Turnaround Investing Blog

George Putnam, one of the country's leading turnaround and distressed investing professionals, shares his timely insight on the economy and turnaround investing opportunities.

Real Estate Investment Trusts (REITs)

Mid-Year REIT Outlook & Six Attractive Investing Opportunities

Real estate investment trusts (REITs), publicly-traded companies that primarily own rent-producing properties, have broadly produced lackluster returns over the past 12 months. While the S&P500 has generated a total return (price plus dividends) of 17.9%, REITs1 have returned only 0.21%. Excluding dividends, REITs produced a loss, returning ‑3.6%. What’s going on?

We think that at least three factors are contributing to the unimpressive performance. Concerns about rising interest rates make the higher yields on REITs somewhat less attractive. Also weighing on returns: rising valuations and slowing earnings growth in most property categories, especially when compared to the open-ended growth potential of technology stocks.

Not all REITs have performed poorly, however. Those focusing on data centers (which serve the rapidly-growing cloud computing industry) returned over 20%, while many shopping mall REITs have lost upwards of 20% as they are under pressure from intensifying internet-based competition, which we call “Amazon Fever.”

As turnaround investors, we approach REITs differently: Rather than focusing on a particular segment of the real estate market, we look for individual REITs that have been neglected by investors but have solid value – that should prevail regardless of the overall market. Some examples, described in our May 2016 Turnaround Letter, include the following:

Note: Price change and total returns are measured from the May 27, 2016 article through June 30, 2017.

These REITs were out-of-favor but offered bargain valuations combined with catalysts for improvement. Over time, we have found that this approach can produce much better returns than the sector benchmarks.

For the REIT group in general, our outlook is much the same as their recent performance: lackluster. Price returns have a good chance of remaining flat, even though high dividend yields will boost overall returns. Valuations look stretched in most segments, and investors may continue to sell shares of REITs subject to internet competition. Broad economic growth is healthy but appears to have reached its limit and may be slowing down. With the Fed ready to start shrinking its swollen balance sheet and gradually increase interest rates, REITs will probably continue to struggle.

There are some attractive opportunities, however – we continue to like the prospects for the six companies highlighted above. In real estate, the mantra is often “location, location, location.” However, in REIT turnarounds, it’s “management, management, management.” Because REIT turnarounds often involve selling illiquid real estate, they can be measured in years, not months. However, for patient investors, they can offer substantial gains while often paying attractive dividends in the meantime. These six REITs have strong management teams and good strategies. Combined with attractive valuations, they offer the prospect of higher earnings and share prices even in a flattish overall REIT market.

1. As measured by the Dow Jones U.S. Real Estate index.

Read More Turnaround Investing Blog Entries

 

Learn & Avoid These 10 Common Mistakes

Free Report: Turnaround Investing Mistakes

Turnaround Investing Blog

Turnaround Investing Blog

A Closer Look At Two Activist Campaigns

Watch to see if ADP’s CEO Carlos Rodriguez inadvertently helps Pershing, and his aggressive and sometimes personal stance against Ackman could backfire. Overall, because of the stock’s strong returns and Ackman’s weak credibility, we would give this activist campaign a low chance of making ADP a successful turnaround investment. For turnaround investors, the Trian campaign appears to have a win-win opportunity for investors--either Peltz joins the board and learns enough to re-invigorate P&G, or loses and management must either execute (boosting earnings and the shares) or they will face a more drastic proxy campaign with higher odds of success down the road. We think the P&G campaign could turn out well for shareholders.  Read More.

Warrants: A Solid Investment Opportunity

Warrants provide a valuable tool for the savvy investor. When selected and implemented well, they can be a smart addition to a diversified investor’s portfolio. Like options, warrants are not equity. They only convey the right to buy equity. As such, neither holder is entitled to dividend rights, pre-emptive rights, proxy voting or any share of any liquidation.

 

Value Investing

 

Warrants' return potential can be very high, but they also carry significant risks. Learn what they are, how they work, strategies to minimize risk and find profit with warrants.

Here's Why You Should Invest in Asset Managers

 

stock market advicex

 

This Forbes article cites a recent MoneyShow write-up that recommends investors take advantage of the strong stock market and potential interest rate hike by "putting some of your investment assets into the shares of asset management stocks."

 

The article praises The Turnaround Letter's OAK purchase recommendation and quotes George Putnam: "As the corporate debt binge that we’ve experienced since 2009 comes to an end, Oaktree will benefit from a growing number of restructurings and bankruptcies."  

 

Learn more about Putnam's investing success with turnaround stocks.