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This newspaper article, from 1982, talks about the experience of holding REITs in high interest rate environments in the 70s and early 80s.

https://www.nytimes.com/1982/12/05/business/the-re...

As you move towards higher interest rates - e.g. perhaps stagflation triggered by an oil crisis - the value of REITs is marked down as they collectively take one more step closer to wipeout.

You can imagine that 50% interest rates would eventually wipe out the equity of every REIT, whereas 0% rates, 'free money', would make even the worst REIT wildly profitable at an operational level.

So there is a curve of rational business valuation connecting those two extremes of heaven and hell, so to some degree, movement of the sector may follow prevailing rates as much as sentiment.

As the 1982 article notes, one of the interesting problems is that after taking a beating, the surviving REITs usually can't raise capital because they all trade at discounts.

By the time they trade near NAV again, and can raise capital without massive dilution of shareholders, prices of assets have long since moved up.

Perhaps this is why some big REITs engage in property development as much as property operations.

An interesting question to ask, in these days of oil crisis and potential looming inflation, is:

Which categories of REITs suffered the most in past stagflationary environments and past oil crises?

The answer is: those with too much debt, those that were not essential.

You might expect residential, logistics, supermarkets, healthcare facilities to continue to be in demand even during recession or stagflation.

Whereas, the most fancy high-end offices and expensive high street stores, might not be in as much demand.

REITs that offering small lots to small businesses, may suffer from a thousand cuts as those small businesses go to the wall.

REITs working with a few very large customers, might face a catastrophe if even one of them fails and occupancy drops 10 or 20% all at once.

REITs with short term contracts (that can be walked away from without penalty) suffer more than REITs with long term contracts.

Inflation-linked contracts may help, but are no guarantee - if the inflation-linked rent rises too fast, the tenant goes bust trying to pay it.

If there is a cap & collar on the inflation link to moderate it, a brief surge in inflation might not be captured in the rent until many years later when the property re-enters the market for letting.

Perhaps it is a good idea to pay a little extra for those companies that can thrive in both a high and low interest rate environments.

Industrial land might be valuable or not; location may matter or not.

In particular, in the USA you have mortgage REITs, which hold debt rather than bricks, and you might expect those to be ruined fastest of all, as we saw with MBS in the GFC 2007-2009.

Does anyone with knowledge of REIT investing/operations have further thoughts they can add here?

TRS

(I welcome & invite any negativity, pessimism, rational criticism, horror stories, painful lessons etc about REITs into this thread!)

I was barely out of college in the 1970’s, had a near minimum wage job that allowed me luxuries like a McDonald’s dinner once in a while, and wildly overpriced regular gas in my Toyota. That’s my way of saying “investing?” I had no idea at the time. Flash forward…

I have read that the two things that held up during the decade of OPEC and interest rates were real estate and gold.

Gold is a particularly special case, since it was price controlled by government fiat until Nixon allowed it to float, so any price movements following that should probably be looked at with a careful eye, as the “history” is really no history at all. I would guess it took the better part of a decade to really reflect a market price that was fair.

And frankly until I started reading our departed Ralph on the Fool’s REIT board, I barely knew they existed. While I have owned a couple over the past decades they have never been an important part of our portfolio, so I claim no special insight here, either.

All of that cautionary language said, I agree with some and disagree with some of your quick study. To wit: high end offices? Yeah, could be trouble. High end stores? In this K shaped economy that’s the only segment doing well. The Journal had a piece a day or two ago about how Class A malls were thriving, while Class B were suffering and Class C are near death.

The rich ARE getting richer, and that translates down into where they shop and what they buy. If you’re a mid-market retailer you have your work cut out for you. Ironically, if you’re a down-market retailer you might be OK; Dollar Stores (and their cousins) seem to do well when consumers are pressed (not that that segment is going to go to any mall, of course.) What does that mean for prestige office towers? I have no idea. Will AI hollow them out? Will even richer corporations want to flaunt it? No clue.

For residential and commercial “location is key” but perhaps not in the old way. Besides being stratified by income, we are also seeing geographic separation: some parts of California are “to the moon, Alice” while others are languishing. Likewise Colorado, likewise Texas. I wouldn’t want to have any retail in the Rust Belt these days, would you? Would anybody? (I know national franchises have to be *everywhere*, but those in a middle tier do not and can pick their markets more carefully, or at least I would if given that task.

There’s a lot in flux right now, so I have no idea if specific sector REITs will prosper, (industrial, retail, data centers, health care) or whether those that mix and blend to iron out the volatility would be a better bet.

As I say, it’s not something I follow except in a general way, and I would be interested to hear what others have to say, if anything.

> "I agree with some and disagree with some of your quick study. To wit: high end offices? Yeah, could be trouble. High end stores? In this K shaped economy that’s the only segment doing well."

Hi goofyhoofy, thanks for the reply.

Just to be clear, I wasn't addressing the current economy, which I agree has problems, as well as hot/cold spots in real estate.

I was only reflecting on what was more likely to survive stagflation if it happens.

Stagflation is a fairly rare situation where you have a) economic stagnation, along with b) super high inflation that persists. It might look like:

a) full recession, or something barely short of recession.

b) e.g. persistent 8%+ inflation for many years.

occuring together.

In the past, stagflation has followed in the years after an oil crisis.

The US experienced stagflation for all of the period 1975-1985, and perhaps a few earlier years too, following an oil crisis in 1973 and 1979.

https://www.federalreservehistory.org/essays/great...

Right now, the US is not in stagflation, and not close to stagflation.

Inflation is at 2.4% (not high inflation) and growth at 2% (not recession or near-recession).

It's more like an economy that isn't firing on all gears, and has growing inequality.

You said that high end stores were the only segment doing well near you.

That got me wondering about whether rich people in the 1975-1985 era tried to conserve wealth, or had a 'spend it while you still have it' mindset.

Apparently in the 1980-1985 period, conspicuous consumption on all kinds of things and showing off became the norm among the wealthy.

In the earlier 1975-1980 period though, it seems it was more things like high-end jewellery and famous fine art, land, that might retain some resale value in a crisis.

Perhaps this is an example:

Tiffany & Co., a jewellery and fine goods store, saw sales jump 22% in 1977, and margins of 14%, before being sold to Avon in 1978.

Here are some articles from the new york times, in 1983 and 1984.

https://www.nytimes.com/1984/06/20/business/avon-t...
https://www.nytimes.com/1983/10/16/business/at-tif...
https://en.wikipedia.org/wiki/Tiffany_%26_Co.

By 1984, margins at this famous high end store had collapsed from 14% to 3%, and sales were essentially stagnant over the 1977-1984 period, adjusting for inflation.

Debt-to-income rose for the rich throughout the period, but it seems that came from buying up hard assets that would go up with inflation, while the debt was eroded.

The cost of basics/essentials rose quickly, whereas the luxury goods CPI rose much more slowly. That apparently encouraged the rich to keep spending.

e.g. the value proposition on high end goods improved; that's probably part of why e.g. Tiffany saw their margins erode almost to zero in the example above.

So it seems that if stagflation does arrive, the high-end retail you are describing will probably continue to do very well, at first anyway, and should be able to keep paying the bills later too.

Thanks again for your post.

TRS

A possible case against:

I have invested in REITs, and income trusts more generally, only on rare occasion over the years. Only when they seem oversold, basically.

The reason for that reticence is that I like high long run total return after inflation from my portfolio, which is the only thing that really matters.

Stocks with the best long run total returns are almost invariably those with a high return on shareholders' equity and on assets, and that number not declining over time. Over VERY long periods, in fact, your rate of return on any company's stock will tend to converge on their ROE (more specifically ROIIC), no matter what your entry price was. (excluding stocks with such high leverage that they are at risk of blowing up, or miscalculations of a meaningful ROE). Almost invariably, the absolute best firms can deploy giant amounts of new capital into their business the same high rates of return.

So, the problem with income trusts is that they are required to pay out the lion's share of all their earnings. Maybe there are borrowings or fancy buy-low-sell-high activities to get around that, but the core business is being milked rather than expanded. Capital reinvestment is therefore very constrained as a general rule, so earnings do not rise much even if their ROA on the piffling amount of expansion capex were excellent. In short, they tend to have their hands so tied that they end up as cash cows: earners, but earnings not growing, so the long run total return after inflation often isn't in general a whole lot different from the coupon yield. Jam today, but same amount of jam every day. This problem is compounded by the observation that most cash cow businesses have a finite life span...you get nothing but the yield, and then at some point down the line you often don't get that either.

I believe that there is a huge population of investors who are myopically investing for income over long periods who would do VERY much better if they instead invested in the very best companies they could identify, without regard to dividends, and sold little bits of stock to fill the gap between the actual portfolio dividend yield and the desired portfolio income rate. Admittedly there are people who simply don't care about a long term rate of return as they are wealthy enough that it doesn't matter, so all power to them.

Some such folks remain unconvinced of the "sell a bit from time to time" approach because of a fear that they might have to sell some stock at low prices during a bear market. So what? Each sale is going to be tiny. If you have a portfolio large enough to live off, a bear market isn't going to change that fact. Some of those tiny sales will be at above average valuation levels, some at below average, so over time the average valuation level received is going to be pretty much the same as the average valuation level of those investments in the next XXX years, which is all you could ever expect anyway.

The excuse that it's a lot of work doesn't really fly any more, either, as there are "one click" rebalance buttons at many brokers. Every three months rebalance to (say) 99% stock and 1% cash, then withdraw the 1%. This automatically sells only the amount of stock necessary to top up the dividends received during the prior three months.

Admittedly, for some people there is a material difference in tax rates between dividends and capital gains, but (a) it's not usually that large, so (b) it's probably not a good enough reason to let the coupon tail wag the total return dog. I personally have a HUGE tax advantage in capital gains versus dividends from stocks in most countries (though not the UK), but I like to think my thoughts here apply pretty generally. Perhaps I fool myself : )

I'm not saying that there aren't some excellent income trust choices out there, nor that there aren't people whose financial needs are well met by the sector. Just food for thought about my own reason for not usually being a big fan. You asked : )

Jim

Stocks with the best long run total returns are almost invariably those with a high return on shareholders' equity and on assets
...
I believe that there is a huge population of investors who are myopically investing for income over long periods who would do VERY much better if they instead invested in the very best companies they could identify, without regard to dividends, and sold little bits of stock

An even more off topic comment related to that: there is nothing wrong with trying to do both, I suppose. Do something to make sure you're picking among the best firms you can, but which also just happen to have some dividend yield.

I used the free FT.com global equity screener to find UK dividend payers with high ROE. Over 100m market cap, debt:capital not too high, not local listings of foreign firms. I picked a subset of industries that I'm comfortable with. (no funds, tobacco, basic energy, REITs...)
The 45 stocks have minimum 5-year-average ROE of 18%, average among the list is 33.2%
The 45 stocks have minimum dividend yield of 3%, average among the list is 5.65%
The 45 stocks have maximum debt:capital of 40%, average among the list is 16.9%

I imagine an equally weighted portfolio of these firms would give satisfactory returns. It could be rebalanced or reconstructed once in a while, a few months or a few years. My speculation is that this would do better than a basket of UK REITs because the firms can, and apparently do, get good returns on the capital they allocate. (though perhaps not, UK REITs seem to be quite cheap just at the moment)

Anyway, in case anybody has any interest in that exercise, the names today are:


Victorian Plumbing Group PLC VIC:LSE
Ultimate Products PLC ULTP:LSE
4imprint Group PLC FOUR:LSE
ITV PLC ITV:LSE
Wilmington PLC WIL:LSE
Warpaint London PLC W7L:LSE
Cake Box Holdings PLC CBOX:LSE
Greggs PLC GRG:LSE
Supreme PLC SUP:LSE
Serica Energy PLC SQZ:LSE
Mortgage Advice Bureau (Holdings) PLC MAB1:LSE
AJ Bell PLC AJB:LSE
CMC Markets PLC CMCX:LSE
Foresight Group Holdings Ltd FSG:LSE
Impax Asset Management Group PLC IPX:LSE
IntegraFin Holdings PLC IHP:LSE
Man Group PLC EMG:LSE
Ninety One PLC N91:LSE
Polar Capital Holdings PLC POLR:LSE
Record PLC REC:LSE
Tatton Asset Management PLC TAM:LSE
Tavistock Investments PLC TAVI:LSE
Hansard Global PLC HSD:LSE
Integrated Diagnostics Holdings PLC IDHC:LSE
Bioventix PLC BVXP:LSE
Alumasc Group PLC ALU:LSE
James Halstead PLC JHD:LSE
Keller Group PLC KLR:LSE
Morgan Sindall Group PLC MGNS:LSE
Luceco PLC LUCE:LSE
Andrews Sykes Group PLC ASY:LSE
FDM Group (Holdings) PLC FDM:LSE
Fonix PLC FNX:LSE
FRP Advisory Group PLC FRP:LSE
Keystone Law Group PLC KEYS:LSE
Pagegroup PLC PAGE:LSE
SThree PLC STEM:LSE
M Winkworth PLC WINK:LSE
Bytes Technology Group PLC BYIT:LSE
Ingenta PLC ING:LSE
Kainos Group PLC KNOS:LSE
MONY Group PLC MONY:LSE
Quartix Technologies PLC QTX:LSE
Catalyst Media Group PLC CMX:LSE
Yu Group PLC YU.:LSE


There are undoubtedly some very bad looking firms in that list, and undoubtedly some very bad firms. However, if using this sort of approach, I recommend using the whole slate rather than pruning, as those two groups are often very different. Murphy's Law of quant investing: the dog you eliminate is often the one that gives the highest return. Spend your time stress testing the logic and details of the screen, not the individual firms it picks. Would you be interested in a single stock that had 5.65% dividend yield, five year average ROE of 33%, debt of only 17% of equity, and absolutely guaranteed not to go bust? (like an index, I assume it's essentially impossible for all 45 companies to explode)

Jim

Hello Jim

Thanks for your replies and interest.

However, I kinda feel it's the REIT board and it's a thread about 'how do REITs perform during stagflation'.

So when you say e.g.

>"Stocks with the best long run total returns"

That's not really what the thread is about, it's: "REITs, 1970s/80s, stagflation".

And in the second post:

> "I used the free FT.com global equity screener to find UK dividend payers with high ROE."

again, while interesting, that kinda isn't what the thread or the board are about either.

Could we possibly migrate that part of the discussion to another board (of your choice - perhaps Non-US stocks, since it's UK equities)?

I'm certain your intention is to be helpful, and to highlight other opportunities by point of comparison.

But it's perhaps not so different to going on a thread on a GARP board and talking about the wonders of gold*.

If possible I'd rather keep this thread for this particular niche topic that I'm interested in, that's why I started a discussion on it to see what came up.

Thanks

TRS

* oddly enough, I believe gold outperformed GARP, ROE strategies, and REITs during past stagflations. I don't hold gold.

In response to the broad issue of 'why consider REITs at all for stagflation rather than other types of stocks?'

A. Here's some data about how regular stocks do _during stagflation_ compared to REITs. You may be surprised.

Note: this is not a REIT-related website specifically, it's from a discussion of stagflation and asset class returns.

See: https://d2csxpduxe849s.cloudfront.net/media/469BA3...

This table breaks down time periods into 'goldilocks', 'disinflation', 'reflation' and 'stagflation'.

Regular stocks do great in the first 3 economic conditions, but they do badly in stagflation.

Interestingly, REITs perform comparably to other stocks in both goldilocks and disinflation.


B. See: https://wealthgenadvisor.com/navigating-stagflatio....

covering 1973-1982


C. _During stagflation_ in the past, REITs do pretty well and other stocks do pretty terrible. I think we may see stagflation. And REITs are cheap. So that's my angle.


D. However, even in regular times (which this thread is not about), REITs may beat or compare favourably with other stocks, outside of stock bubbles:

An industry article from 2010, after a massive property crash...

See: https://www.reit.com/sites/default/files/media/Por...

If you skip ahead to page 3, you should see the general idea.

" For the 10-year period ended March 31, the FTSE NAREIT All REITs Index delivered a compound annual total
return of 10.95%, and the FTSE NAREIT Equity REITs Index delivered a compound
annual total return of 11.42% – a significant outperformance of the S&P 500, which
provided investors with a compound annual total return of -0.65% over the same period."

"“The long-term annual total returns of the FTSE NAREIT Equity REITs Index typically
have been in the range of 10% or greater,” Grupe said. “Equity REITs also have
outperformed the S&P 500 for the past 15-, 20-, 30- and 35-year periods.”"


E. See: https://www.reit.com/news/blog/market-commentary/r...

(Industry article, rolling 10 year and 20 years returns, 1990-2020, stocks vs REITs)


F. See: https://www.fool.com/research/reits-vs-stocks/

1972-2024

8.0% SP500 annualised return

12.6% NAREIT index annualised return

and you can pick pretty much any timeframe you like outside the last 10 years of bubblemania and I think you'll see the same sort of result.


G. Given that REITs tend to do similarly to other stocks in the long run, better/worse in some conditions, there's an argument for holding both and farming volatility.

See: https://i.redd.it/65d8ziq1yxbe1.png


H. Having said that, I would probably not invest enthusiastically in REITs at average prices, despite my username.

I. But I think they make sense when they are at near-record valuation lows, while regular stocks in many markets and other assets are basically around record valuation highs.

J. It especially makes sense if you are consciously avoiding the US market, avoiding any sector Trump can tariff or ruin, and avoiding anything at risk from AI (or AI over-investment).

K. About high ROE stocks and stagflation. Hard to say. If it's high ROE because it has great and stable returns with modest assets, sure, should do OK in stagflation? If it's high ROE because it has mediocre returns with almost no equity... maybe no buffer to survive a tough economy? But it's really a topic for a different board.

TRS

> "the problem with income trusts is that they are required to pay out the lion's share of all their earnings"

Whether that's a problem, a blessing, or a non-issue, depends on the life you've lived, where you live, all kind of things.

For me, it's currently not a problem, it's a benefit.

Though, if I had moved to some other nearby countries, then high ROE and no dividend could be more beneficial.

Tax, and trustworthy re-use of capital by companies that reinvest gains, has a huge impact. Price does too.

If BRK halved suddenly, and if the US wasn't the way it currently is, I'd buy BRK in a flash, and forget REITs.

Many of the 'problems' I've encountered investing in the past 20+ years involved companies with success in their core business, generating beautiful returns, gradually thinking they could be successful in any niche, moving into vanity projects, pushing far too far, too fast, often not communicating that the underlying business model is changing to something much more risky (e.g. banks, MBS/CDO), doing buyouts of other companies at big premiums, CEO pay increases etc.

Or my personal pet peeve - optimising for ROE by shrinking equity, by throwing away all those lovely profits doing buybacks at sky-high prices, and most often, buying back when the share is most richly valued, sometimes to counterbalance all the stock issued as generous equity grants to employees and CEO.

Very few companies are like Berkshire when it comes to well timed buybacks.

My ideal situation is a company that sits in a very profitable niche, growing organically/with inflation, paying the 'rent' on the niche to me.

They have a core business clear in mind, they can focus on optimising how well they do it.

Providing the returns I'm getting from a company are similar to the broad index, but without so much volatility for example, or perhaps with better performance in certain points of the economic cycle, such as stagflation (the topic of this thread), or with greater tax efficiency... why care?

Also, anyone reducing the issue of REITS down to one single attribute (they pay out earnings each year) would be taking an unreasonably narrow view of an interesting sector, that is qualitatively different to other sectors, and is filled with very unusual and diverse opportunities.

For example, the sector as a whole, performs differently during stagflation to other kinds of stock. See my other post.

Depending on your views on economics, Trump, war, oil, etc, you may have a much more serious concern in mind than the trivial issue of whether you 'sell capital to get needed income' or 'reinvest unneeded dividends to restore capital'.

-

> "the core business is being milked rather than expanded"

If something offers me a boring 11-13% CAGR, or 10% but with less volatility / more of a safety net than the general market, why care that it does it by paying dividends?

Not all niches can be grown forever. There are family businesses that have prospered for hundreds of years by comfortably sitting in a niche.

Further, certain niches are *only* available to explore if you are willing to look at high dividend payers.

There are so few 'wonderful' opportunities out there, with the US market at CAPE 40 ish lately.

Why avoid whole categories of potential opportunity simply because they pay out income promptly rather than reinvesting it on your behalf?

That doesn't make sense to me.

I think it's better to keep my eyes fully open to both worlds - both companies that reinvest earnings, and companies who pay them out.

Who cares as long as it's good, safe and cheap.

-

> "Almost invariably, the absolute best firms can deploy giant amounts of new capital into their business"

I generally don't want to buy the 'absolute best' businesses.

They're usually priced far too high relative to how great they are. Everyone is looking at them.

They're also usually in the US, which I don't want to invest in any more.

(I stand with Canada on boycotting, even though I'm not Canadian).

And worst of all, if they stop being great, even for a moment, your account gets shredded.

I would rather seek dull '2nd highest and 3rd highest decile' businesses.

Few people compete for 2nd or 3rd place in the olympics. But in investing it often pays perfectly well.

-

> "Admittedly, for some people there is a material difference in tax rates between dividends and capital gains, but (a) it's not usually that large"

For a UK investor with UK REITS in a UK savings wrapper (SIPPs, ISAs, LT ISAs, or simply low income), it's a 40% gap vs a US stock or ADR, on dividends.

Personally, I feel 40% is quite a lot.

It can be even higher for e.g. Euro dividend stocks vs REITs for a UK investor.

For example, in practice 53% tax versus the company pre-tax income, by the time you get the dividend in your bank account from French high quality dividend stocks (e.g. Total/Sanofi), because reclaiming the withholding tax from France is awful in practice.

I feel 53% is definitely quite a lot.

-

> "I believe that there is a huge population of investors who are myopically investing for income over long periods who would do VERY much better if they instead invested in the very best companies they could identify, without regard to dividends"

I don't know if you're addressing that comment at some/all REIT investors? It kind of comes across that way, but it maybe wasn't your intent.

Might it not be a little unkind to call people 'myopic' on a forum dedicated to a type of income investing?

Simply because they have different goals or experiences or emotions or taxes etc that shape what they want from an investment?

I mean by all means, think negative thoughts about how others invest if you want to, but coming here to say it seems a little bit harsh.

Particularly when

- they maybe just have different preferences about the emotional side of investing (tick, tock, here comes a divi, why bother to check the price or sell?)

- they have very different tax situations to yourself

- they *enjoy* REIT investing more than other styles of investing (I fall into this category oddly, it's the most investing fun I've had in ages!)

- they may hold strong views about the prospective returns of REIT stocks or of sectors that are classically dividend payers (e.g. oil, miners), according to the stage of business/economic cycle (see my other post) - perhaps REITs serve as a convenient proxy for investing according to those strong views.

- they may have particular insight into the REIT, oil, or whatever sector from past investing, or from a career in that sector - it may be their investing edge.

This is a board for people who *want* to do the opposite of what you're describing, who generally want income.

And this is a thread about stagflationary economies.

If someone held some of their assets as cash in the bank, or in bonds, or bought an annuity, for income, would you call them myopic?

There is no One True Path in investing.

Some types of investing require tax setups I don't have, knowledge or skill I don't have, emotional responses to loss or gain or past experience, I might not have.

I think it's important to take plenty of time to understand other people's needs, wants, goals, taxes, financial situation, any edge they have, emotional response to issues in investing, etc., before we say to them what they really should be investing in, or label them or perceive them as 'myopic'.

Because you cannot prescribe good solutions to a person without first learning who they are, exactly what situation they're in, and what problem they are trying to solve.

Ultimately, we should use money to make ourselves happy. If investing in income-paying stocks is all it takes to bring a big smile to someone's face, we should celebrate that with them, because there are thousands of far more destructive, wasteful and truly myopic ways to use money.

Spending money on a stock that works 'in a way that makes you happy' is no different from buying a wine you prefer or travelling to a holiday location you particularly like. People have preferences, biases, emotions, as well as their personal situations, and that's OK. It isn't myopic to know yourself and what makes you happy.

It's best not to 'yuck' other people's 'yums' if they tell you they're happy about what they're doing.

Many people *consciously* optimise investments for a quiet boring life, good sleep, or to live in a way that brings pleasure in itself. Not only for peak theoretical profit opportunity. An example might be, boycotting US stocks, because of the feelings they would create in relation to ethics etc.

Here's the most famous example of this idea:

- "Do you know the only thing that gives me pleasure? It's to see my dividends coming in" - John D Rockefeller.

TRS

>"Stocks with the best long run total returns"
...
That's not really what the thread is about, it's: "REITs, 1970s/80s, stagflation".

Well, yes, my comments were partially off topic. Apologies. But not wholly--I expect a portfolio of quality stocks is likely to do better than REITs during stagflation too, because of the problems that would hit REITs more than many other kinds of investments.

Stagflation involves inflation. Inflation is usually attacked with high real interest rates. REITs are just companies, but they are companies whose business results are hit more than typical firms by high real interest rates as they roll their debt. Not to mention their greater fragility in some ways, given constraints on capital allocation flexibility and pricing power typically a bit worse than other businesses. So, the purely on-topic comment, I imagine stagflation would be a somewhat toxic situation for REIT investors. Their market prices would probably be very low, mitigated by coupons for those who are satisfied by that and willing to wait it out.

The stagnation part of the question may be an issue for the reliability of coupons.

As you note, it would hit different *types* of REITs in different ways, so an intelligent approach would be discerning by subsector. But I personally doubt whether the impact would be sufficiently varied and sufficiently predictable that the problems could be dodged. Even groups you would think would be immune can be hit very hard in tough economic times, something I learned the last time I ran a company during stagflation. An entire sector that is seemingly recession proof (private medical clinics, say) may have clients who themselves aren't recession proof, and that client may be a government agency. So problems can spread much further than you might at first expect. Maybe the resilient subsectors can be predicted, but also maybe not.

There's many a good case for REITs. There are good cases to be made for having a portfolio which is braced for a possible stagflationary environment. But I personally don't see that much room for both at the same time : )
It seems to me to be a sector particularly vulnerable to that environment.

Jim

Hello Jim, thank you for your reply,

However, I must admit, it feels very frustrating to reply to this most recent post, because I believe I have already refuted the arguments with actual historical data in my earlier post.

And it seems like you've not acknowledged any of that history / data, you have not reacted to it in your reply, and have not adjusted your argument in any way that would reflect it.

---

> "-I expect a portfolio of quality stocks is likely to do better than REITs during stagflation too, because of the problems that would hit REITs more than many other kinds of investments."

1. I would expect that a broad portfolio of high ROE companies will outperform a broad index of *ordinary stocks* during stagflation. But I'd rather take that to another thread on a more suitable board.

2. The best starting point for any rational guess, on any type of stocks vs REITs comparison, is to glance at any historical data that's available.

Here is the data. Again.

https://d2csxpduxe849s.cloudfront.net/media/469BA3...

Please view the jpeg and look at the bottom line of the table before you read the next sentence.

High ROE stocks would need to *outperform the average stock by more than 8%/annum* to make it worth even looking at them, when REITs are already seen to outperform to such a degree during stagflation.

I want to repeat, that this is a huge, massive claim: by claiming high ROE stocks would beat REITs, you are asserting AT LEAST 8%/year outperformance over the stockmarket for a multi-year period of high ROE over regular stocks.

Just to draw level with what REITs during stagflation, not even to beat them.

Well, OK, where is the evidence that supports the claim? Where is the data?

I presented evidence to support the idea REITs will be a better choice than stocks in stagflation.

Repeating a hunch doesn't make it more true.

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> "Stagflation involves inflation. Inflation is usually attacked with high real interest rates. REITs are just companies, but they are companies whose business results are hit more than typical firms by high real interest rates as they roll their debt. Not to mention their greater fragility in some ways, given constraints on capital allocation flexibility and pricing power typically a bit worse than other businesses. So, the purely on-topic comment, I imagine stagflation would be a somewhat toxic situation for REIT investors. Their market prices would probably be very low, mitigated by coupons for those who are satisfied by that and willing to wait it out."


1. Stagflation involves inflation, but it does not equal 'inflation in general'. It is the specific situation where the economy is simultaneously very weak or in recession, along with inflation.

2. The recession LIMITS the capacity to raise short rates to control the inflation. It limits what long-term bond investors demand (because bond yields reflect both growth and inflation). That's what makes it a special situation for REITs and different to high inflation high growth scenarios where the economy is running too hot and there's room to cool it.

3. Inflation is *wonderful* for 'real asset intensive' companies that hold marketable assets that rise with inflation, which were bought with cheap fixed-rate debt, and where non-debt business costs (wages, energy etc) are limited. Any business model like that, basically prints money during stagflation.

4. Inflation is super-wonderful for companies selling a necessity with pricing power and limited competition, e.g. the customer is compelled to buy over and over, even if they absolutely hate the price.

5. It is super-super-wonderful when (3) and (4) above are true AND the customer can't even go bankrupt to get out of it.

6. Inflation is usually attacked with high real SHORT TERM interest rates. REITs do not typically borrow on SHORT TERM interest rates. They are irrelevant except for example where some particular REIT has used a bridging loan for a bid, or where e.g. customer solvency or willingness to continue (e.g. short-term rentals) is highly sensitive to short term rates.

7. Depending on the type of REIT, inflation often feeds into earnings sooner than increased debt costs from policy responses to inflation. For many REITs, the rise in rental outruns the rise in interest by a mile. Run the math, it may surprise you.

8. Many REITs operate with annual re-pricing and many operate with RPI/CPI uprating automatically each year. Some REITs reprice to reflect inflation on a timescale of months or even weeks.

Summary: You know what is awesome? When you lock in a customer for 20 years so they can't escape, corresponding debt at a cheap rate for 5-10 years at a time, and the rental income and asset value soar upwards with inflation and the customer *can't even leave* and (ideally) has infinite money to spend and no way out. And if you're really lucky? By the time you renew your fixed rate debt, inflation is back under control and 5-10Y rates have dumped to counter the recessionary aspects. Inflation with low growth can be manna from heaven for many REITs.

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> "But I personally doubt whether the impact would be sufficiently varied and sufficiently predictable that the problems could be dodged"

Well, the data is the data, and the data says they do (did).

I respect you very much as an investor, but I don't see a reason to respect your imagination / doubts / hunches on this topic when there are such extremely clear, extremely big effects in long-term data.

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> "An entire sector that is seemingly recession proof (private medical clinics, say) may have clients who themselves aren't recession proof, and that client may be a government agency."

Sure, but the data is the data, and the data already includes that type of situation within the sector as part of the result.

And the result at sector level is massive outperformance and solid real returns during stagflation.

That's just how it is (has been).

In relation to your comment - personally, I like UK REITs with long WAULTs, because you get the benefit of a 'locked in' customer for e.g. 10-20 years, but the perks of adjusting rent upwards e.g. every year (automatic with inflation) and every 5 years (rent review). Choose your REIT carefully, and even rising costs of insurance, repairs, energy, personel, taxes etc during stagflation are not your problem because the contracts explicitly transfer it to the customer.

Or if you're not picky, go with the whole sector and get +8% outperformance over average stocks during stagflation, historically. That's the data.


> "It seems to me to be a sector particularly vulnerable to that environment."
> "I imagine stagflation would be a somewhat toxic situation for REIT investors"

I still don't know why it seems this way to you when history and data says the opposite and you've been shown that data.

Here's the second link from my previous post, again. Almost the same result as the first link, using a different time window.

https://wealthgenadvisor.com/navigating-stagflatio...

Scroll to graph with green and black, halfway down the page.

REITs win during stagflation. That's how it is. High ROE stocks might also do better than regular stocks, but +8%/year outperformance is one hell of a hurdle they'd have to beat.

So where's the data *during stagflation* that would support any claim of >8% high-ROE-stock outperformance *during stagflation*, outside of your personal hunch?

TRS

The problem with that table of returns during different macro regimes is that, even assuming it's both correct and predictive (I have concerns), we don't know what regime is coming next. After all, if you know the future, there are LOTS of ways to invest profitably.

When you invest in a certain type of security, you should expect no more than the average return from that class of security, the "base rate". If you think the specific investment you're considering will have a return different from the norm achieved by that class, the evidence you have for its exceptionality has to be bulletproof in proportion to the degree of divergence you're expecting.

So how do REITs do compared to high ROE stocks as a general rule?

These figures are for stocks listed in the US, but the general conclusion isn't likely to be wildly different elsewhere.

Using the Value Line database of 1700 stocks, years 2005-2025 inclusive, which I have handy:
Equal weight portfolio of all REITS, CAGR 7.17%. Average about 34 stocks.
Equal weight portfolio of top 10% of stocks by ROE, CAGR 12.81%. Average about 155 stocks. No other checks or filters.
The baseline advantage for high ROE stocks is therefore a rather remarkable 5.64%/year. Both figures assume reinvested dividends.
Over 20 years, if you weren't withdrawing, that's the difference between having 4.0 times your money versus 11.1 times your money.

Hence my comment that you'll usually do better in total return with a slate of high ROE stocks than you will with a slate or REITs. Emphasis on "usually". To overcome that baseline level of 5.6%/year drag, you have to have extraordinary evidence that your specific REIT picks, or anticipated future economic circumstances, are exceptional.

This is not all that surprising. To overgeneralize just a bit, the annual value generation of a typical REIT share doesn't grow faster than inflation over the long haul. Without the ability to reinvest much of their earnings, they're mostly forced dead enders.

Again, that isn't to say that there isn't a time and a place for REIT investing. If the portfolio is to generate income, if nothing else high coupons mean you get less variation in current income even if the total income is ultimately lower. Just to remember to be realistic about overall return assumptions. Expect the base rate, not the case rate. I don't recommend betting your rent money on a macro forecast being right.

Jim

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