With REITS, Inflation Needn’t be the SpoilerInnovative Portfolios Editor
Inflation is certainly a topic of concern these days. “New Inflation Fears Rattle Wall Street, Retirement Planners,” Lynnley Browning writes in Financial Planning. “Inflation has emerged as the new spoiler for retirement.” “Investors have shifted their spectrum of concerns from slow growth, high unemployment, and deflationary pressures at the beginning of 2021, to inflation, asset bubbles, and Fed Policy,” Tom Ozimek writes in The Epoch Times.
REITs to the rescue?
According to Nareit.com (the worldwide membership organization for real estate companies), REIT dividends have outpaced inflation as measured by the Consumer Price Index in all but two of the last twenty years. What’s more, Nareit authors add, while real estate investment trusts have not proven to be the only inflation hedge, “their comparatively low correlation with other assets also makes them an excellent portfolio diversifier that can help reduce overall portfolio risk and increase returns.”
Real Estate Investment Trusts, or REITS, are an excellent hedge against inflation, explains JR Humphreys, senior portfolio manager of Innovative Portfolios’ Real Estate Income & Growth separately managed account. With a fully invested portfolio of publicly traded U.S.-based equity REITs, the strategy’s primary goal is current income with a focus on capital appreciation.
According to Humphreys, REITs represent an effective inflation hedge for a number of important reasons:
- Many leases are tied to inflation.
- Higher costs for land, materials, and labor reduce the potential profits of new real estate development.
- Existing properties have low exposure to labor and commodity costs.
- Property taxes (existing real estate’s biggest expense) tend to rise more slowly than other costs.
Demographic trends have benefitted REITs, Humphrey adds:
- Aging baby boomers are driving the need for healthcare and skilled nursing facilities.
- Increasing e-commerce is driving the need for warehousing facilities.
- Work-from-home trends drive the need for data server farms and 5G cell towers.
For income-driven portfolios, REITs offer higher—and growing—income benefits, along with potential for capital appreciation lacking in bonds. “Unlike bonds, which pay a fixed amount of interest and have a set maturity date, REITs are productive assets that can increase in value indefinitely. As these businesses profitably acquire more properties, they grow their cash flow, can increase their dividends, and see their stock prices appreciate over time,” Simply Safe Dividends explains.
With more than 225 publicly traded REITs, property types include apartment buildings, medical facilities, hotels, data centers, offices, shopping malls, cell towers, data centers, infrastructure, warehouse properties, and even timberland.
The Innovative Portfolios Real Estate Income & Growth portfolio comprises small and mid-sized capitalization REITs that can be represented in any of the 13 REIT sectors of the equity REIT universe. As Humphreys sums up the situation, REITs are one of the best performing equity classes during times of moderate to high inflation. “Every investor should have an allocation to REITs,” he asserts.