“Of course, if the mall is completely dead we’re going to be wrong,” says Beam. “But if you think the mall will survive, I think it’s one where you’d be well served to have some exposure.”
The primary reason health-care REITs have been battered, he says, is the regulatory risk for Medicare and Medicaid reimbursements. Rising interest rates have also deterred some investors because health-care facilities tend to have long lease durations, he says. Nursing homes, for example, are often leased to operators for many years.
Salient has embraced a favorable sentiment for nursing home REITs over the last couple of years. “It’s a sector that isn’t glamorous,” says Beam, “but I think it fulfills a vital need.” The stocks are priced with a very critical view of Medicare and Medicaid reimbursement, he says, but they don’t reflect that the supply of nursing homes is shrinking because of the physical deterioration of outdated existing facilities and the inadequate building of new facilities. Salient has exposure to the Sabra Health Care REIT, which holds two-thirds of its assets in nursing homes.
Beam favors public REITs over private real estate because they offer liquidity, can be used in tax-deferred 401(k) accounts and tend to rank high in asset quality and management quality.
“Your random Regulation D offering, if you’re an accredited investor, isn’t necessarily going to have the quality that you get in the public real estate space,” he says. (Regulation D of the Securities and Exchange Commission relates to private placements.)
Private Opportunities
Tim Wallen, the CEO and a principal of MLG Capital, a Brookfield, Wis.-headquartered firm that specializes in small to mid-cap commercial real estate acquisitions and offers private real estate investment funds to accredited investors, says it’s not too late to invest in commercial real estate even though a more stabilized economy and rising interest rates make it more difficult.
He thinks investors should consider holding both public REITs and private real estate. They operate very differently, he says, and many people don’t understand the nuances. REITs provide high liquidity and diversification, he says, while private real estate offers low correlation to the S&P 500 and dynamic tax planning opportunities.
Large public REITs tend to pay a 3% to 4% dividend, he says, using the iShares U.S. Real Estate ETF (IYR) as a benchmark. Private real estate firms offer between 7% and 10% cash-on-cash yields (before-tax cash flow divided by equity), he says, as well as the “promote structure” (a real estate industry term for profit-sharing).
Private real estate is a “very fractured, fragmented industry” that involves many people, he says. “The real opportunity today is finding somebody’s mistake or missed opportunity that we can buy and fix or take advantage of,” Wallen says. “It takes a lot of searching to find those diamonds in the rough,” he adds.