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.
On life support… and just barely.
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?
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.
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.
And, not surprisingly, that same REIT recently popped up on my friend John Del Vecchio’s quality screen in his newsletter, Hidden Profits.
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.
Visa takes blame for duplicate transactions affecting Coinbase users
Discover what the future holds for blockchain technology in the next #IGCryptoChat this week
4 alternative cryptocurrencies to Bitcoin
Why Trump should say grace for Catholics when downing his Filet-O-Fish
Warren Buffett seals investment on Teva Pharmaceutical
This fast-growing organic products stock already has space on Whole Foods’ shelves
Cannabis acceptance grows as hemp industry leader PotNetwork Holding breaks CBD sales records
The CBD industry is enjoying a boost from the lifestyle sector
Why Vapor Group Inc. might be the breakout penny stock you’ve been looking for in 2018
When you should consult your financial advisor
Promoting women’s football in Malta by UEFA projects
Euro NCAP marks its 20th anniversary with two crash tests
European Parliament’s International Trade Committee backs CETA
The American Heart Association has released four new PSAs
PwC presents 20th global CEO survey results in Switzerland
Featured2 days ago
CBD stocks emerge strong in the growing cannabis industry, marijuana legalization
Crypto1 day ago
One of America’s oldest gold mines enters the crypto-century
Featured1 day ago
This hemp market player’s growth is about to go into overdrive
Crypto1 day ago
Could Global Blockchain Technologies change the way we invest in cryptocurrency?
Entrepreneurship5 days ago
Woman to Watch: Hudson’s Bay CEO Helena Foulkes
Featured5 days ago
5 ways investing in STEM programs could benefit city education
Commodities5 days ago
Cellulosic ethanol production needs to step up to meet expectations
Business4 days ago
Disney announces price hikes for Disneyland tickets in the US