By Brad Thomas, Wide Moat Research, Trades Of The Day, 2024-09-05
We've been told for years now that the American economy is booming.
Jobs are plentiful. Consumers are consuming. Inflation is now tamed… or at least well on its way toward being so.
Say it with them: All's right with America! Tra la la la la.
Yet despite that consistent – even constant – narrative, there's been an equally consistent – even constant – stress resting on and over the country.
I wrote about this two weeks ago in a Wide Moat Daily piece titled, “American Consumers Aren't Looking So Hungry Anymore.” It included insights about the past earnings season… how companies actually beat earnings due to cost-cutting measures much more than income increases.
Plus, “consumer prices are still up more than 20% since February 2020.” And “Americans are saddled with a staggering record $1.14 trillion credit card debt.” We can now add in more recent negative reports like the one from The Federal Reserve Bank of New York, showing how:
The expected likelihood [in July 2024] of… becoming unemployed rose to 4.4% from 3.9% in July 2023. The current reading is the highest since the series started in July 2014.
Meanwhile, job holders' satisfaction with their current salary fell year-over-year from 59.9% to 56.7%. Their positive perception of nonwage benefits and promotion opportunities dropped as well, probably because inflation continues to rise – even if at a lower rate.
That's why I'm never surprised when I get completely depressed comments along the lines of:
I wouldn't invest in anything that paid under 5% unless I planned to hold it for a very long time. REITs‘ returns should return to mean, but I have zero faith in the direction of the government spending, the subsequent inflation, and then rate hikes. The time to buy REITs was a while ago. Right now, I'm happily taking my 5% per month sitting on cash. Winter is coming.
I'm not surprised. I understand it. But I can't agree with the conclusion.
While winter is indeed coming, it only means REITs are more important than ever.
Real Estate Has Timeless Value That Can't Be Denied (Only Ignored a Little While)
There are a limited number of assets that have stood the test of time in retaining their value. And almost every single one of them is a commodity:
- Grains
- Livestock
- Precious metals
- Precious jewels
The first two make obvious sense since humans need food to survive. We always have and always will. So, sources that provide that substance are always going to have a market.
Precious metals like gold can't be eaten, for their part. But they're beautiful, rare, and don't easily tarnish, making them a reliable source of currency to exchange goods – including for edible assets.
Precious jewels are, admittedly, just beautiful and rare from a historical perspective. Enough so, however, to keep our attention for millennia, regardless of whether it makes sense or not. (I know diamonds are used in many industrial activities today, but that's a much more recent development.)
Then there's another asset category that needs to be mentioned – one that's not rare, not always beautiful, and not a commodity at all. Yet it's every bit as essential as grains and livestock.
No matter how depressed we may get, we need real estate.
We always have. We always will.
REITs Are As Necessary – and Healthy – As Ever
REITs, while only 64 years old as a legal concept, capitalize on this enduring necessity.
It doesn't matter whether the economy is good or bad. Real estate stands.
For that matter, real estate can stand out even better during downturns when people set aside their luxuries and focus on the fundamentals. If you think that artificial intelligence and other big-tech concepts will dominate investors' thinking if a recession hits, please recall the dot-com crash.
Technology companies were everything in the 1990s. Mainstream market media outlets couldn't stop talking about them! And yet, after that bubble burst, guess what stalwarts took the stage for years?
The correct answer is REITs, which bounded:
- 99% in 2000 compared to the S&P 500's -9.1%
- 5% in 2001 compared to the S&P 500's -11.9%
- 2% in 2002 vs. -22.1%
- 5% in 2003 vs. 28.7%
- 4% in 2004 vs. 10.9%
- 3% in 2005 vs. 4.9%
- 4% in 2005 vs. 15.8%.
2007 flipped that narrative, admittedly. And everything performed abysmally in 2008. But take a literal page out of my The Intelligent REIT Investor to see how well they tend to hold up in varying economic climates:
Moreover, real estate investment trusts' overall fundamentals haven't changed since the last time I wrote about them here at Wide Moat Daily. Global REIT advocate Nareit published findings late last month that “REITs have continued to maintain low leverage ratios, focusing their financing activities on fixed interest rates, longer-term maturities, and unsecured debt.”
Q2 data from its Total REIT Industry Tracker Series (T-Tracker®) shows that, on average:
- “Leverage ratios were low with debt-to-market assets at 34.1%.”
- “Weighted average term to maturity of REIT debt was 6.4 years.”
- “Weighted average interest rate on total debt was 4.1%.”
- “Fixed rate debt accounted for 90.8% of listed REITs' total debt.”
- “Unsecured debt was 79.% of REITs' total debt.”
Put together, this means the average REIT has “greater operational flexibility” with a “catbird seat for potential acquisition and development opportunities in the current marketplace.”
With all due respect to the naysayers, the information I'm seeing all indicates that select REITs are the place to be. Just like they have been. Just like they will be.
Because that's the nature of the assets they hold.
The need for real estate never dies.
Regards,
Brad Thomas
Editor, Wide Moat Daily
Source: Wide Moat Research
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