Yesterday, I wrote about Warren Buffett’s big weekend announcement at the annual Berkshire Hathaway (BRK-A)(BRK-B) shareholders’ meeting.
He’ll be stepping down as CEO by year’s end.
That news sent BRK.A and BRK.B tumbling 4.87% and 5.12%, respectively, for obvious reasons. Berkshire Hathaway is Warren Buffett, and nobody knows what it will be like without him.
Since I’m not one of its shareholders, however, I can sit back, relax, and focus on other investment opportunities…
Like the real estate investment trusts (“REITs”) Buffett overlooked in that same meeting.
I don’t mean to pile on the Oracle of Omaha. My regular readers know how much I respect him. My company name, Wide Moat Research, is even based on his words of wisdom.
But Buffett does have his blind spots. And this weekend’s meeting proved as much a few times over.
For instance, when an attendee asked him why he was buying stocks instead of real estate, he responded with:
… it’s so much harder than stocks in terms of negotiation of deals, time spent, and the involvement of multiple parties in the ownership. Usually when real estate gets in trouble, you find out you’re dealing with more than just the equity holder.
There have been times when large amounts of real estate have changed hands at bargain prices. But usually stocks were cheaper, and they were a lot easier to do.
On the one hand, he makes a good point that personally owning and operating properties is both time- and money-consuming. I’ve been working on a development deal for over two years now; and I’m still trying to finalize the land acquisition alone. Not everyone has that kind of time or money.
Then again, that’s what real estate investment trusts are for.
REITs: A Beautiful Blend of Stocks and Real Estate
Unlike Warren Buffett, I do see value in owning real estate in all its brick-and-mortar glory. As I explained a few weeks ago on The Wide Moat Show, this asset class offers:
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Lower volatility
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Passive income
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Tax advantages
Now, as Buffett pointed out, “When you walk down to the New York Stock Exchange, you can do billions of dollars worth of business, totally anonymous, and you can do it in five minutes.”
That’s completely true and something I acknowledge in the opening pages of REITs for Dummies:
There’s a lot involved in renting out a property on a legal level and perhaps even more so on an ethical one. So many issues can (and do) come up, from structural considerations regarding the actual buildings and properties they sit on to weather-related hazards that can literally hit your holdings, to general nuisances and differences of opinions with tenants.”
“But,” I add, “suppose you could bypass all that by being a virtual owner instead.” That’s what REITs offer.
They own properties (or property loans), most of which they then rent out to others. Offices, apartments, health care facilities, warehouses, data centers, hotels, warehouses… These are just a few of the kinds of real estate they own and operate.
By law, REITs don’t pay any income taxes – provided they pay out at least 90% of their taxable income to shareholders via dividends. This setup tends to produce safe and steady profits for both REITs and their investors.
Warren Buffett knows all this, and not just because I sent him a copy of another one of my books, The Intelligent REIT Investor, several years ago. He may or may not have read it, in all honesty.
But I know for a fact that Berkshire Hathaway has since invested in a handful of REITs, including Store Capital (STOR) and Seritage Growth Properties (SRG). And I know it’s made some very nice dividends off them.
Why Buffett didn’t mention that, I’m not sure. Maybe it was just time constraints. He did, apparently, keep this year’s Q&A much shorter than in past years.
Even so, as a dedicated value investor, I’m surprised he didn’t spread the word about the value proposition for many quality REITs.
The State and Status of REITs Today
REITs have been underappreciated these past two years. There’s no doubt about that. With rising rates and the AI narrative, REITs have fallen out of favor. Big Tech has been the focus.
But now that the Magnificent Seven tech stocks are starting to fall out of favor, REIT stock gains are holding up much better than broader equities.
For instance, you might be surprised to learn that a slow-and-steady triple-net REIT like Realty Income (O) has outperformed Nvidia (NVDA) by a wide margin since the start of the year (up 7% vs. down 17.7%).
Yet many are still trading at tempting entry prices. And they’re still well below their former highs, many set in late 2021/early 2022.
Despite their share prices being depressed for so long, they kept right on paying their dividends as scheduled. Many even raised them along the way.
And I don’t expect that trend to change anytime soon.
As Todd Kellenberger, client portfolio manager at global real estate player Principal Asset Management, recently pointed out:
This liquid real estate asset class offers two key ingredients for a compelling investment case: attractive valuations and solid fundamentals. What’s been missing in recent years is the third – and often most critical – element: accommodative interest rates.
Until now.
During the past two years, rising real yields have posed a headwind for REIT performance. However, that pressure may be easing now as policy and growth expectations develop.
Meanwhile, the correlation between REIT returns and real yields has reached an extreme of -0.9. While damaging in a rising rate environment, this heightened sensitivity has historically driven a strong upside when yields decline.
Source: Principal Asset Management
Recognizing all this, I’ll be sending Mr. Buffett a copy of REITs for Dummies this week. I’ve always wanted to meet him, and maybe this gift will be my ticket to do so.
I’ll keep you updated about that effort. In the meantime, I have a few more takeaways from Buffett’s shareholder meeting I’ll be sharing this week… including his thoughts on Berkshire’s sizeable war chest.
And I’ll be discussing Berkshire Hathaway in even more detail on our YouTube show this week. Make sure to tune in live at 11 a.m. EST on Thursday. I aim to make it worth your while.
Regards,
Brad Thomas
Editor, Wide Moat Daily
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Do you agree with Brad that Buffett should invest in more REITs? Write us at [email protected].