to own REITs… perhaps one of the best periods in my 13 years on Seeking Alpha (and over 30 years as an investor).
I, for one, look forward to seeing it play out. And I hope you’re excited about it, too!
For further details see:
REIT Resolutions: Is The Thrill Of Victory Worth The Agony Of Defeat?