REITs – The Timing may be Just Right

By Sheaff Briefs Editor Perspectives, Portfolios, Possibilities bond and equity markets, diversification, dividends, downside risk, ETFs, investment income, investment strategies, market capitalization, market performance, portfolio diversification, Real Estate Investment Trust, REITs, Sheaff Brock Real Estate Income & Growth portfolio 0 Comments

Investment income can be rather hard to find these days, as you’ve no doubt noticed. With interest rates in “the 2’s,” (not to mention the risk of principal loss when, as Kiplinger predicts, those rates likely rise), it’s time to get strategic, taking a broader look at portfolio possibilities. When both stock and bond markets become more unpredictable, Sheaff Brock feels it becomes important to diversify into assets that are less correlated with traditional stock, bond, and cash holdings. While real estate ownership nicely fits the non-stock-and-bond-correlation bill, direct ownership of real property comes with some big challenges: it’s illiquid, expensive, and time-consuming.

In past years, one solution for investors has been Real Estate Investment Trusts (REITs)—companies that own and manage income-producing real estate. When REITs came on the scene more than sixty years ago, they quickly became a favorite with income-seeking investors because, as David Nethercut of REIT.com put it, they “democratize real estate investment.” By law, REITs are required to maintain dividend payout ratios of at least 90%. Investors also appreciated the simplified tax treatment as compared with direct ownership of income-producing real estate. Those seeking diversification would need to buy a fund of REITs. Today, the most popular REIT funds and ETFs (Exchange Traded Funds) own nearly the same large-cap companies, with little exposure to smaller or mid-sized REITs.

Sheaff Brock’s new Real Estate Income & Growth portfolio bears only slight resemblance to those large, relatively monochromatic funds and ETFs. The portfolio’s spread of all market capitalization companies includes:

medical properties
apartments
storage facilities
hotels
retirement community properties
timberland
billboards

In addition to diversification, there are three other guiding principles characterizing Sheaff Brock’s approach to real estate portfolio design:

focusing on downside risk first
aiming for exposure to all market caps
seeking companies with low leverage (lower borrowing can equal lower risk)

In fact, great care was taken to keep the Sheaff Brock Real Estate Income & Growth portfolio “nimble.” In a special interview with our SheaffBriefs editor, Managing Directors Ron Brock and Dave Gilreath explained the special timing factors that encouraged them to expand the firm’s portfolio offerings beyond stocks, bonds, and options, and to venture into income-producing real estate. Here are their thoughts:

In general, real estate has tended to “lag” the stock market over long periods of time, meaning there might be upside potential in real estate.
REITs may serve as an inflation hedge (investors are noticing inflation gradually re-entering the picture)
With foreign investors buying U.S. real estate, demand for domestic property has global support.

Real Estate Investment Trusts are not “new.” However, in terms of nimbleness and diversification, there’s a whole lot of “new” to be excited about in the Sheaff Brock Real Estate Income & Growth portfolio!