From a small northwestern observatory…

This is normally the point in the month when I provide the portfolio stats for ACCRE, specifically the Sharpe Ratio and the correlations with the S&P. I’ll do that at the end. First, though, some questions I’ve received over the past month lead me to provide a primer — perhaps more of an abstract of a primer — on REIT investing in general. Note that during troubling economic times, investors regularly look to real estate as a safe haven. REITs can provide that pathway, but only if investors understand a few of the basics.

What is a REIT? — The modern-day Real Estate Investment Trust (“REIT”) is a creature of the Tax Code, and specifically (and I still find this humorous), an amendment to the 1960 Cigar Excise Tax. Without boring you too much, if a real estate trust is structured in a certain way, then the income from that trust can be passed thru to the investors without paying corporate taxes. Now-a-days there are a lot of ways of accomplishing this tax feat, but w-a-a-a-a-y back in 1960, only REITs were a viable solution to this problem. Remember that the maximum tax on unearned income back then was 70% and in some cases 90%. Figuring out a way to make this income a pass-thru without double-taxation was (and still is) a big deal.

In the early days, REITs were mostly “captive” of big corporations or other entities. A retail business might move all of their real estate (and mortgage debt) into a REIT just to get it off the books and thus make the returns look better. The REIT existed only to hold all that paper. Nothing really changed. However, over the years, REITs began spring up as for-profit entities on their own, to specialize in certain property types, and to get listed on the New York Stock Exchange (or later NASDAQ). In many ways, the mid-1990’s was saw a real shift in REIT management style, and the modern day REITs are now largely stand-alone investments. (There are some exceptions, but they are rare.)

REITs and Liquidity — REITs basically fall into two categories: Public and Private. Private REITs are fairly similar to private equity funds or hedge funds, and provide very little in the way of liquidity. There are a lot of reasons to organize a private REIT, but trade-offs require a high degree of investor sophistication. Conversely, public REITs trade just like stocks. They are liquid, marginable, and often can be “shorted” or have options just like stocks. Specialists or NASDAQ firms make a ready market, and they often trade in the after market. Settlement terms are the same as for any other stock.

REITs Specialization — Long ago, a particular REIT may own a smorgasbord of assorted property. There are still a few that do that (“diversified” REITs). However, today, REITs largely specialize into several sectors:

Within these sectors, individual REITs tend to focus on specific areas. For example, Regency Centers (REG) is a Retail REIT focused primarily on grocery-anchored centers, usually thought of as “neighborhood shopping”. Tanger Factory Outlet Centers (SKT) is also a Retail REIT, but, as the name indicates, invests in outlet centers (currently 39 of them in 20 states and Canada).

REIT Information — The National Association of Real Estate Investment Trusts (NAREIT) maintains a wealth of info on 195 publicly traded REITs. Note that there is also some data there on a limited number of private, and “public but non-listed” REITs. Further, your favorite data sources, such as your trading platform or Yahoo Finance will also be great sources of free information.

Unfortunately, real estate in general is not well understood by financial advisors, and REITs are simply a highly liquid way of investing in real estate. Thus, an advisor may know a lot about, say, pharma or tech, (or both, for that matter) but ask him or her about the retail sector or housing or even something as tech-related as data center warehouses, and you will all-too-often get a blank stare.

As always, if we can answer any questions, either on big stuff or small stuff, let us know. We’re here to help.

And now on to our mid-month report. September, as you know, was not a great month for the market in general. The S&P 500 pulled back over 6% last month, and has only recovered a bit of that so-far this month. Generally, we aim for ACCRE to be only partially coincidental with the S&P 500, thus providing some attenuation during down periods. However, for reason’s I’m still exploring, ACCRE fell much closer to lock-step with the broader market downturn in September.

S&P 500:
Average Daily Excess Return	0.0327%
Standard Deviation	1.3451%
Sharpe Ratio	2.4315%
ACCRE Fund:
Average Daily Excess Return	0.0455%
Standard Deviation	1.1540%
Sharpe Ratio	3.9436%
Correlation (overall)	56.4666%
Correlation (monthly)	73.4120%

Notably, the previous monthly correlation was only about 52%. That’s a point of some interest, and we’ll want to get the correlation, on a month to month basis, back to that level.

Well, that’s about it for this week. Please note that any mention of any particular investment or investment sector is not to be interpreted as a recommendation. Greenfield Advisors, ACCRE, our team members, or our clients may or may not currently have investments which are consistent with or adverse to those mentioned herein. As always, any specific investment should only be made upon consultation with your advisors. Stay safe, and stay in touch!

John A. Kilpatrick, Ph.D., MAI — john@greenfieldadvisors.com