Real Estate Investment Trusts (REITs) just had a very bad week. Many popular REITs (such as HCP, DLR, WELL and VTR) were down more than 7%, while the S&P 500 was up almost 1%. And importantly, there are a few real time learning opportunities here. Chicken little thinks the sky is falling, arm-chair quarterbacks are blaming the Fed, contrarians says this was long overdue, and asset allocators are whining that these are just tremors before the “big one” whereby the market’s tectonic plates are about to shift. So what do you do?
Don’t Panic. Be Smart:
When a group of stocks (such as REITs) sells off, there are a variety of knee jerk reactions as varied as the characters in the previous paragraph. But we view this as a real time learning opportunity, and we have some advice:
1. Stick To Your Long-Term Plan:
REITs may sound attractive because of their big juicy dividend yields, but just because they sold off doesn’t mean you should ditch your long-term investment plan (and for goodness sake, do not!). We own several of the popular REITs listed in the table above, and we have enjoyed truly powerful year-to-date returns in addition to big dividends. And even though the price sold off last week, they keep paying those juicy dividends. We’re not selling.
2. Be Opportunistic, Not Crazy:
If you have been looking to rebalance your portfolio and/or put some extra cash to work, now is a better time to buy most REITs than it was just a week ago. The saying is not “buy high,” it’s “buy low.”
3. Take advantage of the volatility:
As our regular readers know, we frequently write about attractive income-generating options trade opportunities, and this past week has created a few in REITs. One of our favorite options trades is selling put options (because it generates upfront premium income for us) on stocks (in this case REITs) that we’d be comfortable owing for the long-term if they get put to us. And when volatility jumps (as it has for REITs over the last week), the premium income available is bigger. Generally, we like to sell puts that are at least 4-6% out-of-the money and expire in roughly one month. We like to sell them when the premium income we generate comes out to at least 6% to 10% extra income on an annualized basis (i.e. when we multiply the 1-month income we generated times 12-months). We’re sifting through the numbers this morning looking for attractive opportunities.
The Bottom Line:
Just because REITs sold off, don’t panic! If you’ve picked them right (which we believe we have) they’ll keep paying you those attractive dividend payments no matter what the share price does. And over the long-term, those share prices are likely going higher, perhaps significantly so. It’s okay to be opportunistic so long as it’s consistent with your disciplined, long-term, prudently-diversified, goal-focused, investment strategy. In fact, that exact strategy has proven to be a winner over and over again throughout history.
We are currently long the following REITs: WELL, HCP, DLR, EGP, NRZ, WPC, SPG, O. You can view all of our current holdings here.