Summary
- I’m currently in the process of writing my predictions for 2021.
- As you can imagine, this forecast is going to be like no other.
- I am maintaining an “overweight” allocation in Net Lease REITs.
- W. P. Carey is an easy pick, amid a "black swan" global pandemic.
- Looking for more investing ideas like this one? Get them exclusively at iREIT on Alpha. Get started today »
Every December I provide my REIT predictions for the upcoming year and over the last few years I have forecasted average REIT returns of between 9% to 12% per year. I’m currently in the process of writing my predictions for 2021 (for iREIT on Alpha members) and, as you can imagine, this forecast is going to be like no other.
As I reflect on a year ago, when I put together my 2020 REIT predictions, I had no clue whatsoever that we would all be dealing with a global pandemic. Fortunately we were prepared for a recession, as we were underweight sectors such as lodging, malls, and theaters; however, our picks were not immune to volatility.
Fortunately, our conservative risk management practices paid us more than dividends, as our core portfolio (appropriately named the Durable Income Portfolio) has generated annual returns of 20.5% (since 2013), in the midst of a once-in-a-lifetime black swan.
Even in 2020 (year-to-date) the Durable Income Portfolio has returned 10.9%, an impressive number, when compared with benchmarks like the Vanguard Real Estate ETF (VNQ) that returned -7.0% YTD.
In my 2021 REIT Forecast I explain to readers that I am maintaining an “overweight” allocation in Net Lease REITs, as I’m primarily looking to allocate capital to REITs with higher exposure to investment grade tenants and higher exposure to essential industries.
The rationale for that call is that Net Lease REITs provide more downside protection in the event of economic setbacks and increased restrictions (on social distancing). While rent collections continue to rise (in Q3-20) in the Net Lease REIT sector, the odds are that rent growth will be muted until the pandemic passes.
I have written recently on EPR Properties (EPR), a challenged company with high exposure to movie theaters (46%). I explained,
“While some view EPR as a turnaround story-in-the-making, we view it as a speculative bet best avoided by conservative, income-oriented investors.”
I also wrote recently on Realty Income (O), a higher quality Net Lease REIT with around 5.7% exposure in theaters. I explained that,
“…at some point, that number will be lower. And one way or the other, the REIT has managed to collect 93.1% of rent in Q3-20 and 100% from investment-grade tenants.”
As I ponder my 2021 REIT predictions, I’m reminded that the movie theaters remain a cloud (overhang) for many net lease REITs, and this could prevent them from seeing rent collections normalize. Some theaters paid September rent as studios were set to release new movies but missed October as studios ultimately postponed new releases.
