“It was at this school that Einstein first engaged in the visualized thought experiment that would help make him the greatest scientific genius of this time: he tried to picture what it would be like to ride alongside a light beam” – Einstein: His Life and Universe by Walter Isaacson
Albert Einstein was famous for his thought experiments. Mathematical equations were not relegated to the paper they were written on, he actively visualized them in order to fully understand them. Things become more real and tangible in three-dimensional space, and investors can take a cue from the great German physicist when thinking about their portfolios. When you lift it off the page, what does your portfolio look like?
This thought experiment is particularly relevant in REITs, because these companies own physical assets. You can literally go and walk through the buildings that make up a REIT portfolio. So what would a Serenity Alternatives REIT portfolio look like? Below we’ve assembled a sample of REITs taken from our Serenity REIT model along with some visual aids.
As a quick aside before we delve deeper, the companies below do NOT represent a full REIT portfolio as we would construct it. Our process is complex and optimizes our portfolio over a set of more than 60 risk factors. The selected REITs below are a small sample of REITs that have scored highly in our model recently.
Boston Properties (BXP) – Boston Properties owns one of the highest quality office portfolios in the US. Concentrated in New York, Boston, San Francisco, Washington DC and Los Angeles, BXP owns over 50 million square feet of office space. This large portfolio is 93% leased. Since it’s IPO, BXP has doubled the return of the REIT index, and performed 3x as well as the S&P 500.
One striking visualization of BXP’s portfolio is Salesforce Tower in San Francisco. Finished in 2018, Salesforce Tower is a 100% leased 1.4 million square foot office building adjacent to the Transbay Transit Center in San Francisco. It is the tallest office building in San Francisco and an irrefutably, irreplaceable asset. Imagine walking through the most state-of-the-art office building in the country located in the center of the worlds technological beating heart. Salesforce tower is easily one of the BEST pieces of commercial real estate in the country.
BXP represents exposure to the highest quality office buildings in the US, in the densest and most populous US cities. BXP has high quality real estate, in high quality locations, with an incredibly talented management team, and a development pipeline that very few real estate companies could replicate. Oh, and it trades at a 13% discount to the market value of its underlying assets (it’s cheap).
Prologis (PLD) – Prologis is the premier owner of warehouses both in the US and globally. With 3,771 buildings in its portfolio representing 786 million square feet, PLD has scale that few if any real estate owners can match. As e-commerce has grown in influence as a driver of US growth, Prologis has reaped the rewards by supplying space to Amazon and other e-commerce leaders. PLD warehouses see goods flow through them representing $1.5 trillion in value annually, or roughly 2% of the worlds GDP.
There is a good chance that the Amazon packages arriving at your door have been inside a Prologis warehouse. When you imagine an Amazon warehouse the size of 16 football fields, complete with robots picking packages off the shelves and delivering them to a docking station, bustling with trucks from UPS, Fedex, and Amazon, you are visualizing a PLD warehouse.
Another way to visualize the PLD portfolio is to think of a map covered in dots that represent warehouse square footage. What immediately stands out is PLD’s incredible scale and penetration into the world’s largest logistics markets. To the left is a map of Los Angeles with PLD dots in green. PLD is the dominant warehouse landlord; their portfolio is 4 times the size of their nearest REIT competitor in the LA market!
The advantages of such scale are myriad. PLD can closely work with tenants to fill their needs in almost any market. They can develop almost any type of warehouse or industrial real estate, anywhere in the world. Their balance sheet is A-rated, which is a rarity in the REIT space, and indicates the robustness of the cash flows their portfolio generates. To say the Prologis portfolio is irreplaceable is an understatement. Size and scale matter in real estate, and PLD has them both.
VICI Properties (VICI) – VICI properties is the newest REIT on our list, but possibly the easiest to visualize. All you have to do is imagine the bright shining lights of Las Vegas. Anyone who has ever wandered past or into Caesar’s Palace has experienced the VICI portfolio firsthand. Caesar’s is only one of 60 properties owned by VICI across the gaming, retail, and entertainment industry verticals.
VICI is part of a growing trend in which public companies spin their real estate holdings into a REIT, while re-investing the cash from the spin-off into their core business. Caesar’s Entertainment (CZR) did exactly this when it created VICI, signing a 15-year lease with VICI, and agreeing to pay them $494 million per year in rent to operate Caesar’s casinos within what are now VICI properties.
As more casino’s and other entertainment venues look to raise capital to fund their business, VICI is able to buy more real estate, and diversify away from their main tenant, Caesar’s. This avenue of growth and extremely long leases give VICI an incredibly stable cash-flow profile. The company also pays a dividend in excess of 5%, and trades at a much lower multiple than the typical REIT. In a word, stable cash flows, at a reasonable price, from iconic assets.
Equinix (EQIX) – The final REIT in our short list owns some of the least traditional and hardest to access real estate in the US. Equinix is a data center company and can be considered one of the original players in the internet revolution. Equinix specializes in connection points within the internet, acting as the physical circulatory system to the worlds information economy. If you’ve used the internet, you’ve almost undoubtedly sent a string of 1’s and 0’s through a fiber optic cable straight into an EQIX datacenter.
Data centers can be tough to visualize, apart from the typical image of rows of computers and blinking lights. The surprising thing to most investors is how centrally located many data centers are, as their physical location makes a difference for how fast they can send internet traffic in different directions. Connectivity is key in the data center space, and EQIX has the most highly interconnected portfolio of any data center company.
Operating in 24 countries, EQIX sends data back and forth across the globe constantly. As their network grows, the space in their data centers actually becomes MORE valuable. This density phenomenon acts very much like physical space in the world’s largest cities. The more people that want to be in the same place, the more expensive it is to be there. For EQIX, who owns the best space, this is a good thing.
The Full Picture: Did you guess the key theme underlying the Serenity sample REITs? If we could summarize it into one word it would be “irreplaceability”. Serenity’s model emphasizes companies with portfolios that are truly unique and irreplaceable. Too often real estate investors settle for generic properties in generic locations, that are replicated thousands of times over by other investors, leading to completely vanilla returns.
Own a few multi-family buildings in a single metro area? How many portfolios are there out there that look just like yours but with a different name? Hundreds, thousands? Own a piece of BXP? How many portfolios are there that contain Salesforce tower and the GM building? ONE! And you can own a piece of it via the REIT market.
At the end of the day we believe that irreplaceable real estate will preserve its value and grow its cash flows faster than real estate that is plain vanilla. That is why the Serenity model is consistently weighted towards high quality REITs, with high quality assets, and high quality management teams. Add in a skew towards REITs that are cheap and growing the value of their real estate and you have the Serenity formula for success. Value, momentum, and quality within some of the world’s best commercial real estate.
That’s the Serenity edge.
Martin Kollmorgen, CFA
CEO and Chief Investment Officer
Serenity Alternative Investments
Cell: (630) 730-5745
**All charts generated using data from Bloomberg, LP, S&P Global, and Serenity Alternative Investments
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