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Episode #6: Reits Vs. Stocks with Matt DiLallo

Matt DiLallo joins the podcast this week to talk about some research on the historical performance of REITs vs. stocks. Matt is one of the most prolific writers on Millionacres and has authored a ton of our REIT content. 

If you are interested in learning more about REITs, our “Complete Guide To Investing in Real Estate Investment Trusts (REITs)” is a great place to start. https://www.fool.com/millionacres/real-estate-investing/reits/# . Matt’s latest article, “2 Office REITs to Buy Now” https://www.fool.com/millionacres/real-estate-investing/articles/office-reits-october-2020/ is also an excellent read.

In this episode, Matt speaks to Millionacres Editor, Deidre Woollard, to outline some of the reasons one might consider REITs as a part of a long term investing strategy. 

Transcript

Matt DiLallo: REITs are actually stocks, they're publicly-traded companies. The big thing that makes them different is their corporate structures and how that differs from a typical common stock. You've got your Google, that's actually structured as a C corp and the way it works is the government taxes them on their net income and what a REIT's different is they don't get that taxation on their net income. That's part of how Congress set them up to be like this special structure on real estate and that allows them to pay dividends and it gives them an extra edge. While REITs are technically stocks, they're a different entity that Congress has set up to own real estate and give the average investor the opportunity to own a great high-quality portfolio of cash flow and real estate. [MUSIC]

Deidre Woollard: You are listening to the Millionacres podcast. Our mission at Millionacres is to educate and empower investors to make great decisions and achieve real estate investing success. We provide regular content and perspective for everyone from those just starting out to season pros with decades of experience. At Millionacres we work every day to help you demystify real estate investing and build real wealth. Hello. I'm Deidre Woollard, an Editor at Millionacres and thank you so much for tuning into the Millionacres podcast. I'm excited today to have Matt DiLallo with me to talk about some of the research he's done on Millionacres on REITs versus stocks. Now, REITs, as we talked about on previous podcasts, are real estate investment trusts. Matt is one of our most prolific writers on Millionacres, he writes a lot of our REIT content. He studied REITs for many years, and he always has great insights. I learned a lot from him so excited to have him here so welcome, Matt.

Matt DiLallo: [MUSIC] Thanks. Thanks for having me again.

Deidre Woollard: I'm really appreciative that you're going to do this with me. You published this piece on REITs versus stocks, which is on our Millionacres Research Center, and it looked at the historical performance of real estate investment trusts over time. I thought that this is really important because I think a lot of people don't know how REITs act compared to the S&P 500.

Matt DiLallo: Yeah. What we wanted to do is just answer that basic question that investors probably have is, is real estate a better investment than the stock market? That answer actually changes every day because stocks go up and down every day. However, I looked back at the data as far as I could go and from 1972-2019, REITs actually outperformed the S&P 500, it was 13.3 percent versus 12.1 percent. That gives us a good idea of over the long term REITS have done really well, they've outperformed the market. For an investor that has a long-term time horizon, REITs would be a good place to park your money. If the idea is I want to outperform the stock market then REITs is a good place to go. I broke down the information in a lot of different ways in that article to give people an idea of how REITs have done during different time periods. But the general thesis was the longer you own a REITs, the better it performed versus the S&P 500.

Deidre Woollard: Great. Thank you. Can you explain a little bit how REITs are similar to other stocks and what makes them different? I know that they were started in 1960 to allow people to invest in commercial real estate.

Matt DiLallo: Yeah, so REITs are stocks, and that's probably where there might be some confusion. They're publicly-traded companies. The difference is in how they're taxed. A typical public company like your Amazon or your Google, that would be classified for tax purposes as a C corporation. What happened is they make money and then the government taxes them on their taxable income and then if they pay dividends, you as an individual pay tax on that as well. But a REIT's a special structure, there's a couple of these special structures out there. Another one's in energy and they're called master limited partnerships. But these allow investors, REITs specifically, to own income-producing real estate, but not get that double taxation. They're not taxed at the corporate level so everything flows through to the investor, and they get taxed once. So one of the benefits of these REITs is they pay these big dividends and so it's really great for a retirement investor, or just somebody that wants to make some extra to cash and so that's the basic difference. There's a lot of nuances in there of what a REIT can own and can't own. But it's basically the company that focuses on cash flow and real estate and pays a big dividend.

Deidre Woollard: Great. Thank you. I want to go back to your data a little bit because I noticed in looking at this the last 25 years and the last 20 years REITs outperformed stocks. But something's been happening, especially last year, where REITs have not performed as well and I know that this year in particular has been tough for real estate investment trusts.

Matt DiLallo: The data that I looked at it, if you go back 20 years, for example, the S&P 500's up 7.7 percent and REITs are up 13.3 percent. If we remember back 20 years, that was the dot-com bubble that burst, and so that was a big impact. You have things like that, that will impact performance. Now, in recent years, we've seen a reversal of the dot-com bubble tech stocks have just been going crazy. That has really helped pump up the S&P 500 and it's really skewed the numbers towards the S&P. Last year the S&P was up 31.5 percent, REITs were pretty close at 28.7 percent, but slightly underperformed. This year's been a totally different story. S&P's up about eight percent, REITs as a whole are down 11.7 percent and there's a lot of reasons for that. You can just say COVID but retail has been just terrible. Office, you've got the work-from-home trends. Healthcare, seniors' housing has been really a tough market. You have hospitality's been tough. It's just been a really tough year for real estate because there's so many unknowns, COVID's thrown a lot of unknowns into the real estate sector, and that's weighed on valuations and it shows that over the short term risk can be volatile, but if you look long term and you look at a REIT that's in a good long-term trend, that could have a potential of outperforming in the long term.

Deidre Woollard: I would say the positive of that is that there are some deals to be had because obviously some of these REITs are trading below what they did in previous years. A lot of them, from what I've seen, followed somewhat the trends of this year where they went down in February and March and then recovered. Not all of them have recovered just because of some of the things you mentioned. Certainly, retail REITs and hospitality REITs have been slower to recover, but this year is really an anomaly from what I've seen. I think over time real estate and especially real estate investment trusts tend to be that more predictable, steady stock as opposed to tech stocks which may swing more dramatically.

Matt DiLallo: There's something in investing called beta, which is how a stock performs versus the S&P 500 and a low-beta stock would have a lower correlation and typically REITs are like that, they have a lower correlation so if the S&P 500 is up one percent a REIT might be up half a percent or something like that. But this year's been totally different. There's been just a lot of shocks to the real estate sector. You've got these unknowns like what's the future of office? Are people ever going to go back to the office? Can people afford to pay their rent? What's the future of retail and that's just has been weighing on the these. That's why we really haven't seen that bounce back, that we've seen in a lot of other sectors.

Deidre Woollard: That brings up another interesting point which is just that with real estate investment trusts, you have this wide variety of types of things you can invest in. You mentioned healthcare, we've talked a little bit about hospitality. Obviously, there are office REITs and so there's really a wide variety of different types of real estate and then also because of that, there's a wide variety of different types of returns based on those different sectors and how they're responding because right now things are definitely responding differently across different sectors from what it looks like.

Matt DiLallo: One of the things I looked at in the article I wrote on REITs versus stocks was the subgroups and how they did and NAREIT, which is the National Association of Real Estate Investment Trusts which I highly recommend their website reit.com. They have just a ton of great data on there that they update. They've been keeping track of the sub-group since 1994 and so I looked at how they perform versus S&P 500 and I broke it all out in the article. One of the ones that I want to highlight is self-storage, which really was the big highlight since 1994. 16.7 percent total annual return versus the S&P at 9.3 percent during that time frame so really wide outperformance. Then so for comparison's sake, one of the laggards was diversified real estate which really surprised me. Diversified real estate only returned 9.8 percent over that time. You think if I'm owning a diversified portfolio of real estate, that would kind of benefit me. But in this case, one of the things that the research showed was that companies that focus tend to do better, they perform better and a lot of that can be you're diversified but if you own hotels and you own retail, that might not be a great way to diversify. Each sector has its own benefits and right now we're seeing a lot of headwinds in different sectors, we're seeing tailwinds in other sectors, so that's one thing that a beginner just look at what a REIT focuses on because that could have a big impact on performance.

Deidre Woollard: Self-storage is interesting too because it is very easy to create self-storage. It's fast. Putting together a self-storage facility is a lot shorter than putting together a new hotel or a new mall or a new office building or something like that. But I know there's also been some concern about maybe too much self-storage and whether or not the supply and demand ratios are potentially a little off.

Matt DiLallo: Yeah, and as I was digging into the data, long, long term self-storage is great. But the past couple of years it hasn't been quite as good and that's because you've seen a lot of new players get in there like private equity funds and institutional investors because they discovered you can get really great returns. As that happens, you've got all this competition, and they've just been building and building these self-storage facilities all over the place. That's really hurt returns because one thing that differs from a self-storage and an office, you're not going to sign that long-term lease. It's usually month to month and so if your competitor's building a new facility right down the street and you've got all these month-to-month people, they can offer free rent for a month, or they can really drive down the prices, and we've seen that a lot. But there's been kind of a notable shift in the sector in the last year or so where they're not building as much and one of the big players is Public Storage.

Matt DiLallo: They own like nine percent of the market, so pretty massive player. But they've noticed, they're only going to build five billion more dollars worth of self-storage capacity this year. Next year, they think it's going to be four or less and then going down, and that will help the market absorb it. That's one of those things that investors should look at. It might be struggling now, but what are some the lighter end of the tunnel that might turn things around?

Deidre Woollard: Well, you mentioned Public Storage, and one of the things that I've noticed from reading some of your work and some of the other writers on Millionacres is that there tend to be, within each sector, I would say usually 3-5 big players, and they tend to have a lot of the market share. Is that what you've seen in some of what you've researched?

Matt DiLallo: Yeah, there's probably, I think maybe five publicly traded self-storage REITs. Public Storage is the biggest. Then you have a lot of, even in how they operate, like public storage, they basically will buy the facility and own it, and they make their money as a real estate owner. Others out there will actually manage the facilities for third-parties, I think it's Life Storage, that's a big part of their business is managing these business further. They don't have to spend as much money even to the buy buildings facilities because they are basically putting their branding on it, and that's allowing them to earn this management income. It would be who [inaudible 00:13:23] not when I look at what the portfolio but look at how they're growing. Self-storage, I see different ways that they're growing and that have a big impact on how much money they're spending, what their dividends are going to be. It can be daunting offshore, like I don't understand all this. That's where we're trying to help readers get a better idea of what these companies actually do because you see a broad sector or self storage, but there's a lot of differences in the companies, their balance sheet is going to be different. It really pays to take a deeper look at what the underlying company's doing.

Deidre Woollard: True. I think also one of the things, one of the misconceptions that I've seen is that people think, "Okay, that's a real estate investment trust, it really is just real estate." But as you just pointed out, there are other things that different companies do. For example, Simon Property Group, which is the biggest mall REIT? They are also now investing with partners in some of the retail brands that actually are inside their malls. There are other REITs that, they have real estate, but they also may have a retail component or they may have some other component. They manage things and that's how they make their money.

Matt DiLallo: Like a hotel REIT, one of the reasons they are really, really struggling is because instead of owning the building and leasing it to a hotel operator, most of these like to earn a triple-net lease, which you see that sometimes. A triple-net lease, that protects you, tenants paying everything, and you're getting a steady rent check. In this case, they basically operate the hotels through a third-party, like each room, it's its own rental unit in a sense. So when nobody's renting that room, they are not generating revenue. That's why we saw in a few looked at some of the numbers that these hotel REITs we're posting, it's like 95 percent decline in revenue, and that is why their stock prices have been hammered. It's really understanding how these companies make money. Like an office property, they'll have like a 10-year lease with top-quality law firm versus, this room might not rent out for another month.

Deidre Woollard: I just want to go back and define triple-net lease for people because I know that when I was first looking at REITs, I would see those single-tenant triple-net lease and I'd be like, wait, what is that? Could you define that for people?

Matt DiLallo: Yeah. It's a lease structure where is a triple-net to the tenant paying the taxes, they're paying the insurance, they're paying all the expenses. Basically, the owner of the property, they're getting a very steady rent check as opposed to if you are paying the taxes or you're paying some of the utilities that can fluctuate. But it's basically, you're getting a very, very steady paycheck from these REITs every month. A lot of investors favor that stability that you will see in a triple-net lease structure.

Deidre Woollard: In general, do those leases tend to be longer? I know one of the things that we see across REITs is that lease terms can vary quite a bit. Offices tend to be longer, and so that's another factor for REIT investors to take a look at.

Matt DiLallo: Yeah. I think a lot of that going to focus on the January like the longer-term leases. One of the triple-net lease focused companies that I owned is a diversified REIT called W. P. Carey. I believe there are average lease term across their businesses; 10-years, they own industrial, they own restaurants, they own storage properties, hotels, I think. So that's the very focused on that long-term, steady types of lease structure.

Deidre Woollard: That's really another important factor for investors to look at. You want to look at what you REIT is investing in. You want to look at the management, obviously, you want to look at what they're holding, how they make their money, but also their leases and what their leases look like overtime. Another thing that I've seen also is vacancy REITs, occupancy REITs. That's obviously something that I think we're probably paying more attention to this year. At least, that's what I've seen so far.

Matt DiLallo: Yeah, that, I'd even throw in the credit quality of the tenants and even the credit quality of the company itself. Because if the tenants don't have access to pay their rent when they're not open, it just impacts things. But it might sound like it's a daunting task to research REITs, but it's really not. Something that you have to buildup overtime, and it's something that investors can look for, specifically, a really, really high-quality REIT. One that comes to mind is go with residential because it hasn't been impacted as a much better company like AvalonBay properties or AvalonBay Communities. High quality, one of the biggest rates in the country. They have a really good balance sheet. I think that's a very understandable business owned, because they own multi-family properties. If you are an investor and you're thinking, "Oh, I can buy an apartment building down street, and then I'd have to manage that and be a landlord," there's some work involved. Or I could buy AvalonBay properties and own a diversified portfolio of these multi-family buildings and not have to do all the work. That's where the trade-off is. You have to do a little bit out of work upfront to like a research which, for example, multi-family REIT, I want to buy it, but then it's really passive income after that. That's the real benefit of REIT versus some of your other real estate investments.

Deidre Woollard: That is true. I think that's one thing that gets people excited is that idea of passive investing. Obviously, anyone who is owned a rental property knows that it's a lot of work and it's a lot of dealing with tenants. At Millionacres, we have several of our riders and our staff members are also landlords for both short-term and long-term investments, and I've certainly heard some stories, so that's something to consider. Another thing that people really like about REITs too is those dividends. Some of them come in monthly, some of them are quarterly, I believe most REITs, I would say, are quarterly dividend providers, but that's something that makes them really attractive for retirement portfolios, for example.

Matt DiLallo: Yeah. Actually, the way Congress set up REITs, they are actually better they'd be owned in our retirement account, because there's qualified dividends and I think regular dividend, I'm not very big on taxes. I hired accountant for all that stuff's way above my pay grade. But if you own the center retirement account, it doesn't matter because it will only be the tax deferred if it's in a traditional IRA or the tax-exempt if it is a Roth IRA. That'll enable you to have those dividends. You can reinvest them and have them compound over time so that when you do retire, you've already got a ready income stream to pull from. [MUSIC]

Deidre Woollard: We're about halfway to break time. I want to take a quick break and remind our listeners that if they are looking for further advice about investing in REITs, we have some great free resources available on millionacres.com. Our reinvestment guide has a comprehensive overview of the different types of REITs, the risk to be aware of, and everything else you should need to decide investing in REITs is right for you. Checkup the show notes for the link. In our next segment, let's look at some of our data overtime and also what is happening in REITs this year, and some of the impact we are seeing. All right, we're back with Matt Dellelo, one of our week writers at millionacres.com, and an active investor in a variety of Real Estate Investment Trust. Today, we're talking about the state of REITs and we're looking at some of our data overtime and also what is happening to REITs this year and some of the impact we've seen. We've talked about some of the bad news with office REITs, and retail REITs, and hotel REITs having some tough times. But let's also cover some of the good news. For example, infrastructure and data centers are having a good year.

Matt DiLallo: Yeah. We mentioned this at the top of the show where technology stocks has just been going gangbusters this year, and these are REITs that focus on technology. Infrastructure REITs, they are your cell towers. There's some of them that will own some fiber optic cables and 5G small cells. So they're going to focus on that side of things, and then your data center stats, where a lot of these software-as-a-service type companies will house their data, and we just need more data. Even though right now we're stuck at home, the whole idea of mobile communication, mobile data, is going to be increasingly important. Anytime we do go out, we're checking our phones, we're standing in line at the store, social distance of course, but we're looking at the news, and that's just going to continue, and that's just opening up the door for these REITs to really grow. That's why we're seeing so much out-performance of them, not only this year, but longer-term. They've just been really a good place to go. If you wanted to get in on technology, but you see the Nasdaq touching new highs, and that's nerve-racking. This is a lower risk way, I would say, of getting into some of these big technology trends, and it's a bunch of different REITs to consider. But it's just a good way to get into a long term trend with real estate.

Deidre Woollard: Well, and we talked earlier a little bit about leases, and another factor there is not just the leases themselves, but who the tenants are. With data centers, you might have tenants that are Facebook, Google, Amazon, some of those big providers, and I think you see a similar thing across Industrial REITs too, where some of those warehouses are leased to some of those huge tech companies. So you don't necessarily have to invest in the tech companies, you can also invest in the places where they are spending their money, and taking huge leases.

Matt DiLallo: Yeah, exactly. Industrial is another one. A lot of times when there is a sector that's challenged, so we talked about retails really started to like, but what are the opportunities for investors is, who's benefiting for what's killing retail, and that industrial. With more and more people shopping online, they need to build these distribution centers to store this, all the stuff we're buying. These Industrial REITs have just been able to grow really at a fast pace by serving this backbone need of e-commerce. There's so much space that they need to build, and it's another really good growth sector for real estate investors.

Deidre Woollard: Yeah, I read a CBRE study that we will need a billion more square feet of storage, or industrial space, by 2025, which is just amazing. I know that Amazon is just expanding by leaps and bounds. Obviously, anyone who looked at their quarterly results this last quarter, it was huge, and part of that is just that they need more space constantly. One of the Industrial REITs that I've invested in, is one of the biggies, is in industrial, which is Prologis.

Matt DiLallo: Yeah, that's one of my favorites in that sector, just because they're really big, and scale as an important thing for real estate investment. It just gives them the opportunity to get in on more deals. More companies will come to them asking, "Hey, can you help us with this project?" But they also have a great balance sheet, and one of the things I found is the better the balance sheet, the less risky a REIT can be, and it just gives them so much flexibility. You'll see a REIT that has like a lower-quality balance sheet, and they'll cut their dividend when times get tough, because they need to protect their credit rating, which allows them to borrow money cheaper. But if you were like a Prologis and you got A-rated credit, you just have that flexibility to keep paying your dividend if your customers, for example, aren't paying the rent, which wasn't the case for them. But so you've got that great balance sheet, that great size in the brand awareness, and that would be a low-risk, high-quality, what you would consider like a blue chip REIT in that sector.

Deidre Woollard: Okay, you've mentioned balance sheet a couple of times, and I want to make sure that everyone who is listening understands what that is, and where they can find it, and how they can look at a REIT's balance sheet easily.

Matt DiLallo: A lot of REITs will have investor presentations on their website, and the balance sheet isn't the first thing anybody will focus on. But I found it to be an incredibly useful tool to see if things go south, which real estate is very cyclical, every so many years we're going to have a downturn, and this was one of the bigger ones, but REITs that actually have this strong balance sheet, so there's different ways to look at a balance sheet. One of them is their credit rating, and that's as a borrower, we know that if you have a high FICO score, then it's easier to borrow money. For example, I'm buying a house right now, and I have a good FICO score, and banks were, "Yes, we'll give you money for a house." That's the same way with a REIT. If they have a high credit rating, which for a REITs it's A, B, C, are the ratings. If they have that A rating, it's going to be easier for them to borrow money. One of the things to look at is a leverage ratio. How much income do they have versus their debt? There's no standard for a REIT. If you were to look at a REIT, one has a 6.0 times leverage ratio, that would be solid for one, and not so solid for another. That's why really have to know the REIT sector, and what is acceptable for each one. That's why I tend to look at balance sheet first, or credit rating first, because that's more of an industry standard. If Moody's, which is one of the big credit rating, if they're giving it the stamp of approval, of this is A-rated, I can have a better comfort level, "Okay. Moody's believes that this is really strong. That gives me a comfort to see what's Moody's see in them, and why are they rating that this." That's why I focus on that one the most.

Deidre Woollard: I think that's a really good tip, and I think that's an important factor for people. I think one of the things that is really challenging when you're starting looking at REITs is, "How do you start? Should you narrow down into a specific sector? Should you narrow down into a specific company, and what that process of researching really looks like."

Matt DiLallo: Yeah, for me when I got started in REITs it was, "What am I really interested in?" Or, "What am I trying to replicate?"

Matt DiLallo: I think, if you're comparing, "I can buy an apartment building and that's how I want to get into real estate investing." A simpler way could be, if you don't have time, you have kids, a job, to look at apartment REITs because that would mimic what you're looking at. Or if you're like, "Well, I really want to own a high-quality office building." Well, you could buy an office REIT and that can mimic that idea. That's a good way to get started is what type of property do I really I want to own? Am I really into technology? Then look at data centers and get to know one sector really well that really intrigues you.

Deidre Woollard: You mentioned the investor presentations on the site. What other factors do you look at?

Matt DiLallo: Because dividends are a big thing with REITs, I like to look at what's their payout ratio. One thing, the difference, so imagine REITs versus stocks earlier, a lot of stock it's price, it's their earnings per share. So you look at, what's the dividend divided by the earnings per share? Because REITs that are different, there's a lot of depreciation with real estate and so that compresses their earnings per share, but it doesn't impact their cash flow. Standard metric is called funds from operation, and that's basic proxy of their ability to pay dividends. If a REIT pays out less than 100 percent of its fund to some operation, it's safe. However, if a REIT is paying out 100 percent of their funds from operations and then they can't collect five percent of their rent, they're in trouble. I like to see cushion, 80 percent is a good cushion. More cushion, the better. Office REITs, it's pretty standard for it to be 50 percent. A lot of other REITs, 60-70 percent as a good cushion. Again, it's very sector determined, but that conservative payout ratio really helps when times get tough.

Deidre Woollard: Another thing I've cautioned people about this year and we've gotten some questions before about it is, if a company is suspending its dividend or cutting their dividend right now, I would say don't panic. Because I feel like in other times that could be a sign that, that company is in trouble, but right now with everything that's happening, especially if you're looking at a REIT in one of these riskier sectors that we talked about, like office, a hotel or retail, that actually might be a very prudent move. It's not something that they can continue to do long term, but in the short-term it may be a smart move.

Matt DiLallo: Yeah. A lot of these REITs they made that proactive [inaudible 00:31:42] because we did not know what was going to happen when everything started shutting down in March, so it's like, "All right. We need to conserve cash. We don't know what our rent's going to be. We don't know what the government is going to step in to do." One of the benefits though is that REITs have to payout 90 percent on a taxable income, so at some point these dividends assuming they have taxable income will come back. Hospitality, they might not come back for a while because they're running losses. But a lot of the others like retail REITs, if they own, for example, grocery stores that's the anchor of their portfolio, a lot of those have actually done fairly well. They've collected a decent amount of their rent this year, so they'll probably bringing their dividends back. Even I noticed some several healthcare REITs, they had to cut their dividends because seniors housing was under pressure. If that it bounces back, the dividend is going to bounce back.

Deidre Woollard: That's true. One of the things that I've been tracking is rent collections over time, which has been a huge factor less so in apartments, because that's actually from what I've seen from tracking the National Multifamily Housing Council Rent Tracker, has stayed pretty steady. But in retail, we've certainly seen rent collections were down a lot through March, April, May, and then started to get a lot better in June and July as things started to reopen. I feel like that we're hopefully on a positive upward trajectory there.

Matt DiLallo: Yeah. Going back to the whole concept of looking at what's in a REIT's portfolio, malls have been much, much harder hit than a REIT that owns a community shopping center. The difference with community shopping center, they typically will have a big anchor grocery store as opposed to a mall which will have a department store. The department store wasn't essential, but grocery stores obviously are, and they might have outparcels that will have a CVS, they might have some restaurants. So these businesses stayed open and that's allowed them to clock a much higher portion of their rent. That's why I think a lot of those retail REITs that cut their dividends but that own those separate properties, they'll bounce back because they have been collecting their rent, they just didn't know at the time how bad it could get.

Deidre Woollard: I think going back to your REITs versus stock analysis, it really is a long-term investment. If you're investing in REITs. It doesn't make a lot of sense, both from what I've seen in the data and also in general, to try to gain the market and get in and get out. These are really long-term investments.

Matt DiLallo: Yeah, definitely. It's compounding because of the dividends. One of the things that just as an investor I learned over the time, one of the biggest factors in outperformance, and this is a study done by research firm called Ned Davis Research, they found that companies that grow their dividends consistently, usually annually, they've outperformed the S&P 500 significantly over the long term. Conversely, companies that cut their dividends haven't. Companies that have cut their dividends the same were underperforming. Then companies that don't pay a dividends typically didn't do well. That shows a REIT that has a strong balance sheet and is in a growing sector, they tend to do very well. That's why when I'm looking at REIT, balance sheet matters, portfolio matters. What business is it in? Is it in malls? That's going to be tough. Is it in hotels? That's going to be tough. But if it's buying apartment buildings in fast-growing cities, that's an attractive market. If it's building industrial, that's a good market. So if you're looking at those qualities and you're going to hold for a long-term, you should do really well in real estate.

Deidre Woollard: So we mentioned that some REITs are down a little bit this year. Are there any ones that you are looking at particularly? Do you feel like this is a window of opportunity for people to buy REITs now while they're still maybe underperforming a little bit?

Matt DiLallo: Yeah. I just added AvalonBay Communities to my portfolio. That was my newest REIT. I've been watching multi-family for years because I wanted to mimic that idea, being a landlord, and they're down. At one point, I think it was 30 percent, but their rent collections haven't really changed. As you mentioned, apartments have done very well. Now, there's concerns they own apartments, for example, in San Francisco. There's concerns that as in tech companies allow people work from home, they don't need to live in San Francisco. They can move to wherever that's cheaper or stay within New York City. There's always a concern and that's why evaluations are down, but these guys know what to do, they've been in the business for a long time. So that's one that I was like, "Yeah, I'll buy that great, high quality apartments for 30 percent off."

Deidre Woollard: Nice. As we wrap up, what do you think real estate investment trust investors should be looking for in the third quarter? What do you think they're going to be seeing?

Matt DiLallo: Nobody has ever talked about rent collections, I don't think in years past, but this year, all of a sudden everything is on rent collections. What is on the rent collection trend? We want to see those numbers to get back to as close to a 100 percent as possible and not see declines. That's office, that's residential retail. If they can pick up the rent collection pace, I think that will give investors more of comfort. "Hey, these are going to survive the downturn. Maybe we sold them off much too deeply earlier this year," so you could see some bounce backs if the rent collection numbers look good.

Deidre Woollard: That is a great place to end this. Thank you for your time today. Just a reminder to our listeners is that you can find all of Matt's writing and all of our real estate investment trust content in our REITs hub on Millionacres.com. We publish new articles every day and we're continuing to build out our REITs coverage. [MUSIC]

Matt DiLallo: Thanks for having me again. [MUSIC]

Deidre Woollard: Thank you for tuning into the Millionacres Podcast. I hope you like today's show. If you enjoyed this episode, please consider subscribing through your favorite podcast provider. If you have any questions, please feel free to drop us a line at help@millionacres.com. Stay well and stay invested. [MUSIC] People on this program may have an interest in the deals, offerings, or services they discuss. At Millionacres or The Motley Fool, may have a formal recommendation for or against. Always consult a certified tax professional before acting on tax advice, and do not buy or sell assets based solely on what you hear. [MUSIC]