I have spent a lot of time screening and testing ideas this week. Once I got started testing some ides that came from my conversations about bank stock investing, I just kept going, testing different ideas and combinations of stock-picking strategies. I spent a lot of time working on income portfolios because that is where I have found it most difficult to create repeatable, dependable quantitative strategies. The other night while I was crunching numbers and watching the Orioles' pitching staff find new and exciting ways to lose baseball games, I hit on an idea that appeared to have merit.
I spent a good deal of time working with and testing the basic idea and was able to refine it down to a very simple, easy-to-use and successful income strategy. I limited my universe to just publicly traded real estate investment trusts (REITs) and only bought those with the highest Piotroski F-scores. We only purchased those stocks with F scores of 7 or higher to ensure that we had only financially strong REITs where fundamental conditions were improving. I rebalanced quarterly to make sure that if the fundamentals of any of the REITs in the portfolio began to deteriorate, they were sold before any serious damage was done.
I didn't use any valuation methods such as PE or price to book value in the final model. Adding these factors to the mix worsened performance substantially. The REIT F-score model has a little bit of an unintentional momentum flavor to it, as the REITs with the best fundamentals tend to attract large-scale institutional buying. With just the F-score, a portfolio of REITs outperforms in both up and down markets while providing a better-than-average income stream.
While there may be some concern about overloading your portfolio with real estate, I will say I have long felt that most investors have too little exposure to real estate in their portfolio. The data from the National Association of Real Estate Investment Trust show that REITs perform as well as, if not better than, the broader market and crush the fixed-income alternatives. The major investment firms suggest less than 10% exposure to REITs. I think that's way too low. In the same way that I think you can put 100% of your growth money in small banks, I think you will do just fine having 100% of your fixed-income portfolio in REITs. Neither approach will make your broker very happy, but I suspect you will be delighted with the results.
I have included a spreadsheet below with all 28 REITs that qualify, but I want to highlight a couple that catch my eye. Gladstone Land (LAND) is a REIT that owns and leases farmland around the United States. While it owns some properties in California, most are near the coast and have access to a variety of water sources so the droughts in that region are not a huge problem. The bulk of its properties are outside California and have no water-related problems. Michael Burry of Big Short fame has said owning farmland in water-rich areas and selling the food to those with water shortages is the best way to make money from global water-supply problems. Gladstone Land is growing earnings at an impressive rate and the shares yield 4.78% at today's prices.
Whitestone REIT (WSR) has an interesting approach to owning shopping-center properties. It acquires, develops, owns and manages what it calls Internet-resistant properties with a concentration on Austin, Dallas-Fort Worth, Houston, San Antonio and Phoenix, areas with a well-educated, well-paid population. Whitestone favors tenants that offer products not usually offered, or impossible to purchase, online like groceries, dining, health and wellness, education, financial services and entertainment. It seems to be working as over the past five years it has averaged 30% growth in revenue and 32% growth in net operating income. The shares yield 7.57% right now, so they are an excellent choice for an income portfolio.
The current REIT F-score portfolio has a nice mix of office, self-storage, multifamily, mortgage lending and industrial properties. The 28 REITs listed below all have F-scores that indicate solid financial conditions and prospects for the underlying business in the year ahead. It is a sound approach that may help income-seeking investors achieve their goals without the risk of many other strategies.
|Symbol||Company||Mkt cap (millions)||Yield||Piotroski F-score|
|LPT||Liberty Property Trust||5743.31||4.85||7|
|O||Realty Income Corp||16152.72||3.62||7|
|LXP||Lexington Realty Trust||2314.95||6.9||7|
|DCT||DCT Industrial Trust Inc||4111.82||2.49||7|
|LAND||Gladstone Land Corp||104.03||4.64||7|
|CMCT||CIM Commercial Trust Corp||1781.43||4.8||7|
|WPC||W.P. Carey Inc||7149.12||5.64||7|
|NLY||Annaly Capital Management Inc||9868.29||11.25||7|
|SKT||Tanger Factory Outlet Centers Inc||3598.04||3.15||7|
|HIW||Highwoods Properties Inc||4810.06||3.44||7|
|MAA||Mid-America Apartment Communities Inc||7683.87||3.13||8|
|CUZ||Cousins Properties Inc||2197.72||3.06||8|
|PDM||Piedmont Office Realty Trust Inc||2999.55||4.06||7|
|ELS||Equity Lifestyle Properties Inc||6214.63||2.11||7|
|HST||Host Hotels & Resorts Inc||12442.8||4.8||7|
|DEI||Douglas Emmett Inc||5020.89||2.53||7|
|SPG||Simon Property Group Inc||64402.02||3.05||7|
|AAT||American Assets Trust Inc||1858.01||2.4||7|
|GGP||General Growth Properties Inc||25383.07||2.54||7|
|BRX||Brixmor Property Group Inc||7750.78||3.63||7|
|EXR||Extra Space Storage Inc||10933.14||2.92||7|
|RHP||Ryman Hospitality Properties Inc||2604.98||5.48||8|
|IRET||Investors Real Estate Trust||763.85||8.24||7|