After the recent market crash, REITs are now priced at exceptionally low valuations and enormous discounts to net asset values (NAV*):
source
The average discount to NAV is today at 31%, and if you remove the richly priced large caps, the average discount to NAV is closer to 40%-60%.
What this means is that REITs are valued at a ~2x lower valuation than what their real estate is really worth. In other words, you get to buy $2 of real estate for the price of just $1 through the public REIT market.
And that's not all. You also get the benefits of liquidity, diversification, and professional management at no cost. Generally, REITs trade at a premium to NAV because of these benefits, but today, you get it at a steep discount because of market panic.
Now the interesting thing is that:
If you were offered to buy a desirable property in the private market at a 50% discount to fair value, you would probably jump on the opportunity. You would be earning a massive cash flow yield because of the low price, and in the long run, you know that you would achieve enormous appreciation as market conditions normalize.
However, in the REIT market, when investors are offered the same opportunity, they are paralyzed by fears of volatility and short-term results. And for this reason, they are not fleeing away from the opportunity.
Both represent the same thing: Real estate.
But, because one is liquid, investors lose their long-term focus and start thinking like traders instead of landlords. They let the market dictate them what to think and they become overly emotional.
We believe that all REIT investors should think like landlords. If they did so, they would realize that they are currently served a "once-in-a-decade" opportunity in the REIT market.
Landlord vs. REIT Investor
REIT investors behave just like all other stock investors. They are very short-term oriented and worry about the next quarter results more than anything else.
Today, we are seeing a lot of REIT investors try to rationalize why they should not be investing, despite the historically low prices:
Tenants cannot pay rent. Sell!
Dividends will be cut. Sell!
We have not reached a bottom yet. Sell!
The worse is still to come. Sell!
REITs will go bankrupt. Sell!
Landlords, on the other hand, understand that the world cannot function without real estate. It's absolutely essential to our society. And for this reason, real estate is a low-risk investment that will always be needed.
At times, rents may need to be lowered, but then at other times, rents will be hiked again. Most importantly, landlords are long-term oriented investors, and therefore, they understand that the best time to invest is when prices are temporarily discounted.
They do not worry about short-term volatility. They focus instead on the income that their properties produce and wait patiently for long-term appreciation.
So my message to you, REIT investors, is think more like landlords, and not like traders. You are part real estate owners when you invest in REITs. You have tenants paying you your dividends and the underlying properties appreciate in the long run. This may not always be reflected in the share price, but in the long run, REITs always have recovered and continued their upward trajectory.
Now is a Great Time to Invest in REITs… if You Think Like a Landlord
Nobody knows what will happen in the short run, but one thing is clear: When real estate can be bought at cents on the dollar, you should be buying.
Serious, but Temporary Crisis
The world is not coming to an end. We are undergoing a serious but temporary crisis, and sooner rather than later, the economy will open again and we will gradually return to normal. Meanwhile, governments are taking a "whatever it takes" approach to support their economies. Checks are mailed to people. Emergency loans are granted to businesses. And interest rates have hit 0%.
REITs Are Better Prepared Than Ever
Some rent checks will be missed and REITs will suffer from lower cash flow in 2020, possibly even 2021. However, most missed rent payments will still be paid at a later date and REIT balance sheets are today stronger than ever before. Leverage is low at just around 35% LTV. Maturities are limited in 2020 and 2021. And most REITs have enough liquidity to survive even a prolonged period of 0 cash flow.
As Things Return to Normal, The Opportunity is Knocking
Right now, everything looks very bleak. But as we return to normal, rent payments will start flowing again, and investors will quickly realize how irrational it was to sell off REITs based on a few months of missed rent payment.
We believe that we are served a historic buying opportunity that rivals the 2008-2009 period. REITs are priced at enormous discounts to net asset value, and we are loading up on them while we can.
Those who had the courage to buy REITs in 2008-2009 made a fortune in the following years.
It only took 24 months for REIT share prices to nearly triple in value:
Today, several REITs are trading at even lower valuations than during the 2008-2009 crisis:
Simon Property Group (SPG): An A-rated blue chip with a high-quality mixed use retail portfolios is currently offered at 30 cents on the dollar - an even lower valuation than in 2008-2009, despite having a drastically better balance sheet and portfolio. Insiders are loading up on shares with more than $20 million in purchases over the past weeks. The company could triple in share price and still be relatively cheap by historical standards. There will be a lot of pain in the near term, but with an A-rated balance sheet and years of liquidity, SPG is not in trouble:
Source: tikr.com
EPR Properties (EPR), another blue-chip with a multi-decade track record of market outperformance, an investment grade rated balance sheet, and a desirable triple net lease portfolio, is now offered at 40 cents on the dollar, and a deeper discount to NAV than in 2008-2009. There's a lot of uncertainty regarding its tenants in the near term, but the company has years of liquidity to find flexible solutions, and a few years from now, we will look back and wonder what was this speed bump. The company has so much liquidity that it has decided to buy back up to 10% of its own stock:
And one last example: Weyerhaeuser (WY), the largest timberland owner in the world with an investment grade rated balance sheet is offered at 50 cents on the dollar. Lumber prices will take a hit from lower construction activity, but timberland values are resilient during recession. WY does not need to harvest trees when prices are low. It can just let them grow instead, which increases their future value. With a large liquidity position, WY is in no rush and timberland will always be needed. Yet, this is the lowest valuation ever for the company:
Fortunes are made during times of crisis
These are just three examples of high-quality, investment-grade rated companies that generally trade at close to NAV. Yet, today, they are offered at peanuts on the dollar because of the market's excessive short-term orientation.
We cannot predict when the market will recover, but we are confident that real estate bought at these distressed prices will provide significant returns in the coming years. This is not just an empty statement. We have been accumulating more shares over the past weeks at High Yield Landlord.
Be a landlord. Not a trader. The opportunity is knocking.
Historic Market Opportunity! Act Now!
The recent market crash has created exceptional opportunities. Many high-quality REITs are now offered at >10% sustainable dividend yields and have 100-200% upside potential in a recovery.
At High Yield Landlord, we are loading up on these discounted opportunities and share all our Top Ideas with our 1,500 members in real-time.
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