Drexel University business students had a chance to pitch their investment fund’s best ideas for 2019 last week at the New York Stock Exchange, and among them were picks involving a software-payments provider and a cybersecurity firm.
The students, and those who came before them, have been riding a positive wave. The student-run Drexel fund has averaged 11 percent a year in returns since 2007, and now manages $2.2 million, more than double their original stake.
The business undergrads gave their best current ideas at the exchange as part of a Jan. 22 Benchmark NYSE Investor Investment Symposium, which covered investing in REITs, or real estate investment trusts, in various areas, including retail, technology, e-commerce, and data centers.
REITs sold off precipitously in 2018, so why consider them now? Well, they are paying investors healthy rents in the form of dividend yields.
The chief benefit of investing in REITs is dividend income. According to Kevin Kelly, CEO of Benchmark Investments, REIT dividend growth has outpaced inflation in 18 of the last 20 years. REITs have historically risen with inflation surprises due to the ability of landlords to raise rents.
“As interest rates rise, investors need to position their portfolios accordingly as the dispersion of property returns will become more pronounced,” he told the crowd.
Some real estate sectors perform better than others in a rising interest rate environment.
“REITs are critical investors in data centers for the cloud and investors in cell towers, which are growing regardless of the direction of interest rates. It’s like a utility play, but with commercial rental rates and tenants that are Fortune 1000 companies," Kelly said. He also pointed out that there’s demand for an additional 4,000 new data centers by 2020.
Over the long term, REIT investors like to point out that REITs posted positive total returns 87 percent during the time when Treasury yields were rising between 1992 and 2017. And REITs outperformed the S&P 500 more than half of the time during the same period, according to Benchmark.
Last week’s event highlighted some new REIT exchange-traded funds brought to market by Malvern-based Pacer Financial. Pacer launched three new REIT ETFs in 2018, including Pacer Benchmark Data and Infrastructure Real Estate SCTR ETF (SRVR), which invests in data centers.
ETFs may be a backdoor way for retail investors to buy REITs, said Fran DeAngelis, a longtime investor and expert in ETFs based in Boston. “The yield will never be as high as the [best-paying] REIT itself. But some of these new Pacer funds are interesting. They’re small, however, so the question is whether they will survive.”
That said, ETFs that hold REITs can be useful.
“Some of the REITs are high-priced, so the [investor] can try an ETF instead,” he explained. “Investors panic when the Fed raises rates, but because rates are so low, many of these REITs have fixed their debt covenants for 10 years out or longer.”
DeAngelis owns EPR Properties (EPR), with a 6 percent dividend yield; Kimco Realty (KIM), 6.8 percent yield; Tanger Factory Outlet (SKT) at 6.2 percent yield, Apple Hospitality REIT (APLE) at a 7.8 percent yield; Digital Realty Trust (DLR), 3.8 percent yield; and Iron Mountain (IRM), the data storage giant, at 6.8 percent yield.
Back to Drexel’s Dragon picks. Drexel’s Dragon Fund, an equity portfolio, is managed by LeBow undergraduates enrolled in Applied and Advanced Portfolio Management.
It was funded in 2007 by the Drexel board of trustees with $250,000, and has been part of Drexel’s endowment, with new stocks recommended for inclusion each quarter. Additional infusions include $100,000 in March 2011, $450,000 in June 2013, and $200,000 in June 2016 for a total stake of $1 million, said Diana Sandberg, associate professor of finance.
Currently, Dragon Fund assets under management surpass $2.2 million
Dragon Fund currently holds Global Payments Inc. (NYSE: GPN), a worldwide provider of payment technology and software, which reports year-end 2018 results before the market opens on Feb. 13.
“There are five players in a purchase: you, the merchant, the card network, the bank, and the payment processor. And this has low sensitivity to interest rates,” said Rachel Bliss, one of the student presenters. The stock has risen 20 percent since the fund purchased shares in late December 2018.