- Most investors allocate most of their capital into individual stocks and bonds and invest only a little in alternative real assets.
- I do the opposite and believe that most individual investors would do better if they invested a greater portion of their portfolio into real assets.
- I lay out my thesis for real assets and present 3 of my large positions.
In late 2019, I wrote anarticlein which I explain that individual stocks and bonds may not be suited for DIY individual investors.
Bonds are easy to rule out because they pay close to nothing and do not protect against inflation. The average individual investor is unlikely to earn satisfying results from a bond portfolio in 2020.
On the other hand, the issues with individual stocks are a bit more complex. They couldin theoryproduce high total returns, butin practicethey rarely do for individual investors. They pay little or no income, they are highly volatile, and they are complex to understand.
As a result, you are likely to eventually lose patience and sell your stocks, often at a very inopportune time. According to a study by J.P Morgan (JPM), individual investors have earned a 1.9% annual return over the past 20 years:
So clearly, investing in individual stocks and bonds is not working out well for the average individual investor. Yet, people are overconfident and like to think that they are special. They will surely do much better than average.
I wouldn’t be so sure about that. If you think rationally for a second, you would need to have an edge over other market participants to earn superior returns. But realistically, you cannot be an expert in many different businesses. It is very difficult to succeed in businesses. So much in fact that most business owners fail within just a few years. Yet, somehow, everyone who invests in stocks suddenly thinks that they are some type of business guru who can understand consumer products, energy production, pharmaceuticals, and many other complex businesses.
To me, thissounds more like speculating than investing. In reality, you have little knowledge about what own and you are betting on the appreciation of something that you barely understand yourself.
Coming from a private equity background, I never understood the appeal of that approach. I believe that stocks are fantastic investment vehicle, but I believe that the great majority of Seeking Alpha readers would do much better with a traditional S&P500 ETF (SPY) or something comparable. I invest a chunk of my portfolio in stocks through ETFs, but the active part of my portfolio is invested elsewhere.
So If not Stocks and Bonds, Where Do I Invest My Capital?
I invest about 50% of my entire portfolio into various real asset investments such as commercial properties, airports, energy pipelines, windmills, mines, railroads, etc. Anything that is tangible, and an essential part of our infrastructure:
Unlike stocks and bonds, real asset investments offer much higher income, lower volatility, and even greater long-term total returns.
As an example, to this day you can buy a Dollar General (DG)net lease propertywith a 10 year lease at a 7% cap rate, finance half of it with a 4% mortgage, and earn a 10% cash on cash return. Add to that just a few percentage points of growth and you get to 12-15% annual total returns:
It is a high-cash flowing investment with inflation protection and recession-resilience. People need to eat and DG’s business has historically done well during times of crisis as people cut their budgets and look for bargains. The property owner earns a steady rent check and enjoys low single digit growth in the long run.
I don’t know about you, but I believe that this is a much more attractive investment than most other stocks and bonds:
- It is simple.
- It is predictable.
- It is recession-resistant.
- It pays a lot of income.
And most importantly, it feels like a real investment and not like a speculative activity that will cause you to eventually lose patience.
This Dollar General property is of course just one example. You can also invest in apartment communities, industrial parks, energy, timberland,… or anything else that is tangible. The real asset market is far larger than the stock market. Yet, most investors ignore it all together:
But there is one issue. Buying that single property may cost you a few millions. Unless you have a $100 million portfolio, you will never achieve sufficient diversification by buying direct properties.
So How Do You Invest in Real Assets?
Publicly traded real asset companies.
Nowadays, there exists tax-advantaged corporate structures that allow individual investors to access real asset investments without having to actually go out and buy properties.
With REITs, or Real Estate Investment Trusts, you may invest in hundreds of such Dollar General properties and diversify appropriately in the same way you would invest in any other sector – through the purchase of stock.
Moreover, unlike regular stocks, REITs must pay 90% of their taxable in income in dividends to shareholders. As a result, the dividends are very significant and help you to remain patient.
REITs have existed for decades and consistently outperformed regular stocks and bonds over long time periods:
So put simply, REITs combine the benefits of stocks (low transaction cost, liquidity, management) and real estate (high yield, superior returns, inflation protection) into one beautiful vehicle.
But here skeptics may say:
REITs are also stocks… and didn’t they crash recently?
And the answer to that would be yes. REITs are real estate investments traded in the form of stocks. As a result, they can be quite volatile at times and this was particularly true when the pandemic hit the market.
However, despite occasional periods of high volatility, it should be noted that REITs have historically always recovered from past crises, and tracked the performance of the real estate market in the long run.
In other words, they behave like stocks in the short run, but correlate with real estate markets in the long run. A study byCohen & Steers(CNS) confirms this as it found that the returns of REITs and real estate are near-perfectly co-integratedin the long run. This is not really surprising when you consider that REITs do not own anything else than real estate.
Now, the interesting thing is that the higher volatility of REITs can often result in very attractive opportunities for active investors.
As an example, right now there exists REITs that trade at just 50 cents on the dollar.In other words, each dollar invested gives you $2 of real estate value.
The public market is very concerned about the economic shutdown as it will cause some pain to REITs in the short run. However, if you look at the bigger picture, this is a fantastic opportunity to now load up on REITs while they are deeply discounted.
Historic Opportunity To Buy Discounted Real Assets Through Public Markets
Currently, REITs are priced at near their lowest level in 10 years. Now the interesting thing is that simultaneously, stocks and bonds are valued at near their highest level in 10 years.
Stocks are priced at a 30% higher valuation multiple than historical averages even as we go into a severe recession. Almost anyone would agree that this is quite pricey and risky:
Bonds are not any better. The 10 year treasury has repriced at a 0.6% yield, which results in a negative return after taxes and inflation:
Stocks and bonds are richly valued, pay little income, and offer minimal margin of safety in a risky environment.
In comparison, REITs and other real assets are priced at historically low valuations with the highest yield spreads in over 10 years:
What will happen as all the yield-starved investors return to REITs to generate income?
It does not take a genius to understand this is a very bullish set-up for REITs. But don’t take this just from me.Brookfield(BAM), one of the biggest private equity firms in the world, anticipates a major shift from bonds and stocks into real asset investments.
It notes that the demand for real assets has already grown very significantly since 2000, and this demand will only accelerate now that we are in a 0% interest rate world. The institutional capital chasing real asset investments has grown by $30 trillion over the past 10 years, and another $45 trillion is expected over the coming decade:
With interest rates expected to remain at near-0% for years to come, real assets are the only alternative left to generate the much-needed income.
We believe that investors who position themselves today will profit from this rush to real assets as investors bid up prices. The yield spread of REITs is not sustainable at these levels. It is the highest it has ever been at the exception of the great financial crisis. As it returns to historic averages, a number of REITs have 50-100% upside potential. We discuss a few of these opportunities below:
Profit from the Rush to Real Assets: The Real Asset Portfolio
We currently own24 real asset investmentsin our Core Portfolio at High Yield Landlord. These are mostly REITs or other similar public companies that are deeply discounted and offer significant upside potential in the recovery.
They represent what we believe to be the most attractive investment opportunities right now. Below we shortly highlight three of them:
STORE Capital(STOR) is a net lease REIT with a portfolio of over 2,500 properties ranging from home improvement stores to gas stations, gyms, pharmacies, restaurants and other necessity, service, and value based retail shops. The interesting thing here is that STOR has 13 year long leases with pre-agreed rent increases. As such, STOR is expected to generate steady cash flow in the coming years, even if we go into a prolonged recession. Its tenants also enjoy strong ~2.5x rent coverage and therefore, even if their profitability drops somewhat in the short term, they should still be able to make rent payments.
STOR also have a solid BBB rated balance sheet and a blue-chip management with a track record of significant outperformance. Yet, due to near term fears, STOR is currently priced at just half of where it was prior to the covid crisis. The 6.5% dividend yield is expected to remain sustainable and the shares have 80% upside as they return to recent highs.
Medical Properties Trust(MPW) is a healthcare REIT with a Portfolio of >300 hospitals. It is the only REIT that specializes in hospitals, which can be very lucrative investments. MPW is consistently able to acquire these at high 7-9% cap rates and with long leases that provide consistent and predictable cash flow growth, even during today's crisis. The business model is recession-proof and MPW has a strong balance sheet to fuel a 5-10% annual growth rate.
The company is barely affected by the recent crisis, but it has dropped in association with other REITs and now trades at just 11x cash flow and pays a defensive 6% dividend yield that is well-covered. As MPW returns to recent highs, it has 40% upside potential.
AvalonBay Communities(AVB) is one of the largest REITs in the world. It has a >$20 billion market cap and owns ~300 apartment communities, mostly located in strong gate-way coastal markets.
These are Class A communities that are in high demand. Shelter is essential, even during recessions, and especially so during mandated lockdowns. AVB has not had major issues collecting rent payments, even despite all the talks of rent strikes.
AVB combines these defensive assets with an A-rated balance sheet to generate steady and predictable cash flow. It has a track record of ~5% annual dividend growth and has never, ever cut its dividend, not even in 2008-2009.
It is currently priced at a 4.2% dividend yield and we estimate that it has 50% upside potential in the recovery:
STOR, MPW and AVB are just three examples among many others. It is by investing in this type of real asset opportunities that we are able to generate nearly $800 per month in dividend income from a $120,000 Portfolio:
Compared to other bonds and stocks, our real asset Portfolio is very opportunistically priced. It trades at just 7x expected cash flow and a 50% discount to estimated fair value.
At High Yield Landlord, we have positioned our Portfolio to profit from the anticipated rush to real assets. Institutional investors are already repositioning their Portfolios and now you have the opportunity to do it ahead of them.
Are you Positioned to Profit from the Rush to Real Assets by Yield-starved Investors?
AtHigh Yield Landlord, we have positioned our portfolio to thrive in today’s rapidly evolving environment. We are the#1 Ranked Service for Real AssetInvestors on Seeking Alpha with over 1,800 members on board.
We spend 1000s of hours and well over $50,000 per year researching the Real Asset market for the most profitable investment opportunities and share the results with you at a tiny fraction of the cost.
Source: Seeking Alpha