Commercial RE was “hit” in the last recession, although not nearly as badly as many other asset classes. Nonetheless, lessons were learned, and one of those was about leverage. The average REIT leverage ratio was 58.3% in 2008. That wasn’t a bad number, but today that has declined even more significantly, to 48.4%.
Sandeep Mathrani, the 2019 Chair of NAREIT and CEO of Brookfield Properties, writing in the current issue of REIT Magazine, notes that REITs are also doing a much better job of laddering maturities, avoiding large fluctuations in the cost of capital. For example, the average maturity in 2009 was 60 months, and that’s out to 72 months today. I’d encourage his article to all of you.
Naturally, every serious trader is glued to the screen right now. That said, one of the “selling points” of a curated REIT fund is that it adds a significant degree of diversification to a portfolio. The past two weeks are a case in point.
Yes, we took a small loss in the past couple of days. To be specific, since the close of trading April 30, we are down (drum roll, please), by 0.2% as of the close of the market today. That’s right. If you had a dollar invested in ACCRE’s portfolio on April 30th, you’d still have 99.8 cents. Conversely, the S&P is down 4.5% and the Dow is down 4.8% in that same period.
So why is this? There are a lot of fundamental reasons why a well-managed REIT portfolio will providing insulation during periods of financial uncertainty. This is not to say that all REITs perform well, nor are REITs fully insulated from long-term economic trends. That said, though, well-selected and well-managed REIT investments will generally provide superior returns and great diversification.
While we continue to outperform the S&P overall, April was not one of our best months. Indeed, we were basically flat in April (down 0.5%), and so were REITs in general (down 0.06%). Admittedly, this comes on the heels of a very strong January, February, and March (up a cumulative 13.5% in those three months!).
Right now, our portfolio is stable. Our Sharpe ratio (the measure of excess returns versus volatility) continues to beat the S&P hands-down. Intriguingly, our overally lifetime correlation with the S&P declined a bit over the last month (which is a good thing for investors seeking diversification). However, I expect to make a couple of trades this coming month. Subscribers will receive immediate e-mails when and as we make those trades.
Everyone knows a market downturn is in the cards — but as usual, real estate may be the safe harbor for weathering the storm. With that in mind, Dr. Peter Linemann of Wharton believes public market real estate — namely REITs — are the place to be in anticipation of that.
Writing last month for Commercial Property Executive, Dr. Linemann notes that, “Contrary to mythology, real estate equity returns have historically been better during periods of rising interest rates, partly because owners had locked in low long-term fixed-rate debt, while enjoying increased incomes from improved occupancy and higher rents.”
Linemann believes private equity “dry powder” totals about $325 Billion globally, with about 15 to 20 percent targeted for the U.S. However, the stock of commercial real estate will expand only about 6% over the next three years. He believes in the face of this, cap rates will actually fall, supporting the safe harbor theory.
Tomorrow morning we will post the April results for ACCRE. See you then!