REITs -- What Percentage?

[CritMass]

Well, just curious to see if this thread will revive itself. I hold O, OHI and a Vanguard REIT index. All three are just approx 5-7% of my total portfolio, with Vg index the largest.

[Robandcindy2]

In my effort to reduce risk by allocating to many assets I have two groups of REITS. Each group is counted within and as part of our Financial Sector.

REITS-4% of total Equity portion of our portfolio

ARCP
DLR
NNN
O
VNQ
VNQI

Health Care REITS-4% of total equity portion of our portfolio

HCP
MPW
NHI
OHI
HCN

All equally divided within their group.

I used to track the Health Care REITS within our Health Care Sector but read somewhere that really was not accurate so back into the Finance Sector they went.

Excellent thread and comments everyone!!

[Lee64]

I got hit hard with the mortgage reits last quarter. there were some SA authors I should have listened to and now I need to wait to break even. I hope agnc and nly don't cut anymore that's for sure.

[hendi_alex]

A person should probably make a significant distinction between property REITs and Mortgage REITs. Property[edit] REITs, IMO, represent a category where a conservative investor can allocate 10% or even more exposure toward long term dividend growth investing. Mortgage REITs however are very cyclical, with the downside often representing total disaster for any longs. The companies don't just suffer during the down period, there are usually a flood of the companies which go broke. IMO Mortgage REITs are speculative and are not suitable for the conservative investor.

[Lee64]

(02-10-2014, 09:38 AM)hendi_alex Wrote: A person should probably make a significant distinction between property REITs and Mortgage REITs. Mortgage REITs, IMO, represent a category where a conservative investor can allocate 10% or even more exposure toward long term dividend growth investing. Mortgage REITs however are very cyclical, with the downside often representing total disaster for any longs. The companies don't just suffer during the down period, there are usually a flood of the companies which go broke. IMO Mortgage REITs are speculative and are not suitable for the conservative investor.

Then again, those dividends are very nice when they stop carving into them. Makes for nice supplemental income with a smallish allocation.

[hendi_alex]

I like mortgage REITs and buy them sometimes, but always when the fed action and spreads are moving in a favorable direction. At other times, lost share value and/or possible b.k.'s represent poor total return at the best and near total loss at the worst.

[Dividend Gamer]

I really like REITS and BDCs and MLPs, really enjoy monthly dividends.

I will focus a lot on them for now as they have been beaten down, and I will accumulate while I can. With a horizon of more than 40 years to invest for, my allocations have no where to go but up.

I can't let a set limit deter me from getting into great companies.

[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.

[EricL]

Added to my OHI yesterday to bring it up to a full position in my 401K.

[Dividend Watcher]

(02-11-2014, 09:23 AM)hendi_alex Wrote: Just be sure to remember that in general [yield equals risk]. ... etc.

Alex, first off, it's nice to see you back posting again.

Thank you so much for this post. I still have a problem wrapping my arms around these business structures. Equity REITs are the only thing I am the least bit comfortable with and own a small stake in O.

I keep thinking that if I were going to get rich off of these high yields, why doesn't Buffett, et. al. own big chunks of them?

Once I can come with with intelligent questions, I hope you don't mind me asking for more information.

[EricL]

(02-11-2014, 03:05 PM)Dividend Watcher Wrote:

(02-11-2014, 09:23 AM)hendi_alex Wrote: Just be sure to remember that in general [yield equals risk]. ... etc.

Alex, first off, it's nice to see you back posting again.

Thank you so much for this post. I still have a problem wrapping my arms around these business structures. Equity REITs are the only thing I am the least bit comfortable with and own a small stake in O.

I keep thinking that if I were going to get rich off of these high yields, why doesn't Buffett, et. al. own big chunks of them?

Once I can come with with intelligent questions, I hope you don't mind me asking for more information.

I agree, I wouldn't touch mortgage REIT's with a 10' pole. At least with equity REIT's you know they own physical property that are occupied by tenants that pay rent. Much less risk and easier to understand than the other.

[hendi_alex]

mREITs raise equity, then borrow to lever up 7x-10x. The cash is generally deployed by holding mortgages in their portfolio. Income is generated from the spread between borrowing and lending rates. Some of the mREITs are originators, while others simply buy bundled products on the market. Most do both. When spreads narrow or heaven forbid, invert, the huge use of leverage can get them into trouble very quickly. If the mark to market for holdings drops, that can eat up the 10%-15% equity very quickly and can trigger loan covenants. IMO the best time to buy is very near the end of a fed. rate increasing cycle, or shortly after the decreasing cycle has begun. The time to exit is well in front of any fed increases. IMO, jobs creation and inflation rates are the best indicators for early exit before the mass exodus and share price collapse that invariably takes place. All of these operations do a significant amount of hedging, but the hedging only covers modest changes in rates for fairly short duration. I've seen more retail long investors lose more money on mREITs than on any other single investment, at least in the context of several years of reading posts on various investment boards.

---

BDC's are basically in the same business, of holding loans and making profit from the spread between borrowing and lending, but..... Leverage use is much smaller, no more than value of equity. They hold loans for various businesses which can't access capital through more normal means with banks or share offerings. The BDC also can get very creative in their terms and can write the loans with strings attached that are heavily in their favor. BDCs are generally more diversified than mREITs, but they are also serving many clients who are not in the soundest of financial condition. They have the same issue with revolving debt and with loan covenants. ACAS is a great example of one of the best BDCs which was almost brought down when loan covenants were triggered in 2008-2009. Everyone thought that ACAS was the most conservative investment in the BDC realm. Shares have still not come anywhere close to recovering from the near b.k. during the last crisis.