Yesterday, as expected, the Federal Reserve announced another raise in interest rates.
That makes three 75-basis-point raises in a row. All in an effort to tamp down inflation, which came in earlier this month at 8.3%.
This year, inflation has hit levels not seen in decades and shows no signs of a meaningful pullback… Clearly, the Fed knows it has a lot of work to do to bring prices down and confidence back to the economy.
Here at Intelligent Income Daily, we don’t have a crystal ball. We won’t try to guess what it’ll take to balance out the economy or when it’ll happen.
What we do know is there are certain investments that have outperformed others through market crashes, recessions, and yes, even periods of high inflation.
That’s why we prefer to fortify our portfolios with income plays that will serve us in any market environment.
And it turns out, we’re not the only ones.
Today, I’ll share what some of the smartest investors have been pouring their money into recently, and how we can invest alongside them.
Mirroring the Smart Money
According to a Cambridge Associates study, from 2001 to 2021, one investment group averaged an annual return of 14.7% compared to just 8.6% for the S&P 500. That’s a 71% better result over 20 years.
That group was private equity funds. And that outperformance accounts for the high fees that come with them (typically 2% annually plus 20% of all returns over a certain threshold).
So it makes sense to pay attention to private equity funds’ moves. And right now, they’re targeting one of our favorite sectors: Real estate investment trusts (REITs).
Yesterday, I shared with you how GIC and Oak Street – both private capital market companies – are buying out Store Capital (STOR). I was surprised, but not shocked. That’s because I knew Store owned a portfolio of incredibly valuable real estate.
But as it turns out, that was just the latest in a string of deals involving private equity scooping up real estate assets over the past year:
Last November, Cerberus and Highgate teamed up to buy CorePoint Lodging, a hotel REIT.
That same month, KKR and Global Infrastructure Partners bought CyrusOne, a datacenter REIT.
Blackstone went on a buying spree, picking up Bluerock Residential last December, Resource REIT this January, Preferred Apartment Communities in February, and American Campus Communities in April. All four are apartment REITs.
In April, Blackstone also bought PS Business Parks, an industrial and office REIT.
In May, Brookfield bought Watermark Lodging Trust, a hotel and resort REIT.
And that’s not all… A recent Goodwin report showed that not only are we seeing more deals involving REITs, but the prices buyers are willing to pay are higher as well.
Recent transactions show these buyers were paying an average premium of 27% for these assets compared to the historical rate of 22.5%.
Clearly, private equity funds see immense value in real estate.
And when these smart investors are buying, it’s worth paying attention.
What’s So Great About REITs?
Here at Intelligent Income Daily, REITs are some of our favorite investments for safe, reliable income. In previous weeks, I’ve shared some of the reasons why: They provide diversification, have predictable earnings, and are required to return most of their earnings to shareholders through dividends.
Plus, they’ve historically been a great inflation hedge. In the late 1970s, REITs performed 3x better than other stocks, even when inflation spiked over 10% and interest rates increased by 8.5%.
That’s the same opportunity those private equity funds are seeing today.
Now, smaller investors like you and me might not be able to invest in those funds. They often look for bigger players with deep pockets who are willing to lock up several million dollars for years.
But we can do the next best thing – invest in the same valuable real estate they so desperately want to buy. All it takes is a buying a few shares of our favorite REITs.
One group of companies I’ve got my eye on right now is apartment REITs. A few weeks ago, I shared with you three high-quality names in the sector: Mid-America Apartment Communities (MAA), AvalonBay Communities (AVB), and Essex Property Trust (ESS).
These companies own the same kind of properties Blackstone was snapping up earlier this year at much higher prices. Their shares are now trading much lower, even though average rents are still up more than 10% over last year.
On top of that, high mortgage rates and the housing shortage are still preventing many would-be homeowners from moving out of rental apartments.
So REITs’ outperformance during periods of high inflation plus a rough housing market make this the perfect storm for them to really shine.
Here’s the bottom line: I can’t tell you when the Fed will stop raising interest rates or where the stock market will bottom out. But I do know this…
REITs are looking more attractive every day and can provide you with both a stable stream of income and strong returns over the long term. Just ask the private equity managers.
Happy SWAN (sleep well at night) investing,
Editor, Intelligent Income Daily