I recently heard Amazon, the world’s largest online retailer, described as a “bull in a china shop” for the way it’s disrupted industry after industry.
But that’s really the wrong analogy. An angry bull lashes out erratically, goring or trampling whatever happens to be in front of it at the moment. Amazon is far too mechanical for that.
The better comparison for Amazon would be a steamroller. Like a steamroller, Amazon slowly and methodically flattens everything in its path.
On life support… and just barely.
Dying a painful death by 1,000 cuts.
Even grocery stores, convenience stores, and pharmacies – businesses long believed to be “Amazon-proof” – are now at risk of being run over.
With the entire brick-and-mortar retail economy seemingly under attack, retail-focused real estate investment trusts (REITs) have absolutely gotten smashed.
National Retail Properties (NYSE: NNN) – an ultra-high-quality retail landlord I previously recommended in Boom & Bust but have been out of for a while – is down about 20% over the past year, even while the broader stock market is close to all-time highs. And National Retail is the bluest of the blue chips with exceptionally strong tenants.
Some of its more mediocre competitors are down significantly more. Spirit Realty Capital (NYSE: SRC) – which has weaker tenants more directly in Amazon’s path – has seen its stock sink by nearly half in the past year.
What’s the takeaway? Are we looking at a nightmare future of boarded-up shop fronts and decaying, dilapidated retail real estate?
In fact, Warren Buffett’s Berkshire Hathaway just made a major investment in a retail-oriented REIT. There’s still a lot of value to be had in real estate, at least if you know what to avoid.
So today’s let’s go over some things to keep in mind when putting together an “Amazon-proof” portfolio.
#1: Focus on services.
Amazon drones won’t cut your hair or do your other half’s nails any time soon. Basic personal services, such as barbershops or hair and nail salons, tanning beds and even gyms and movie theaters are about as Amazon-proof as they come.
It’s worth noting that the REIT that Buffett purchased has about two-thirds of its portfolio in properties tied to the service sector.
Shopping malls have been dying for years. I don’t consider that up for debate. But the strip mall next to your house – the one that probably has a dentist, a Starbucks and a dry cleaner in it – should be just fine. Amazon is not realistically a threat here.
#2: Focus on demographics.
One of our specialties at Dent Research is using demographic data to forecast consumer spending, and this works phenomenally well with real estate.
Consider nursing homes or assisted-living facilities. With the aging of the Baby Boomers, it’s a foregone conclusion that demand for these kinds of properties is about to go through the roof.
There’s just one big problem with trying to invest in this space: the person picking up the tab is Uncle Sam, via the Medicare and Medicaid programs. And Uncle Sam can – and does – arbitrarily change the reimbursement rate he pays for services.
I have no interest in trying to invest in a nursing home operator. And, for that matter, I wouldn’t want to be a doctor these days either. The risk that the governrnment changes the payment rate and grinds profits to nearly zero is a risk I’m not willing to take.
But I’m perfectly comfortable being the landlord in this situation. While the governrnment is very likely to crimp profitability in the years ahead, it’s not likely to actually drive nursing home operators out of business. As a landlord, you don’t need your tenant to be loaded. You just need them to make enough money to continue paying the rent.
One of the most profitable recommendations in Boom & Bust’s history was in a REIT that specialized in skilled nursing properties.
And, not surprisingly, that same REIT recently popped up on my friend John Del Vecchio’s quality screen in his newsletter, Hidden Profits. (Learnrn more about John’s approach here.)
#3: Be careful with hotels, office buildings, and apartments.
President Trump will very emphatically tell you that he’s never personally been bankrupt, and I believe him. But in his career as a hotel and casino mogul, he’s had a handful of colossal failures.
Hotels and casinos tend to be expensive trophy assets that, because of their high purchase prices relative to the rent received, often fail to generate a reasonable returnrn for their investors.
They’re also highly cyclical and get hit hard during recessions when business travelers and vacationers cut back on travel. The same is true of ritzy office buildings and high-priced luxury apartments.
Boring, distinctly non-sexy properties like storage units and warehouses often make far better investments than trophy assets because the rents collected tend to be high relative to the price paid for the properties.
So again, avoid trophy assets or REITs that buy trophy assets and focus instead on less exciting addresses that throw off a lot of cash.
#4: Remember, real estate is all about cash flow.
And, finally, remember that real estate is first and foremost an income investment.
This makes it perfect for my newsletter, Peak Income. I currently have three REIT investments in the model portfolio, and I’m looking to add a new one this one that has all of the characteristics I covered today: It’s service-based, is backed by strong demographic trends, is delightfully boring, and throws off a tremendous amount of cash every quarter.
And, most important of all, it’s Amazon-proof.
Portfolio Manager, Boom & Bust Investor