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Premium Issue - 8/2024

While I have every confidence that the Big Five REITs in the free portion of this letter will deliver returns that exceed the market indexes, the premium part of the service is for those who want or need to do better.

The standard edition of the report does and will continue to do a fantastic job with the big picture of real estate and infrastructure-related investing, in the premium section, we will get down and dirty with investments that offer the opportunity to deliver returns that can measure in multiples of the initial investment and not just percentages.

We will be much more aggressive about making volatility work for us instead of against us and identify opportunities created by extreme market movements.

For those looking to maximize income and protect that income from inflation, the premium Real Income Report will identify opportunities to deliver high levels of cash income regularly from real assets and debt securities collateralized by real assets.

It is worth mentioning that the smartest money on the planet is accumulating real estate-related debt right now. Ares Management is an incredibly successful debt-oriented alternative investment firm that spun out of Apollo over 20 years ago.

Ares Management (ARES) is actively involved in real estate debt. The firm's real estate debt strategy has grown significantly, surpassing $11 billion in assets under management. This strategy focuses on directly originating and investing in various commercial real estate debt opportunities across the U.S.

Ares is not the only large real estate firm entering this space. KKR has been capitalizing on the current credit crunch by targeting opportunities with lower loan-to-value ratios and better interest coverage, allowing it to achieve equity-like returns while taking on less risk.

So are Blackstone and Apollo.

I plan to focus the Real Income Premium Service around two portfolios, one devoted to total return and one dedicated to earning a high current income.

In the total return portfolio, we are looking for REITs with solid fundamentals that are deeply undervalued.

Keep in mind that my approach to investing begins with credit.

We are not interested if the REIT or infrastructure project does not have solid credit.

We want to own a diversified portfolio of REITs that will benefit from the multiyear price recovery process that is just starting.

There is little serious capital in the real estate markets yet. Most mainstream investors are still scared off by the negative headlines, particularly those surrounding the office markets.

The private real estate markets have not begun to recover much. The Green Street Commercial Property Index is still down 20% from the high levels reached in early 2022. While most property classes have recovered modestly in 2024, we are barely above the bottom in commercial real estate pricing.

The Green Street index began the year at 121.5 and is currently at just 123.6.

There is still a lot of skepticism surrounding real estate investment and questions about what will happen in the economy.

These strategies should continue to create opportunities for us as investors in high-quality real estate investment trusts.

Even as many private developers are throwing in the towel (or keys) because they cannot successfully refinance or sell deals, we are seeing REITs come to the markets and easily sell debt at rates that allow them to finance deals without negatively impacting cash flows.

Last week, Realty Income (O) sold $500 million of 5.375% senior unsecured notes due 2054 and intended to use the net proceeds for general corporate purposes, which may include, among other things, the repayment or repurchase of existing debt, buying new properties, or improving existing buildings.

One of the Big Five, Boston Properties (BXP), was also active last week, selling $850 million worth of new debt to redeem maturing notes.

REITs have been able to use their capital strength and access to the market to selectively acquire properties at attractive prices.

CTO Realty Growth (CTO) just closed on a portfolio of three open-air shopping centers for a purchase price of $137.5 million, noting that the portfolio consists of Carolina Pavilion in Charlotte, NC; Millenia Crossing in Orlando, FL; and Lake Brandon Village in Tampa, FL.

Four Corners Property Trust Inc. (FCPT) recently acquired National Veterinary Associates in Indiana for $2 million, a Mavis Tire in Illinois for $2.4 million and a BluePearl Hospital property in Michigan for $1.9 million.

Federal Realty Investment Trust (FRT) announced the acquisition of the Virginia Gateway Retail Center, a 100-acre shopping center that is 95% occupied, in Gainesville, VA, for $215 million.

Quality matters in the current environment. Move slowly and scale into positions in buy-rated REITs.

There are still more than enough market and headline risks that should create opportunities for scale buying.

This week, we introduce the total return portfolio. I have put together a portfolio of REITs that are in excellent financial condition, with outstanding fundamentals and a high-quality portfolio. The portfolio is diversified across segments of the real estate market.

Note that I use Price to FFO (funds from operations). This is a much better measure of cash generated by the business of the REIT than the PE ratio.

With all that said, let’s take a look at the new total return model portfolio:

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