Investing Amid Low Expected Returns | Antti Ilmanen

Summary of: Investing Amid Low Expected Returns: Making the Most When Markets Offer the Least
By: Antti Ilmanen


In the world of investments, everyone seeks low risk, low volatility, and high returns. Introducing REITs (Real Estate Investment Trusts), an investment that could be perfect for the task. REITs have existed since the 1960s, and today, investors from various walks of life are discovering the potential that they hold. ‘Investing Amid Low Expected Returns: Making the Most When Markets Offer the Least’ by Antti Ilmanen explores the ins and outs of REITs, the benefits they provide, and why they deserve a spot in your investment portfolio. This summary delves into the different types of REITs, their performance, and vulnerabilities to keep in mind while investing.

REITs – The Ideal Investment

Discover the potential of REITs, or real estate investment trusts, a low-risk investment option that offers high returns and acts as a hedge against market downturns. While not a new investment opportunity, REITs have gained popularity among all types of investors for their impressive 12% long-term total return. What’s more impressive is REITs’ independence from stock market volatility. This 300-billion-dollar industry has plenty of room to grow, given that it only owns or manages 10% of the 4-trillion-dollar commercial real estate market. With REITs, investors can enjoy high returns, low volatility, and a promising outlook.

REITs: A Beginner’s Guide

REITs, or Real Estate Investment Trusts, are special corporations that own, lease, renovate, manage, and develop real estate. Unlike a regular public company, they must have at least 100 shareholders and widely distribute their shares, and invest at least 75% of their assets in real estate to avoid corporate taxes. REITs offer total returns averaging 12% annually, with steady income, low market-price volatility, and investment safety. Through REITs, investors can benefit from real estate without the time, interest, and knowledge required for managing properties.

Understanding REITs and Their Investment Opportunities

REITs are property companies that operate in the highly cyclical real estate market. Their performance is affected by the four phases of the real estate market: depression, recovery, boom and downturn. Despite this, REITs are not as interest-rate sensitive as bonds, preferred stocks, or utilities. Savvy REIT investors diversify investments across various property types. Office and industrial properties are relatively stable, while retail and residential properties offer significant returns. Health care, lodging, resorts, hotels, self-storage and specialty properties also offer worthy investment possibilities. As with any investment, investors should consider local conditions and broad economic cycles before investing in a specific REIT.

Maximizing Returns with REITs

Real Estate Investment Trusts (REITs) use funds from operations (FFO) as a measure of profitability, and to grow FFO, they focus on internal and external growth. To find REITs that will deliver solid FFO growth, investors need to look for an experienced management team, access to capital, a strong balance sheet, and a geographic and sector focus.

With REITs, in contrast to companies in other sectors, FFO is the most common measure of profitability. Real estate depreciation is considered an expense for these entities, but the value of a well-maintained and well-managed property increases over time, making net income a less effective marker of value than FFO. Investors should also consider other valuation measures, such as adjusted FFO (AFFO), which accounts for expenses that don’t provide added value and other similar costs.

REITs can grow their FFO either internally or externally. Examples of internal FFO growth include improving profits through rent increases, expense sharing with tenants, improving tenant quality, refurbishing or improving the property, and selling holdings. External FFO growth, on the other hand, is accomplished by acquiring additional properties with high yield growth or developing properties. Some REITs also choose to grow through joint ventures or by providing financing for real estate deals.

Investors should seek out REITs with experienced management teams that have seen various market conditions and which are proficient in the art of the deal. Access to capital, a strong balance sheet, a geographic and sector focus, a management team that owns stock in the REIT, cash, and a lack of conflicts of interest are also essential characteristics to look for in an investment. If investors can find a REIT with these qualities, they are likely to receive stable returns even throughout the ups and downs of the real estate market cycle.

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