Publicly traded REIT’s have taken a bath in the market. Now that stocks have been beaten up so much so fast, the question is where and how do you take advantage? The source of fear in the world of REIT investing is 1.) uncertainty regarding the solvency of the company’s financial structure(s) assuming market conditions stay the same or worsen, and 2.) risk of cashflow. For REIT’s, cashflow is of course tied to rents, which are tied to tenants and their ability to pay it.

During an upstroke market, stocks are based on appreciation and expansion, which is based on growth strategy, plans, and ability to execute. When shopping for REIT’s at a discount, you’re really shopping for survivability (not growth so much) such that the REIT can stay alive and recover back to full value, more or less. Survivability and insight into survivability is the new “alpha.”

Put another way, if we just want a REIT to survive, we want the economy that its tenancy is part of to be alive and kicking. The underlying earning power of a REIT is the assets it owns, which is all about its localized economy. If the stock price of a REIT is at a discount, you’re getting a piece of the profit potential of those assets at a discount. If those assets’ true earning power is going to stay the same or grow over time, you win based on the arbitrage of the hold.

DC real estate ought to win in this market because its economy is propped up by an expanding government that is not going away any time soon. Private individual real estate assets in DC are not seeing the same level of discount as many other parts of the country because this concept is not particularly genius. However, publicly traded REITs with a heavy DC concentration have seen a huge depression in market value. As long as those REITs do not have an undue level of risk based on their financial structures, those are, probably, undervalued stocks.


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