Tim Melvin: Expectations for REITs in 2020

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Where Opportunities Lie after a Solid 2019

NAREIT – the National Association of Real Estate Investment Trusts — explored REITs’ strong 2019 performance and linked the sector’s success to a bounceback from 2018’s lackluster performance.  Last week’s commentary quoted Matt Werner, portfolio manager at Chilton Capital Management.

Werner noted that many REITs had lagged the market for several years as they repositioned their portfolio, selling older buildings in less desirable locations, and buying newer, more exciting properties. He thinks that bodes well for next year.

“Going into 2020, REITs should see the reward for these efforts and also enjoy accretive acquisitions and lower blended interest expense on existing debt,” he told NAREIT.

Is NAREIT Correct About 2020 Performance?

I tend to agree that 2020 should be a decent year for REIT investors.

However, I will add a caveat to that.

This year will be a year for hunting with a rifle and not a shotgun.

Strong cash flows, increasing asset values, and, most important of all, the multiples of cash flows and asset values will be important factors in earning high returns in REITs in 2020. Passive strategies will likely not work as well this year as they did in 2019.

Several forces could disrupt the real estate markets next year. These factors include a continued trade war with China, a further slowing in the economy, and the increased risk in the Middle East after the bombing that killed Qasem Soleimani last week.

I do not see much economic threat to the real estate markets in the United States. Therefore, REITs may be somewhat insulated from geopolitical events that roil the broader stock market.

NAREIT Senior Vice President for Research and Economic Analysis Calvin Schnure had similar thoughts.

“Real estate markets enjoy low vacancy rates and a balance of new supply and growing demand, supporting rent growth and REIT earnings in the year ahead,” Schnure said. “Watch out, however, for rising vacancies or slowing rent growth.”

Lending REITs Offer Upside in 2020

The strongest segments of the REIT Market last year were the strongest performing REIT sectors of 2019.

Manufactured home REITs rose 49.1%, industrial REIT s gained 48.7%, and data center REITs popped 44.2%. I think that a similar performance level will be hard for these sectors to replicate next year. I would wait for those markets to settle a bit before committing new capital.

With rents rising and occupancy rates at very high levels, I would look to use short-term market disruptions to buy high-quality REITs at discounted valuations. Patience and discipline will be the key to success in REITs in 2020.

Those investors that are primarily interested in income may want to consider sticking with lending REITs. I see nothing on the horizon that could significantly shock collateral values, so lending REITs should have stable net asset values and produce high levels of income in 2020. The main risk in the Lending REITs is management, so I would investigate the loan loss rate and risk levels of each REIT before investing.

Related: Mall REITS Reeling after Forever 21 Bankruptcy

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January 29, 2020

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