What To Do When You Are Losing Money In REITs

Investing in Real Estate Investment Trusts (REITs) offers opportunities for stable income, but it’s not without risks. If you find yourself losing money on a REIT investment, it’s important to approach the situation with a clear and strategic mindset.

Panicking or selling off your shares without a thorough analysis can often lead to missed opportunities or deeper losses. Here are three crucial steps to guide you in making an informed decision when your REIT investment is underperforming.

1: Evaluate The Root Cause of The Poor Performance

Before making any decisions, it's essential to understand why the REIT's share price is declining.

Consider whether the price decrease is due to a broad market decline or if it indicates weakening fundamentals specific to the REIT.

Market-wide sell-off: Sometimes, macroeconomic news — such as rising interest rates, inflation fears, or political uncertainty — can cause panic and a broad sell-off in REITs. If this is the case, the decline may not be related to the REIT's underlying business. These situations often present buying opportunities as the REIT's price is temporarily depressed but its fundamentals remain strong. An example of this would be Cromwell European REIT, whose share price suffered a 57% drawdown between 2021 and 2023, largely because of the Russian–Ukrainian War, which caused massive drawdowns in all European-focused REITs. However, in the case of Cromwell European REIT, the fundamentals remained relatively unchanged, and distributions remained relatively unaffected, resulting in dividend yields rising from 6% in 2021 to 12% in 2023.
Deteriorating fundamentals: If the REIT is facing company-specific issues, such as declining rental income, high vacancy rates, or management problems, the decline in share price may reflect deeper concerns. In this case, the lower price could signal a new normal, and investors need to assess if the REIT’s long-term outlook has fundamentally changed.
An example of this would be Sabana REIT which experienced over 70% drawdown from 2013 to 2017 because of poor management that resulted in significant deterioration in the distribution per unit. The distribution per unit of Sabana REIT went from 9.38 cents in 2013 to 3.31 cents in 2017 and has remained around 3 cents ever since.

The marked decline in fundamentals has justified the drop in share prices to preserve the dividend yield of the REIT. This suggests to investors that the reduced share price may represent a new normal, mirroring the present fundamentals.

Key takeaway:

During market-wide selloffs, opportunities can arise, but dealing with fundamental issues may call for a more careful strategy.

Identifying the root causes of the poor share price performance is essential for assessing the current intrinsic value of the REIT, which brings me to the next point.

2: Assess the Impact and Update the REIT's Valuation

Once you've identified the root cause of the share price decline, the next step is to map out the impact on the REIT’s future dividends and update its valuation.

There are three stages to this:

Update the expected distribution of the REIT based on the new information available
Run a scenario analysis to estimate the range of future distribution per unit based on a different set of growth rate projections over a different time range
Run a scenario analysis to estimate the range of intrinsic value based on the combination of an estimation of future DPU and its prevailing dividend yield

An example of such a model is as follows:

Running these scenarios will help you determine whether the REIT is undervalued, fairly valued or overvalued based on its updated fundamental outlook which is a key component in shaping the appropriate action that is to be taken.

Key takeaway:

Scenario analysis provides a better insight into potential results, enabling you to make informed decisions regarding the actions required for your REITs instead of reacting impulsively and selling them hastily.

This brings me to the last step of the process which is to determine the action that is to be taken.

3: Decide The Most Appropriate Action

With a clearer understanding of the root cause of the poor performance and the updated intrinsic value, you can now decide on the best course of action:

If the intrinsic value is higher than the current share price and the fundamentals are stable: This might be a chance to increase your holdings, expecting a rebound as market confidence strengthens and valuations revert to their previous levels.
If the intrinsic value is higher than the current share price even as fundamentals are expected to worsen: In this case, consider holding onto your position or selling part of it. The choice you make will be influenced by your outlook on the REIT's future, your risk tolerance, and the availability of other REITs in the market that provide a more favourable risk-reward ratio.
If the intrinsic value is lower than the current share price: The only logical action here is to sell off your position as the REIT is overvalued and further losses may be likely.

Key takeaway:

Use the intrinsic value to guide your decision — whether to hold, add more, or sell. Your decisions should be solely based on the fundamentals and the prevailing valuations of the REIT instead of letting your emotions guide your investment decisions.

Conclusion

Losing money in REITs can be stressful, but it's important to take a step back and analyze the situation rationally.

By evaluating the root cause of the poor performance, updating your valuation, and making a decision based on that analysis, you therefore eliminate the undue influence of your irrational emotions that may cause you to make a wrong call that could further worsen your losses.

In many cases, short-term volatility can create buying opportunities, but understanding the fundamentals and future prospects of your REIT is key to making the right call.

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