In the trading world, real estate investment trusts, or “REITs” for short, are some of the most misunderstood investments out there.
I can’t count the number of times I’ve heard novice investors say: “REITs get slaughtered when interest rates rise; I avoid them at all costs.”
It’s also an incredibly costly mistake…
Fact is, if you’ve let this flawed investor motto keep you out of REITs over the years, you’ve missed out on unworldly gains.
The key is understanding how to find the right REITs.
Thankfully for us, our 10-Minute Millionaire system is designed to sleuth the best opportunities in the market… and it’s just delivered the perfect hospitality REIT to help supercharge our portfolio.
However, before I share our latest millionaire-making opportunity with you, let’s take a minute to understand why REITs are a must-have in 2017…
True Dividend Warriors
Now, when we look at REITs, most of them make their money through real estate investments that are typically a combination of income-producing properties. Think shopping centers, retail strip malls, offices, warehouses… that sort of thing.
To-date, there are over 200 different REITs that trade on a major stock exchange (typically the NYSE) in the United States.
Now, the interesting thing about REITs is that they have to return 90% of their profits back to shareholders in the form of dividends.
Hence why they become so popular when rates are low.
It’s also why investors fall prey to their emotions and abandon ship when rates rise.
Now, you’re not alone if you believed that rising rates were bad news for real estate and, by association, REITs.
This has been a common misconception in the market for a long time.
Sadly, it’s been a misunderstanding that has left hundreds… maybe even thousands… of would-be millionaires starving for badly needed income.
To prove this, all we have to do is look back at the numbers.
Historically, REITs have proven they can weather rising interest rates.
In fact, between 1994 and 2017, interest rates have risen by more than 1% (or 100 basis points) only nine times.
During six of those nine times, REITs surged.
Let’s look at just the last year alone by comparing the how the Vanguard REIT ETF (NYSE Arca: VNQ) has done compared to the benchmark SPDR S&P 500 ETF (NYSE Arca: SPY)…
Looking at the chart, we can see three things.
First, REITs spiked higher last summer after investors were sent scrambling for stability and yield following the Brexit vote.
Second, REITs barely felt the year-end Trump bump.
And thirdly, they are still a fair distance off of their 2016 peak.
The bottom line: REITs have been pulled back to an extreme – exactly the kind of setup we look for here at The 10-Minute Millionaire.
And our system has just given us the go on a hospitality REIT that I’m expecting to be a top performer in our 10-Minute Millionaire portfolio – RLJ Lodging Trust (NYSE: RLJ).
A Place to Rest Your Head
When we look at big, full-service hotels, it’s easy to see that they have a rather unusual business model.
With sleeping rooms, multiple restaurants, various meeting and business facilities, they seek to have “something for everyone” in hopes of attracting big conventions and highly profitable groups.
The pitfall is this also creates a “boom or bust” business model.
When a group that can use all of the full-service hotel’s offerings is booked – big money flows in.
But in between those “big group” bookings, those big hotels have unproductive facilities and staff that drag profit margins down.
In essence, these big hotels act like jacks-of-all-trades, but are masters of none.
Now compare that to hotels with a more business-focused mindset – brands like Marriott’s Renaissance and Courtyard, Hyatt Place, and Hilton’s Embassy Suites, Garden Inn, and Homewood Suites brands.
They have limited food and beverage outlets, modest meeting space, and concentrate on one thing – filling up hotel rooms.
And because they do not try to be a jack-of-all-trades, they can operate with a much smaller full-time staff.
These hotels then have higher revenue per room and profit margins. And with smaller buildings, they also offer the potential for greater return on investment.
These are the folks that RLJ caters to.
And it’s what makes it such an exciting hospitality REIT play.
With a portfolio of over 122 properties, with approximately 20,100 rooms, located in 21 states and the District of Columbia, RLJ is an impressive specimen in the hospitality REIT space.
Let’s take a closer look…
The Two Aces Up Our Sleeve
When we look at this Bethesda-based hospitality REIT, RLJ has two aces up its sleeve…
- The long-term ace is the company’s incredible dividend. Currently, RLJ delivers an annual dividend of 6.38%, making this a stock that is “easy to hold” as we wait for appreciation of its assets to drive up the stock price.
- However, the short-term ace is the really tantalizing opportunity. On July 20, Blackstone Group LP, one of the largest money management firms in the world, placed a $3 billion bid to acquire RLJ. Now, RLJ has reportedly turned down the offer, but this is still great news for RLJ investors. You see, if a company with Blackstone’s reputation is interested, that implies that other firms could be interested as well. In addition, Blackstone could come back a with a higher offer to further entice RLJ into a deal. What that means for our pick is there’s a real possibility of a takeover bid that could further boost the stock.
Here’s what has happened to the price since the news was announced…
The market has taken a wait-and-see attitude with the stock.
But what really excites me is that with RLJ, we get to tap into a rare profit opportunity…
An Extreme Convergence
As you can see in the chart, RLJ give us both a multiyear extreme reversal and then followed that up now with a continuation extreme…
We’ve had the third test of long-term support just weeks ago. A turnaround off of that long-term bottom sets us up for a nice pop going forward.
Now that we’ve found the extreme, it’s time to frame the trade in a way that puts specific numbers on the opportunity we’ve identified.
A Well-Planned Attack
With RLJ, we’re looking at an intermediate-term profit opportunity. But with the big dividend from this stock, we’ll be happy if we have to stick around a while longer.
We’ll “frame our trade” by setting our stop-loss at 20% below our entry point.
Here’s how our fully framed trade looks on the chart…
As you can see in the chart above, we’ll book the profits on half of our shares once we have a 40% gain. That profit target – coupled with the stop-loss – means we have a healthy two-to-one reward/risk ratio.
We’ll let the second half of our RLJ stake run as we enjoy the nice dividend during the ride.
As we monitor this trade, here are several things to watch – and watch carefully.
While most merger and acquisition (M&A) activities would lead to strong upside for our stock, there are scenarios where the RLJ management team could get ego-centric and get in a bidding war for FelCor or make ultimatums that scare off suitors like Blackrock.
On the upside, a sweetened takeover price from Blackrock or other potential bidders could send us to our profit target much sooner than anticipated.
Continued economic strength will also bode well for the business travel industry and, therefore, the RLJ properties.
Rest assured… we’ll keep you updated on this trade.
— D.R. Barton, Jr.[ad#mmpress]
Source: Money Morning