Billionaire Investors Buy When There Is Blood In The StREITs (2024)

According to numerous legendary investors, the best time to buy investment assets is when market sentiment is at its worst. In this article, we look at some of these quotes, discuss an area of the market where market sentiment is particularly weak right now (REITs (VNQ)), and then share some of our top REIT picks of the moment.

Billionaires Buy When There Is Blood In The Streets

The phrase "buy when there is blood in the streets" - credited to Baron Rothschild, an influential member of one of history's most storied and wealthy families - has been echoed in numerous similar phrases from other billionaire investors over the years. Perhaps the most popular of these is Berkshire Hathaway's (BRK.A)(BRK.B) Warren Buffet's motto:

Be fearful when others are greedy, and greedy when others are fearful.

These quotes emphasize the importance of being a contrarian and taking advantage of the market's mood swings, reflecting the fundamental principle of the stock market described by Benjamin Graham in his book The Intelligent Investor and succinctly communicated in his statement that:

In the short run, the market is a voting machine but in the long run, it is a weighing machine.

While the stock market may swing wildly up and down over short periods of time due to the emotionally driven and short-sidedness of its participants, over the long term, stock prices will inevitably come around to reflect the intrinsic value of a company.

Learning how to look past the emotion-driven stock prices and short-term vision of market participants is fundamental to achieving truly exceptional long-term investment performance. This is of course easier said than done as so many investors often hesitate to invest when the market is down, fearing it might drop further. The temptation to try to time the market and achieve quick gains is extremely strong and often leaves investors worse off than if they simply had the discipline to invest when prices fall irrationally without fear of prices falling further in the short term.

This practice of disciplined buying when stocks are in free-fall is ultimately how many great fortunes have been built, and Rothschild and Buffett have certainly profited from it immensely as well.

Why REITs Are In Free-Fall

Given that the REIT sector has now lost almost exactly one-third of its value since the beginning of 2022, many investors are worried that investing in the sector is as hopeless as throwing money into a blazing furnace.

Some recent comments I have seen on Seeking Alpha articles imply that investors are scared to invest in REITs because the rapid and relentless downward momentum has them convinced that REITs have significantly further to drop. Some even believe that REITs are a broken investment vehicle and that they are therefore no longer investible.

Moreover, it is no secret that the REIT sector is extremely sensitive to interest rates (due to a combination of the substantial leverage that many REITs take on and their status as a "bond proxy" in many investors' eyes), as evidenced by the strong correlation between falling REIT prices and rising interest rates:

Given that many investors interpreted the latest Federal Reserve press conference as implying that interest rates are likely to remain higher for longer, full-blown panic over REITs is accelerating, leading to a sharp dip in the sector in recent days:

It appears that we are in, or at the very least near, "blood in the streets" mode for the REIT sector, making it a potentially very attractive opportunity for courageous, long-term-oriented contrarian investors to make a big splash in the sector.

We ourselves believe this is a great opportunity to buy REITs as we do not think that they are in any way a broken investment vehicle and that interest rates are nearing their peak. We have this conviction because:

• Real estate has a phenomenal track record as an investment asset class that spans centuries and all sorts of economic cycles. We do not see any reason why that is changing now.
• REITs are arguably even better investment vehicles than owning real estate directly, further augmenting real estate's impressive track record as an investment case for the sector.
• REIT balance sheets are in strong shape relative to their history.
• REIT fundamentals largely remain strong, with high occupancy rates and rising rents in most cases.
• The Fed's dot plot indicates that the bias is towards interest rates dropping in 2024 and beyond with limited further upside potential for interest rates:

• Core inflation - a more meaningful metric to the Federal Reserve than the headline CPI - continues to decline:

Our Top REIT Picks

Given our bullishness on the long-term prospects for the REIT sector at its current valuations, what are we buying? While we think there are many attractively priced REITs right now, some of our favorites are WPC, O, and CCI as they are all investment-grade, high-quality REITs that have seen their share prices get irrationally pummeled:

• W. P. Carey (WPC) - as we pointed out in a recent article, WPC's stock has taken a particularly fierce beating from Mr. Market recently, as its spin-off announcement and accompanying dividend cut undermined investor confidence in the stock as a reliable dividend payer and grower. That said, WPC is still highly likely to pay out an attractive dividend after its dividend cut, its growth prospects should be meaningfully improved, and - most importantly - its valuation is now very attractive. Over the past five years, it has traded at a meaningful 15% premium to NAV thanks to its strong long-term track record, robust fundamental performance, BBB+ balance sheet, and high-quality and well-diversified real estate portfolio. However, it is now trading at a 12% discount to NAV, making it a compelling opportunity to buy high-quality real estate at a meaningful discount to its private market value.
• Realty Income (O) - O's sterling reputation as a consistent dividend grower looks even more impressive now that one of its most prominent peers - WPC - has announced that it will be reducing its dividend in the near future. As we pointed out in a recent article, O owns one of the most impressive real estate portfolios in the world and has a tremendous track record of delivering consistent cash flow and dividend growth while delivering massive long-term total return outperformance. Moreover, its A- credit rating is one of the best in the REIT sector and gives it a cost of capital advantage over its peers. Last, but not least, it now trades at a steep discount to its historical averages, including a meaningful discount to NAV. The opportunity to buy arguably the greatest REIT in the world at a meaningful discount to the private market value of its real estate happens only rarely, so we think now is a great time to buy the stock if you have a long-term outlook.
• Crown Castle Inc. (CCI) - CCI is a great communications infrastructure REIT that has an impressive track record of growing dividends at a rapid pace and delivering attractive total returns for shareholders. That said, due to weak near-term growth potential and a rapid increase in interest rates, CCI's valuation has plummeted. While some of this was warranted for the aforementioned reasons, we think that an investment-grade infrastructure company with a long-term mid-to-high single-digit dividend and AFFO per share CAGR potential trading at a discount to its NAV and a 6.8% forward dividend yield is a compelling buying opportunity.

Investor Takeaway

With REITs down by one-third since the beginning of 2022, it can be said that blood is now flowing in the stREITs. While many investors may be giving in to fear and pessimism when it is at its worst by selling right now, we believe that long-term value investors should be buying REITs hand-over-fist at these bargain basem*nt prices. While there are many great high yielding opportunities in the sector (and elsewhere) today, blue-chips like WPC, O, and CCI offer investors a great place to start.

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Samuel Smith

Samuel Smith is Vice President of Leonberg Capital, he has a diverse background that includes being lead analyst at several highly regarded dividend stock research firms. He is a Professional Engineer and Project Management Professional and holds a B.S. in Civil Engineering & Mathematics from the United States Military Academy at West Point and has a Masters in Engineering.

Samuel leads the investing group High Yield Investor investing group. Samuel teams up with Jussi Askola and Paul R. Drake where they focus on finding the right balance between safety, growth, yield, and value. High Yield Investor offers real-money core, retirement, and international portfolios. The services also features regular trade alert, educational content, and an active chat room of like minded investors. Learn more.