Connect with us

Featured

4 strategies for Amazon-proofing your REITs

Avoid REITs that buy trophy assets and focus instead on less exciting addresses that throw off a lot of cash.

Published

on

How to protect your REITs? Here are 4 important things you need to keep in mind when Amazon-proofing your real estate portfolio.

I recently heard Amazon, the world’s largest online retailer, described as a “bull in a china shop” for the way it has disrupted industry after industry.

But that’s really the wrong analogy. An angry bull lashes out erratically, goring or trampling whatever happens to be in front of it at the moment. Amazon is far too mechanical for that.

The better comparison for Amazon would be a steamroller. Like a steamroller, Amazon slowly and methodically flattens everything in its path.

Bookstores?

Obliterated.

Shopping malls?

On life support… and just barely.

Department stores?

Dying a painful death by 1,000 cuts.

Even grocery stores, convenience stores, and pharmacies – businesses long believed to be “Amazon-proof” – are now at risk of being run over.

With the entire brick-and-mortar retail economy seemingly under attack, retail-focused real estate investment trusts (REITs) have absolutely gotten smashed.

National Retail Properties (NYSE: NNN) is down about 20% over the past year, even while the broader stock market is close to all-time highs. And National Retail is the bluest of the blue chips with exceptionally strong tenants.

Some of its more mediocre competitors are down significantly more. Spirit Realty Capital (NYSE: SRC) – which has weaker tenants more directly in Amazon’s path – has seen its stock sink by nearly half in the past year.

What’s the takeaway? Are we looking at a nightmare future of boarded-up shop fronts and decaying, dilapidated retail real estate?

Not exactly.

In fact, Warren Buffett’s Berkshire Hathaway just made a major investment in a retail-oriented REITs. There’s still a lot of value to be had in real estate, at least if you know what to avoid.

So today’s let’s go over some things to keep in mind when putting together an “Amazon-proof” portfolio.

SEE ALSO  How much did Roger Federer make after winning his 8th Wimbledon title?

1. Focus on services

Amazon drones won’t cut your hair or do your other half’s nails anytime soon. Basic personal services, such as barbershops or hair and nail salons, tanning beds and even gyms and movie theaters are about as Amazon-proof as they come.

It’s worth noting that the REITs that Buffett purchased has about two-thirds of its portfolio in properties tied to the service sector.

Shopping malls have been dying for years. I don’t consider that up for debate. But the strip mall next to your house – the one that probably has a dentist, a Starbucks and a dry cleaner in it – should be just fine. Amazon is not really a threat here.

2. Focus on demographics

Consider nursing homes or assisted-living facilities. With the aging of the Baby Boomers, it’s a foregone conclusion that demand for these kinds of properties is about to go through the roof.

There’s just one big problem with trying to invest in this space: the person picking up the tab is Uncle Sam, via the Medicare and Medicaid programs. And Uncle Sam can – and does – arbitrarily change the reimbursement rate he pays for services.

I have no interest in trying to invest in a nursing home operator. And, for that matter, I wouldn’t want to be a doctor these days either. The risk that the government changes the payment rate and grinds profits to nearly zero is a risk I’m not willing to take.

But I’m perfectly comfortable being the landlord in this situation. While the government is very likely to crimp profitability in the years ahead, it’s not likely to actually drive nursing home operators out of business. As a landlord, you don’t need your tenant to be loaded. You just need them to make enough money to continue paying the rent.

4 strategies for Amazon-proofing your REITs

Shopping malls have been dying for years. (Source)

And, not surprisingly, that same REIT recently popped up on my friend John Del Vecchio’s quality screen in his newsletter, Hidden Profits.

SEE ALSO  Asteroid Psyche contains more minerals than all the money in Earth can buy

3. Be careful with hotels, office buildings, and apartments

President Trump will very emphatically tell you that he’s never personally been bankrupt, and I believe him. But in his career as a hotel and casino mogul, he’s had a handful of colossal failures.

Hotels and casinos tend to be expensive trophy assets that, because of their high purchase prices relative to the rent received, often fail to generate a reasonable return for their investors.

They’re also highly cyclical and get hit hard during recessions when business travelers and vacationers cut back on travel. The same is true of ritzy office buildings and high-priced luxury apartments.

Boring, distinctly non-sexy properties like storage units and warehouses often make far better investments than trophy assets because the rents collected tend to be high relative to the price paid for the properties.

So again, avoid trophy assets or REITs that buy trophy assets and focus instead on less exciting addresses that throw off a lot of cash.

4. Remember, real estate is all about cash flow

And, finally, remember that real estate is first and foremost an income investment.

I currently have three REITs investments in the model portfolio, and I’m looking to add a new one this one that has all of the characteristics I covered today: It’s service-based, is backed by strong demographic trends, is delightfully boring, and throws off a tremendous amount of cash every quarter.

And, most important of all, it’s Amazon-proof.

DISCLAIMER: This article expresses my own ideas and opinions. Any information I have shared are from sources that I believe to be reliable and accurate. I did not receive any financial compensation in writing this post, nor do I own any shares in any company I’ve mentioned. I encourage any reader to do their own diligent research first before making any investment decisions.

Charles Lewis Sizemore, CFA is a frequent guest on CNBC, Bloomberg TV, Fox Business News and Straight Talk Money Radio, has been quoted in Barron’s Magazine, The Wall Street Journal, and The Washington Post and is a frequent contributor to Forbes, GuruFocus, MarketWatch and InvestorPlace.com. His academic and real-life experience has given him a unique approach to investing, combining his insights into global macro trends with in-depth investment research, and he has developed a reputation for taking complex issues and making them understandable. Charles holds a master’s degree in Finance and Accounting from the London School of Economics in the United Kingdom and a Bachelor of Business Administration in Finance with an International Emphasis from Texas Christian University in Fort Worth, Texas, where he graduated Magna Cum Laude and as a Phi Beta Kappa scholar.

Continue Reading
Click to comment

Leave a Reply

Your email address will not be published. Required fields are marked *

Most Popular