This year hasn't been kind to tech stocks. The Nasdaq is down 14%, and many former highfliers have plunged more than that. Meanwhile, many boring old REITs, or real estate investment trusts, are still churning out dividends, enriching investors while helping to shield them from inflation.
Tech stocks will have their day in the sun again soon, but for now, I'm buying real estate. Let's talk about why, using The Macerich Co. (MAC -1.30%), Innovative Industrial Properties (IIPR 0.28%), and Medical Properties Trust (MPW 4.61%) as examples.
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It's still a better value
Mutual fund legend Peter Lynch preached the virtues of buying into industries that everyone is down on. No institution wants the stock in its portfolio, but eventually the market will realize the value. What industry could be more unloved in the post-e-commerce world, and on the heels of a worldwide pandemic, than mall operators?
Macerich is indeed unloved. It trades for less than the book value of its assets. Its stock price is down 78% over the past five years. The former $20 billion company is now close to small-cap territory. That just means the stock is right where we want it.
It's true that shopping malls are (partially) on the way out. The world of shopping 10 years from now will likely be nothing like it was 20 years ago. Macerich, which was founded in 1972 and has lived through several market cycles, understands that this transition is happening too.
The REIT is focused on Class A regional malls in major urban markets. Management is betting that as low-end malls go away, shoppers will still want a place to try on clothes, buy sporting goods, and even go to the gym in some of its locations.
So far, the strategy is working. According to the company, foot traffic is already back to where it was pre-pandemic, and sales are growing even faster. In the meantime, it has been reducing debt and selling noncore assets to focus on its strategy.
Not many tech stocks face the long-term difficulties that Macerich does, but that uncertainty and more is already priced in. Value investors will likely have more luck finding opportunities in real estate right now.
It can be just as exciting
Real estate isn't all slow growth and yields. Innovative Industrial Properties, a REIT that owns and leases cannabis grow facilities, has a more impressive growth profile than many of your favorite tech stocks. IIPR was founded in 2016 and revenue has grown to $236 million in just five years.
The REIT focuses on sale-leaseback transactions with cannabis growers. Typically, growers have a hard time finding any sort of traditional financing or banking because U.S. law bars federally insured banks from working with them.
Often, the growers have to give away equity to raise more capital, and when they start making money, it goes into property instead of the bank. This is a good way to build assets, but it restricts future growth without further diluting existing owners. Selling the property to IIPR and then leasing it back makes an illiquid asset liquid and allows the grower to keep expanding.
Most of IIPR's management team came from BioMed Realty, a real estate company that caters to life science companies. The team took their expertise in that industry and applied it to cannabis, where the REIT has grown from $30 million in invested capital at its founding to $2.1 billion today. There are plenty of future growth opportunities as well. IIPR is now the leading company in the industry, and it has just 27 tenants in 19 states.
Finally, while the REIT is in no way a slow-growth real estate play, it has a dividend yield of 3.5%. Most tech stocks grow by retaining earnings, but because IIPR is a REIT, it has to pay out most of its earnings as dividends, meaning you'll get paid to watch it grow.
It will protect you from inflation
Inflation hit 8.5% in March. Once a boogeyman of only gold bugs and crypto proponents, inflation has become a very real problem for investors. Over the last year, your portfolio had to gain 8.5% just to break even. Luckily, real estate is a great inflation hedge.
Let's illustrate the concept with Medical Properties Trust, a REIT that finances hospitals. Traditionally, the professionals who were experts at running hospitals were not experts at finding financing for the development of the property (and new hospitals requires millions of dollars to develop), so new hospital growth was slow.
Medical Properties works with the hospital professionals to purchase or develop new hospitals and then lets them run the property under a long-term lease. It is the second-largest owner of hospitals in the world, with over 400 properties in nine countries.
The key is inflation protection. When prices rise, many industries lose business because their customers have a budget constraint and have to cut spending. Healthcare is rarely the thing that you cut. That means Medical Properties' tenants are able to raise their prices to keep up with inflation.
The REIT executes 10- to 20-year leases with its operators and includes either fixed-price escalators or CPI-based inflation escalators. It gets the best of both worlds: a long-term lockup with an experienced operator in a necessary business and annual price increases to keep up with inflation. The best part for you, as the investor, is the dividend yield. At 5.7%, it returns a lot of the purchasing power you've lost to inflation.
Consider adding real estate to your portfolio
During bull markets, tech stocks can boost any portfolio. But bear markets wreak havoc on portfolios overly weighted in tech. Obviously, we don't recommend attempting to time the market, but diversifying at least part of your portfolio into real estate will go a long way toward reducing your volatility in the short term, which should help build your wealth in the long term.
