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Stepan Lavrouk
Stepan Lavrouk
Articles (575) 

Real Estate Investor Sam Zell Weighs In on REITs

Zell is skeptical of the recent stock market recovery

Real estate investment trusts (REITs) can provide investors with a great way to gain exposure to the property market. Not everyone has the money to buy real estate (and still fewer have the capital required to build a diversified portfolio), but anyone can buy shares in a REIT.

Furthermore, REITs allow investors to specialize in a particular sector, be it residential, commercial, healthcare, old age living, or any other niche. Of course, real estate has been a bit challenged over the last few months, as lockdowns have stymied much of the cash flow that some of these assets typically generate (i.e. malls, retail centers, etc.).

Sam Zell is a billionaire real estate businessman who has achieved remarkable success in his industry by utilizing value investing principles and looking for properties that were selling below their intrinsic value. In a recent interview with NYU’s School of Professional Studies, Zell gave his views on the state of both the overall stock market and on REITs specifically.

Don’t believe the headlines

Zell is skeptical of the recent stock market recovery, saying that the rally has been driven mainly by the largest companies in the S&P 500:

“If you ‘eliminated’ the FAANG stocks, I think the results would not look anywhere near as positive as the statistics make them look. There’s very little doubt in my mind that if you take those five out of the market, the market would be down - not as bad as it was, but it isn’t going up a lot. So I think to some extent, the [media] headline definition of the market is not necessarily what’s going on.”

Zell is right - the five largest stocks in the S&P 500 have returned +35% year-over-year. These are Facebook (NASDAQ:FB), Apple (NASDAQ:AAPL), Amazon (NASDAQ:AMZN), Microsoft (NASDAQ:MSFT) and Google (NASDAQ:GOOG). The returns of the S&P 500 as a whole are just +2% year-over-year, and the returns of the remaining 495 companies are actually negative at -5%.

Zell went on to say that a major concern for REIT operators back in March was the uncertainty around rent payments. With so many people laid off and so many businesses shuttered, it’s not hard to see why this might have been the case. Nonetheless, Zell’s own Equity Residential (NYSE:EQR) has been collecting 98% of its rent compared to the same period last year, suggesting that the worst case scenario has been avoided, although he did add that they have had to renegotiate many rent arrangements and assist tenants with late payments.

The main lesson for REIT investors from this interview is that it’s not enough to invest on a sector by sector basis - you need to have a good view into the underlying properties that every REIT owns, and make an informed, value-driven decision on that basis, just as you would with any company with productive assets.

Disclosure: The author owns no stocks mentioned.

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About the author:

Stepan Lavrouk
Stepan Lavrouk is a financial writer with a background in equity research and macro trading. Specific investing interests include energy, fundamental geoeconomic analysis and biotechnology. He holds a bachelor of science degree from Trinity College Dublin.

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