02-11-2014, 09:23 AM
(This post was last modified: 02-11-2014, 09:25 AM by hendi_alex.)
Just be sure to remember that in general [yield equals risk]. That is especially true for the mortgage REITS and to somewhat less extent to the BDCs. While BDCs employ much less leverage than mREITs, both have all kinds of loan covenants that can cause the business to totally unravel during times of tight credit or other significant stress. All three [REITs, BDCs, and MLPs] are reliant on a nearly constant stream of fresh money coming in. The mREITs are most hostage to this need, as they borrow short term and lend long term. The short term borrowings have to constantly be rolled over as the terms mature. One special risk associated with all REITs lies in the fact that the companies never have any significant emergency reserves, as a result of their mandate to pay out 90% of profits to shareholders. It doesn't take a rocket scientist to figure out that this low level of cash takes away much of their flexibility in dealing with any kind of cash crunch emergency.
In the short run all three groups tend to trade in tandem, especially during hard sell offs. Longer term, the MLPs have a history of holding up pretty well during periods of inflation. Property REITs also do fairly well with inflation over the longer term. MREITs and BDCs both get killed during the short run and the long run, as long as rates and spreads put margins under pressure. When loan covenants come into play, or when borrowings can't be renegotiated, both end up being toast, with investors losing most everything.
IMO some allocation for both Property REITs and mid stream MLPs fits nicely in a conservative income investor's portfolio. BDCs and MREITs are not conservative investments, therefore do not belong in the very conservative investors portfolio. Any conservative investor who holds either is not being realistic as to the nature of these investments.
I occasionally invest in all three categories, but do stay pretty disciplined concerning allocations. However, my profile is not that of a conservative investor. My income needs are totally taken care of via pension and social security. Therefore, our investment portfolio represents totally discretionary income. If relying on my portfolio for basic needs, I wouldn't go near a BDC or an MREIT, as the risk they present would fall outside of my investing profile.
In the short run all three groups tend to trade in tandem, especially during hard sell offs. Longer term, the MLPs have a history of holding up pretty well during periods of inflation. Property REITs also do fairly well with inflation over the longer term. MREITs and BDCs both get killed during the short run and the long run, as long as rates and spreads put margins under pressure. When loan covenants come into play, or when borrowings can't be renegotiated, both end up being toast, with investors losing most everything.
IMO some allocation for both Property REITs and mid stream MLPs fits nicely in a conservative income investor's portfolio. BDCs and MREITs are not conservative investments, therefore do not belong in the very conservative investors portfolio. Any conservative investor who holds either is not being realistic as to the nature of these investments.
I occasionally invest in all three categories, but do stay pretty disciplined concerning allocations. However, my profile is not that of a conservative investor. My income needs are totally taken care of via pension and social security. Therefore, our investment portfolio represents totally discretionary income. If relying on my portfolio for basic needs, I wouldn't go near a BDC or an MREIT, as the risk they present would fall outside of my investing profile.
Alex