July 12, 2021 BARRON’S 31
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INCOME INVESTING
A
lthough real estate investment
trusts overall performed well in
the first half of 2021, investors
will have to be more discerning to
achieve success moving forward.
REITs are popular among income in-
vestors because they are required to pay
out at least 90% of their taxable income in
dividends to shareholders. What’s more,
REIT dividends generally held up better
than initially expected during the pan-
demic, though there were some cuts in
sectors such as lodging.
“The property market is not homoge-
nous, so you have had continued diver-
gence in results,” says Michael Knott, head
of U.S. REIT research at Green Street, a
research firm specializing in real estate.
Self-storage REITs have been stellar
performers this year, returning about 41%,
on average, through July 7, according to
the National Association of Real Estate
Investment Trusts trade group. The stor-
age sector, which outperformed the market
last year as well, is benefiting from a
strong housing market.
For example, National Storage Affili-
ates Trust (ticker: NSA), which yields
about 3%, has returned nearly 50% this
year, dividends included.
Residential REITs have also been im-
pressive, returning around 33%, on aver-
age—nearly double the S&P 500’s about
17%.
Regional malls, which had struggled in
recent years and suffered during the pan-
demic, have returned about 50%. One of
that sector’s biggest operators, Simon
Property Group (SPG), recently de-
clared a quarterly dividend of $1.40 a
share, up 8% from $1.30. Like its group, it
has returned around 50% this year.
Even many of the underperforming real
estate investment trust sectors have done
respectably.
Data centers, one of the top gainers last
year, have been laggards in 2021, with a
14% return—not market-beating, but
hardly a disaster. “Data centers were a big
beneficiary during Covid, and there’s skep-
ticism around the sustainability of that,
despite all the demand for data,” says Gina
Szymanksi, a portfolio manager at AEW
Capital Management, citing pricing power
for rental agreements as one concern.
She says it’s important for investors to
examine the fundamentals in various sec-
tors and to assess the pace of the recovery
in each. “Not all Covid winners will neces-
sarily taper off,” she says. And “not all
Covid losers will rebound at the pace peo-
ple are expecting.”
Szymanski sees more upside in sectors
such as apartments, single-family rentals,
and industrial facilities.
She is more cautious on office REITs,
which have returned about 15% this year,
partly because “there’s still controversy
about long-term office demand, given
work-from-home trends.”
First-half returns don’t always tell the
full story. Case in point: Lodging/resort
REITs have returned about 12% this year,
helped by a strong first quarter. But that’s
been followed by weaker results more re-
cently. One concern is that business travel
continues to be weak, compared with his-
torical levels. “Investors are trying to assess
the net impact of how severe business
travel’s impact will be, combined with this
remarkable strength in leisure travel,”
Green Street’s Knott says.
One subsector in which Knott sees op-
portunity is gambling, which includes
REITs such as MGM Growth Properties
(MGP) and Gaming & Leisure Properties
(GLPI). Both own, but don’t operate, casino
properties. “The gaming REITs don’t reflect
the attractiveness of the underlying real-es-
tate value of what they own,” Knott says.
Szymanksi says that REIT valuations
overall “are fair, relative to history, but
the upside is coming from [growth in]
cash flows.”
Just don’t expect a rising tide to lift all
real estate investment trusts.B
By Lawrence C. Strauss
MAILBAG
In Europe, as
Elsewhere, Value
Is What You Get
For Further REIT Gains,
It Will Pay to Be Choosy
Funds That Can Help Investors Navigate
China,” Funds Quarterly, July 2). On the one
hand, in an era where investors are consis-
tently on the hunt for growth, it is difficult
to ignore a market the size of China and the
innovative Chinese companies that are tak-
ing advantage of that market. On the other
(shall I say heavy) hand, we have the Chi-
nese Communist Party and its often unpre-
dictable control tactics. And let’s not forget
that investing in China supports the heavily
government-controlled economy and essen-
tially throws ESG into the dumpster.
Arthur M. Shatz
Oakland Gardens, N.Y.
Celebrating the Fourth
To the Editor:
It was so inspiring to read the article by
Larry Hatheway and Alex Friedman first
thing in the morning of July 4 (“Celebrat-
ing America, a Nation Built on Aspira-
tion,” Other Voices). Whether the dot-com
bubble (2000), 9/11 (2001), the financial
crisis (2008), or the ongoing pandemic,
America has proved to the world that it
will bounce back. As Buffett wrote a few
years back, “For 240 years, it’s been a ter-
rible mistake to bet against America, and
now is no time to start.” This is still valid
today and will be valid for many centuries
to come. This is America’s true greatness.
Rohit Bhosekar
Harrisburg, N.C.
To the Editor:
Warren Buffett famously said that “price
is what you pay. Value is what you get”
(“Europe’s Economy Is Rebounding.
Here’s How to Play It,” Cover Story, July
2). It is interesting that the write-ups for
the four stocks trading above a 17.5 price/
earnings ratio (excluding Groupe Brux-
elles Lambert, which is a collection of
stakes in other companies) all mentioned
something that those companies can do or
already are doing to help their operations,
competitive positioning, or growth. The
write-ups for the other six stocks, all trad-
ing below a P/E of 12.6, mentioned only
macro or government factors as the reason
that those stocks could increase.
Jordan Smith
On Barrons.com
To the Editor:
Thanks for including some low-cost
exchange-traded funds. Given the cost of
Americans investing on foreign exchanges
or paying fees to hold American deposi-
tary receipts, ETFs seem to be the most
cost-effective way of getting some Euro-
pean exposure. There are some older ETFs
that charge more than 50 basis points.
As pointed out in the article, there hasn’t
been a lot of price appreciation, so inves-
tors might want to consider taking a small
tax hit and saving 42 basis points a year
by investing in the ETFs mentioned in this
article: the iShares Core MSCI Europe and
the Vanguard FTSE Europe.
David Parikh
On Barrons.com
China’s Heavy Hand
To the Editor:
Reshma Kapadia’s informative article
concerning the potential problems that
investors might face if trying to invest solo
in China presents a real conundrum (“4