Penn Wealth Publishing

2020.11.01 Penn Wealth Report Vol 8 Issue 04

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10 penn wealth Report volume 8 issue 04 01 nov 2020 Copyright 2020. All Rights Reserved. investment intelligence The first REIT, or real estate investment trust, I ever invested in for clients was Health Care REIT, symbol HCN, back in the late 1990s. e company, which is now called Welltower (WELL $24-$50- $93), owns a diversified healthcare portfolio of over 1,700 senior housing, medical office, and acute care properties in the United States, Canada, and the UK. Back then, I was attracted to the fat dividend yield and the story: an aging US population would create an ever-increasing demand for such facilities. Today, I am attracted to WELL for precisely the same rea- sons—although there is validity as to why the shares are 42% off their 52-week high. While there are many facets to the healthcare arena, in aggregate they make up just one small slice of the real estate pie. e comprehensive and wide-encompassing scope of the real estate market makes REITs one of the most dynamic and excit- ing sectors in which to invest. And right now, there is a massive transformation going on which—we believe—will change the way investors need to look at these vehicles. Let's consider some of the traditional corners of this market, the shifting land on which they are built, and some new entrants which few could have fore- seen just a generation ago—back when I was piling into HCN. Not just the great American skyline When the term "REIT" is mentioned, some immedi- ately picture giant buildings which form the skyline of any major city. Others may picture large apart- ment complexes or retirement communities. And, indeed, office REITs. But there are a number of other options for investors in this sector. e group's diversity is impressive, given the fact that it is actually the second-smallest of the eleven sectors representing all publicly-traded firms. With an aggregate market cap of $2.2 trillion, only the Utilities sector lags—with a market cap of $2.1 tril- lion. Putting that in perspective, the combined size of all publicly-traded REITs is close to being surpassed by the market cap of one company: Apple (AAPL, now worth roughly $2 trillion). e largest REIT is American Tower (AMT), at $112 billion. A large percentage of REITs operate within the small- and mid-cap arenas, with market caps between $300 million and $10 billion. We consider that an attribute rather than a detriment, as many of our most lucrative investments have been uncovered by looking down the market cap scale, not up. For example, while we hold Apple in the Penn Global Leaders Club (GLC) and believe it will con- tinue to excel, it would require a massive effort for it to become a $4 trillion company—especially considering the world didn't have a $1 trillion public- ly-traded company until two years ago (it was Apple, by the way). But consider Taubman Centers (TCO $38), a $2.3 billion retail REIT we own within the Strategic Income Portfolio (SIP). Taubman could double in size and still fit comfortably in the center of the mid-cap range. In other words, REITs tend to offer excellent growth opportunities. Beyond their growth potential, there is another major reason we are attracted to REITs. Note that we said Taubman was held in the SIP, which seeks out income-generating investments for clients and mem- bers. Taubman generates an impressive 7% income stream for investors via its dividend rate. Considering the 10-year Treasury currently yields just over one- half of one percent, many conservative, fixed-income investors are attracted to REITs throughout the eco- nomic cycle. But REITs are not "buy and forget" investments. ey are prone to wild swings based on external fac- tors, such as changes in the tax laws, demographic shifts, and economic activity. Nothing proves this point more than the current pandemic. How the pandemic has disrupted the sector Going into 2020, the biggest concern in REITs revolved around the retail space. With a slew of high-profile bankruptcies, from JC Penney to Neiman Marcus to Brooks Brothers, retail REITs such as Simon Property Group (SPG), Macerich (MAC), and CBL & Associates (CBL) watched as their share prices got slashed by over half. e press glommed on, declaring that the Age of Amazon had arrived, and that Americans had decided to shun the malls in favor of online shopping. Real estate investment trusts can be dynamic, wealth-building, income- producing vehicles, but beware of the seismic shift about to take place. Real Estate Investment Trusts e Changing REIT Landscape e contents of this report reflect the personal views, opinions, and research of Penn Wealth Publishing. While measures are taken to help assure the accuracy of data, no guarantees can be made and the firm is not liable for any losses incurred by subscribers. is is not a solicitation to buy. Always consult your investment professional before investing any money.

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