Portfolio Update - October: Bargain Hunting Gets Harder
Just a quick note to start: We skipped the Weekly Update last weekend because it was right before the end of the month. It makes more sense to focus on having the values projected for the end of the quarter since those are the values we will compare to the results when management announces them.
September included a cut in short-term rates and rates across the curve declined further. All around it should be positive. We saw a modest rally, but not much relative to the decline in rates.
I ended up taking profits on a few of our older positions, but our gains for the month were weaker than the indexes for our sectors. Despite having REITs that have historically been sensitive to interest rates and having interest rates fall, we just didn’t see the kind of rally we would have liked to see.
I ended the month with our portfolio positioned a bit more defensively after selling a few preferred shares right before the end of the month.
A Strange Disparity
We’re one of the very few services that provides a monthly update with comparisons of our performance to relevant index ETFs.
In September, we underperformed the indexes.
We win more often than we lose, but every service will have some months when they underperform.
I decided to break down the relative performance again. This isn’t a usual part of the series, but I did it last month and felt it was worth doing again.
Our comparison is against an equal mix of PFF, MORT, VNQ, and KBWY. That comes out to 25% preferred shares, 25% mortgage REITs, and 50% equity REITs (VNQ and KBWY are both equity REIT ETFs).
We usually have a bit of cash in the portfolio which can buffer downturns but also reduces performance during positive months.
Where Did Our Performance Differ?
The cash allocation was a material factor. We’re collecting short-term Treasury rates on most of the cash. That’s much better than not getting interest, but it still means the return on cash is only about 0.4% per month. If the market dips, that can be great. When the market climbs, it can drag on our performance. We started the month with 13.69% in cash. That was a factor, but not as big as it might seem. Had the portfolio been jumping higher, then the drag from cash would be more important.
Note: Dividends are included.
For preferred shares, our gains were only slightly behind the index (about 2.96% vs. 3.19%). That’s fine. The index has a bunch of lower-coupon fixed-rate shares. Consequently, it had more to gain from rates falling. The majority of our allocation is in fixed-to-floating preferred shares or fixed-to-reset preferred shares.
For equity REITs the spread was wider. The average of the index ETFs was up 3.64% while our equity REITs were up 1.66%. Our equity REIT allocations are pretty concentrated. We’re primarily invested in cell tower REITs, industrial, and housing (primarily MH park). The cell tower REITs were great on the month with gains from 3.79% to 7.3%.
Despite Blue Orca attacking Sun Communities (SUI), SUI only dropped 0.07% on the month. That was better than any of the other positions in housing REITs or industrial REITs. We also have a small position in Alexandria (ARE), which was down slightly on the month.
The mortgage REITs and BDCs section was also challenging. Granite Point Mortgage Trust (GPMT) finally produced a positive month with a gain of about 20%. However, my primary (larger) allocations for the sector are Ready Capital (RC) and SLR Investment Corp (SLRC). The sector ETF was up 1.34%, which was a smaller gain but it was painful because we were down about 3.41%. Ready Capital was down 4.95% and SLRC was down 3.01%. Those outweighed the gains in GPMT and GBDC.
Interest Rates
Treasury rates moved lower during September across the yield curve. The 10-year rate is still trending down, though it broke the 25-day moving average:
Source: MBSLive
The 2-year Treasury rate is still moving lower and still slightly below the moving average:
Source: MBSLive
Portfolio Updates
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 our REIT Forum website 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.
We delivered a respectable gain in August, but the indexes took the lead. Trailing this late in the year has been a rare occurrence.
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:
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.
We have a project underway to update our guides and improve the organization.
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 the taxable positions are in equity REITs.
Preferred shares and baby bonds:
Equity REITs:
Mortgage REITs and BDCs:
Other:
Subsequent Changes
I picked up an extra 919 shares of Ready Capital (RC) at $7.4264 per share. Brings my average cost down again. Normally averaging down has worked very well for me as the eventual recovery provides a nice gain. Thus far it hasn’t worked here, but there’s still time.
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 10/01/2024 here are some of the trades on my radar.
Note: Some prices are end of day, some are during trading. It takes a bit to prepare this section for subscribers.
Paid Section Begins
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