Over the years, I have come to the conclusion that most individual investors are underexposed to real estate.
Most people are too busy chasing the hot stock of the day to consider that the patient, disciplined ownership of REITs can offer market-beating returns over the long run.
According to information on the National Association of REITs’ website, REITs have actually outperformed U.S. stocks and inflation over the past 40 years, and I expect the combination of dividends and appreciation offered by REITs will continue to do so over the next 40.
Over the past five years I have developed a core holding of the three REITs that I never intend to sell. I reinvest my dividends each quarter to increase my ownership, and if we see a pullback that gives me a chance to buy more at a lower price I will do so.
Barring a significant change in management of financial structure, I will never sell these three REITs.
REITs to Buy: Equity Commonwealth (EQC)
I first got involved with shares of Equity Commonwealth (EQC) when activist investors began an attempt to remove the board. They were successful and they managed to get legendary real estate investor Sam Zell to serve as chairman.
CEO David Helfand is a successful real estate investor who has worked with Mr. Zell for years and has learned his craft form one of the most knowledgeable real estate investors of our time. The new team is repositioning the portfolio, has sold more than $2 billion worth of real estate and intends to sell about another $1 billion to conclude the process.
They are using some of the cash to reduce debt and buy back stock and are holding the rest to take advantage of a better pricing environment. At year end, they had a total of $1.8 billion of cash on the balance sheet.
Analysts estimate the REIT is selling about 20% below the actual asset value of the 64 office properties they still own and cash they hold. At the current price, the shares are a bargain for long-term investors.
REITs to Buy: Colony Capital Inc (CLNY)
Colony Capital Inc (CLNY) is also headed by a real estate investor with a strong track record of success.
Founder and Executive Chairman Thomas Barrack made himself a billionaire investing in real estate, and the collection of assets he has built at the REIT should allow us to grow our net worth as well.
Colony has ownership interest in single-family homes, light industrial properties and triple net leased properties. They also invest in and originate real estate debt, including distressed debt.
They currently own $500 million net book value of about 1,700 acquired non-performing and performing loans from the FDIC, commercial banks, insurance companies, GSEs and other financial institutions. They have a weighted average purchase price of 69% of their face value.
Finally they have over $8 billion under management in real estate investment portfolios.
Owning Colony gives me exposure to equity investing, debt-related portfolios and the steady stream of management fees, all managed by some of the best real estate managers in the world today. The shares trade right around book value and yield more than 9% at the current price.
REITs to Buy: Brookfield Property Partners LP (BPY)
Brookfield Property Partners LP (BPY) owns a global portfolio of office, retail, multifamily, industrial, hotel and triple net leased properties all over the world.
85% of the portfolio is in what they call core office and retail, with a focus on what management refers to as trophy properties. In a recent presentation, management told investors that earnings growth and value creation will help them achieve, on a long-term basis, their goal of earning between 12%-15% return on equity and grow the dividend payout by between 5% and 8% annually.
If they hit, or just come close to, their objectives, this will be a market-beating investment vehicle for years to come.
The stock trades at book value — and well below managements estimate of actual net asset value — and yields 4.7% at the current price.
As of this writing, Tim Melvin was long BPY, CLNY and EQC. He is the author of the Banking on Profits newsletter covering the community bank stock opportunity and the Deep Value Report that seeks out undervalued stocks that are likely to survive until they thrive and capture the value effect that has been proven to beat the market over time.