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.

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Is there value in bankrupt PG&E’s stock?

In nearly every case, the shares of a company in bankruptcy become worthless. In very rare cases, however, they can become great investments. W.R. Grace (NYSE:GRA) shares produced a 75-fold return, as an example. With California utility PG&E (NYSE:PCG) now in bankruptcy, the range of possible outcomes for its equity is wide.

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EV/EBITDA: What Is It & Why Are We Using It More?

In reading recent editions of The Turnaround Letter, you have probably noticed that we are increasingly using EV/EBITDA as a valuation measure, rather than the better-known price/earnings multiple.  We thought it might be useful to describe this measure and why we like it.

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Turnaround Letter Stock Pick Named Top Performer of 2017


stock market advicex


What Last Year's Top Stock Pickers Are Buying in 2018


This Forbes write-up follows up on the recent Top Stock Tips report--naming The Turnaround Letter's Crocs recommendation the top performer of 2017: With 90% gains, CROX beat out 100 other investment ideas included in the report; and the stock continues to have value investing appeal, according to Putnam.


George notes, "We see additional upside for the stock in 2018 as management's efforts continue to bear fruit, though the gains will likely be more muted than we saw in 2017."