Portfolio Update - May: Anything Beats April
April was a rough month. Interest rates had bounced around in March, but started and ended at similar levels.
The end of April saw the 2-year Treasury break over 5%, before retreating to 4.73% as of 05/15/2024.
Since REITs tend to be sensitive to interest rates, it’s probably no surprise that our portfolio value dipped in April (along with all REIT indexes).
Likewise, we’re seeing a nice bounce in the first half of March as rates dipped.
When interest rates are relatively low, the correlation between REITs and bonds tends to be lower. However, we’ve seen a stronger correlation with real yields at elevated levels.
Think real yields are not elevated? Consider the last 20 years:
Even before the GFC (Global Financial Crisis), real yields barely broke 2%.
Is the argument really going to be that 20-years is too small as a sample period?
Are higher rates working to stop inflation? It doesn’t feel like it. There’s no evidence for it. The CPI (Consumer Price Index) uses some severely lagged data to smooth out inflation. By the time the Federal Reserve was raising rates, the market was already tackling high prices.
I want to bring in a quote from another good macro analyst:
That’s the issue. If public debt to GDP was very low, then raising rates would have minimal impact on fiscal policy.
However, decades of deficits resulted in a very large amount of public debt.
Many people will argue that monetary policy (interest rates) is the job of the Federal Reserve and they are not responsible for fiscal policy.
However, fiscal policy (deficits, because we don’t do surpluses) includes interest expense.
The Federal Reserve is setting part of fiscal policy, whether they want to admit it or not.
They 100% don’t want to admit it.
Article Starts
You can find prior installments of the Portfolio Updates on the Portfolio tab of our website.
Older editions of the Portfolio Update are unlocked for everyone. The newest release reserves the foreshadowing section for paid members.
Trade Alerts
We have a page on Substack to link all trade alert articles.
Here are The REIT Forum’s trade alerts.
Layout - Modified Order
To keep things simple for our investors, the rest of the portfolio update is divided into several segments. We run the same segments (with new content) each week.
We usually maintain the same order from month to month, but I revised the order to work better with free previews. Eventually, the order will be locked in again.
Returns on Total Portfolio
Sector Allocation
Reminder About Cash
Housekeeping
Recently Closed Positions with Returns
Recently Opened Positions with Returns
All Open Positions by Sector with Returns
Outlook
Foreshadowing Potential Trades (paid section)
This layout maximizes transparency while keeping the foreshadowing of our potential trades within the paid section. It also loads the images together at the front, while putting the text-heavy sections together at the end.
Returns on Total Portfolio
Note: The presentation of the charts was modified slightly to enable running it through Google Sheets instead of Excel to reduce transferring data.
The chart below shows our performance since we began preparing for The REIT Forum at the start of 2016 through the end of the latest month:
There are four major index ETFs we use for evaluating performance. They are:
(MORT) $MORT - Major mortgage REIT ETF
(PFF) $PFF - The largest preferred share ETF
(VNQ) $VNQ - The largest equity REIT ETF
(KBWY) $KBWY - The high-yield equity REIT ETF most retail investors follow
Annual comparison vs. each ETF:
Our performance vs. the average of the ETFs:
We evaluate alpha based on performance against the ETFs because it strips out the general change in our sectors.
The next chart shows the change in the value of our portfolio from month to month. We strip out the impact from contributions made during the month because, obviously, contributions are not returns.
The prior year is included as well to help investors see how the calculations work.
If anyone is confused by these calculations, let me know. I believe this transparency is crucial, so I’ll include an example showing every calculation if I hear that readers have any difficulty following it.
Sector Allocation Chart -
The sector allocation chart helps to explain how we are thinking about risk and seeking returns:
Equity REIT allocation fell from 47.55% to 46.13% despite adding $45,851.53 and spending it on equity REITs. It was a really rough period for large REITs. Especially for large REITs with a strong history of growth in AFFO per share.
Reminder About Cash (repeated)
I normally keep at least 6 months or more of living expenses in “cash”. If you normally keep around $40k to $50k in “cash”, the difference between getting paid 5% and 0.2% is around $2k per year.
I’m using (SGOV), (SHV), and (BIL) as my cash substitutes. These are short-term Treasury ETFs. Prices are extremely stable. Liquidity is excellent.
I use a Schwab business account that is not part of my portfolio. The only assets it holds are actual cash and cash substitutes (those 3 ETFs).
Nearly all my expenses go through my credit card already (paid off in full each month).
I still have my checking through USAA because of the long history on those credit cards. If I need cash, I can sell Treasury ETFs and transfer the funds to my USAA account.
It takes a few days, but that’s fine.
This is a pretty nice return for cash I was going to have there anyway.
Note: Some people think you don’t need a strong credit score after getting a mortgage. I disagree. The long history on those cards is extremely useful if I want to boost someone’s credit score. If I add someone to my card, their next update will show they have a card with 20 years of perfect history.
You can get scammed this way. You are liable for the bill. They can just charge the card and walk away. This doesn’t concern me because I keep a lower limit (such as $10k) on those cards and I’m only doing it for people I trust. If one of those people betrays me, I’ll count myself lucky that I found out for only $10k. For people who can’t afford to risk that money, this would be too dangerous.
Housekeeping
We used to have a repeated section on strategy, but I wanted to shorten the update.
I’ll be posting an article that covers our strategy in greater depth and just adding a link to that post.
Recently Closed Positions with Returns
These are the positions closed during the prior calendar month. If you want to see positions that were closed before that, you can see the prior portfolio updates or use the Google Sheets.
If we didn’t close any positions for the sector during the month, then the image will be blank.
Note: By loading the Google Sheets, you can still see all of our closed positions. We only include the recently closed positions to reduce the size of the article:
Recently Opened Positions with Returns
All Open Positions by Sector with Returns
We will start with the open positions as of the end of the month. It often takes a few days to prepare this article, but the screenshots below are from the end of the prior month.
The cell with the ticker is grey if the position is in a taxable account. This was a request by a few members and there was no drawback to adding the information. All of those positions are in equity REITs.
Preferred shares and baby bonds:
Note: Subsequent to the end of the month, we sold our positions in RITM-C and used the proceeds to purchase additional shares of RITM-D.
Equity REITs:
Mortgage REITs and BDCs:
Other:
Subsequent Changes
None so far.
Outlook
I’m still maintaining some caution as evidenced by the cash allocation still over 10%.
I’ll be hunting for the preferred share opportunities (including swapping positions) and looking for potential opportunities in baby bonds.
We picked up quite a bit of equity REITs during April with our 4 purchases.
Note on target updates:
Target updates are a constant process. Swings in interest rates, positive or negative developments, and new research can all push targets higher or lower.
Preferred share targets update daily for dividend accrual and drop on ex-dividend dates. We also adjust targets for swings in interest rates and risk levels.
Foreshadowing Potential Trades
This section is usually prepared shortly before publishing. The goal is to quickly cover ideas for trades. We aim to foreshadow our trades here, though the market may move in surprising ways. While the article takes days to prepare and documents prices and performance from the end of the month, the potential trades section is written last to provide the most up-to-date pricing.
Based on the change in relative prices as of 05/14/2024 to 05/15/2024 here are some of the trades on my radar.
Note: The section below took two days to prepare because of the fundamental research I was doing while preparing it.