Trying to size a REIT allocation against 60 acres I will never sell

My real estate is land. Roughly 60 acres held long, some of it leased for hay at a number that barely covers taxes, and a smaller parcel I expect to be worth something when the growth path reaches it. Zero income, zero liquidity, and a holding cost I write a check for every year.

So I've been building a public REIT sleeve as the counterweight, and I'm stuck on sizing. Current sleeve is about 180k across four names and one broad fund, blended yield around 4.6 percent. That distribution covers my land carry with room left over, which was the whole point.

Where I'm unsure. The land is a duration bet with no cash flow and enormous single-market concentration. The REIT sleeve is liquid and diversified and pays me. Logic says push more into the sleeve. But both legs are real estate, and both are rate sensitive in the same direction. If rates go the wrong way my land appreciation thesis stalls and my REIT marks fall at the same time. I'm not sure I've actually diversified anything except liquidity.

The second thing bothering me is that the REIT sleeve is where the valuation argument is strongest right now, wide discounts to both equities and private marks, supply tightening, and I'm reluctant to add a lot into a position sized by an argument I did not originate.

Decision in front of me: do I let the sleeve keep growing to 300k over the next two years out of savings, or do I cap it and put new money somewhere with a different rate exposure entirely? Leaning toward growing it. Not confident.

Answer

1diane_kowalskiPassivePRO9

The correlation is real, and I don't think you should talk yourself out of it. Rates move both legs the same way. What differs is what happens after they move.

When rates rise, your land thesis doesn't break, it postpones. Nothing forces you to sell, and nothing forces a price to print. When rates rise, the REIT marks fall immediately and visibly, and the operating companies inside them have to refinance into a worse market. REITs depend on external capital in a way your dirt does not. That's the asymmetry, and it argues for keeping the sleeve at a size where a 30 percent drawdown doesn't make you sell it to pay the land taxes.

On the sizing question I'd flip the framing. Don't size the sleeve against your land. Size it against your land carry. What does the annual carry actually cost, taxes plus insurance plus whatever mowing and fence work runs? Call it a number. Then ask what capital at a 4 to 6 percent distribution covers that with maybe a 40 percent buffer for dividend cuts and years where a couple of names reset payouts. That gives you a floor, and it's a real number rather than a ratio.

Anything above that floor is a straight investment decision and has nothing to do with the land. Judge it on its own. My guess is your floor is well under 180k, which means most of what you already hold is discretionary and the convergence argument is the only thing holding it up. That's worth knowing about your own position.

One more thing on the four names. If they're clustered in the sectors with the tailwinds everybody agrees on, data centers and senior housing and industrial, you've got less diversification inside the sleeve than the count suggests. Consensus positioning is correlated positioning.

3 replies

2priya_n21PO1C

The part I'd focus on is that your land is a total return bet with negative current yield and your REIT sleeve is a current yield bet with uncertain total return. Those aren't the same trade even if both respond to rates. One of them pays your taxes and one of them charges you.

I'd grow it, but I'd grow it for the income, not the convergence argument. If the discount to private marks closes you get a bonus. If it takes five years the dividend still shows up quarterly and still covers the hay shortfall.

1laurenkim53Passive

@arbor's floor idea is the one I'd steal. I've been carrying two rural parcels and never once expressed the holding cost as a capital requirement, I just paid it out of income and grumbled.

The part of your post I'd sit with longer is "an argument I did not originate." I don't think that's a real objection though. Almost nothing you own was your idea first. What matters is whether you can name what would prove it wrong. For the convergence thesis, what would it be? Generalist money staying in AI names for another three years while REIT fundamentals stay fine and the gap just sits there? That's happened before and it's survivable if you're collecting the distribution. Doesn't feel survivable if you bought expecting a re-rating in eighteen months.

Trying to size a REIT allocation against 60 acres I will never sell

3 replies