Buy real assets, the best protection against soaring inflation

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Co-produced with Treading Softly

Most investors have no experience with runaway inflation and its impact on the market. The last time the United States experienced a significant increase in inflation was in the 1970s. We have seen hyperinflation in other countries where rapidly the value of their currency disappears as money is mass printed. One can think of Germany after the world wars, for example, where a wheelbarrow of money was needed to buy a simple piece of bread.

Fortunately, we have ways to invest in real assets that tend to hold their value and historically work as excellent inflation hedges.

So how does this apply to investing? I have a few simple rules:

  1. Buy companies linked to real assets
  2. Buy companies that benefit from rising interest rates

These rules help me stay ahead of inflation and watch my income grow as inflation rages. Real estate benefits directly from inflation, while floating rate investments benefit from the Federal Reserve’s response to inflation. We can do this through REITs, which are directly tied to real assets, and Business Development Companies, which issue debt securities to help grow middle market businesses.

Today I want to look at two fantastic opportunities.

Let’s dive into it.

Choice #1: RQI – Yield 6%

It’s a “perfect storm” for REITs to outperform the market. Inflation is high, causing rental rates to skyrocket. Guess who collects the rent? It comes after REITs enjoyed two luxurious years of historically low interest rates. REITs have been wildly busy refinancing old debt at lower interest rates, typically anything that matured before 2024.

For REITs, rental income is their biggest source of income and, with few exceptions, interest is their biggest expense. In short, REITs are seeing their revenue growth accelerate while their highest expenses have collapsed. Higher revenues and lower expenses are a wonderful thing for shareholders. Do me a favor and don’t tell Congress, someone might call this a “bargain”.

Cohen & Steers Quality Income Realty Fund (RQI) is a CEF that will benefit from these tailwinds that will propel REIT earnings to record highs. RQI invests in blue chip REITs:

RQI Fact Sheet

RQI Fact Sheet

These holdings represent a very diverse range of property types, all of which will benefit from inflation, while REITs benefit from lower interest rates at the corporate level.

The reason we don’t hold these REITs in the HDO portfolio is that the yields are too low to meet our objectives. This is where a CEF can step in and produce a higher return and provide exposure to high quality companies.

RQI is trading at a 6% discount to NAV, which means it is actually cheaper to buy RQI than buying all the individual companies outright. With a net asset value already at the highest level in more than a decade, and likely to rise, there is a good chance that RQI will increase its dividend like sister fund RNP did last year, or that there is a large special dividend at the end of the year.

2022 is going to be a great year for REITs, and the RQI is a great way to take advantage of it!

Choice #2: ORCC – Yield 8.1%

Owl Rock Capital Corporation (ORCC) is a BDC (business development corporation) that invests in “upper middle market” companies. As the third largest publicly traded BDC, ORCC has the ability to invest in private companies that have regional dominance in their industries. These are companies looking to grow by acquiring smaller peers or could be acquisition targets for large publicly traded companies looking to grow rapidly.

ORCC has a conservative portfolio that is heavily focused on senior secured loans. (Source: ORCC, Investor Presentation March 2022)

ORCC Senior Secured and focused on the top of the capital structure

March 2022 Investor Presentation

ORCC’s objective in 2021 was to increase leverage to its target range (0.90x-1.25x) to ensure its dividend is fully covered. This mission was accomplished as ORCC’s leverage increased from 0.87x to 1.13x, right in the middle of their target range. This drove the NII (net investment income) up. The NII went from $0.29/share in Q4 2020 to $0.35/share in Q4 2021.

ORCC Finances

March 2022 Investor Presentation

Dividend coverage has been achieved, with a comfortable cushion. Additionally, the book value ended at $15.08. ORCC produced both revenue growth and book value growth.

The best part is that ORCC benefits significantly from rising interest rates. Like most BDCs, ORCC lends money at variable rates, while a significant portion of ORCC’s debt is fixed. As rates rise, ORCC’s net investment income increases.

ORCC - interest rate sensitivity

March 2022 Investor Presentation

This is a perfect example of how we want to position ourselves in the face of interest rate fluctuations. If interest rates stay low, ORCC makes a lot of money, easily covering its generous dividend. If interest rates rise, ORCC makes even more money and will likely increase its dividend. Heads we win, tails we win again. Since this chart was created, the 3-month LIBOR has risen by around 75 basis points.

ORCC has scale (as it is the 3rd largest publicly traded BDC), a premium credit rating, and the quality to trade at a premium to book value. The only thing ORCC really needs is to spend time in the market to gain investor confidence. We are impressed with how ORCC has handled the COVID crisis and are more than happy to reap our +8% return while we wait for the market to realize what we have already figured out: ORCC is a high-end BDC. The BDC sector will be one of the hottest sectors in 2022 and is expected to generate exceptional returns. Buy ORCC while it’s still cheap and get that super high return!

The time of dreams

The time of dreams

Conclusion

I like to get paid early and often. To do this, I keep my hard-earned money tied to reliable sources of income under a wide variety of conditions. By investing in RQI and ORCC, I have exposure to real assets or loans secured by the assets of companies in the United States.

By saving my money to make more money, I can relax and reduce my stress – two essential things to keep you healthy. When it comes to retirement, I want to make sure my financial health isn’t something I need to worry about. I want the same for you too. Just like your personal health, your financial health needs to be monitored and monitored, but you don’t want to be constantly stressed and worried about it.

You want your financial health and your personal health to allow you to enjoy all that retirement has to offer. Find that hidden beach, enjoy a new drink, make new friendships or rekindle old ones. Take the time to enjoy the breeze, the flowers and the warmth of the sun on your skin. After all these years of hard work, you should have time to enjoy the simple things. Being a landlord and a creditor allows you to do this, while being a debtor puts you back on the job market.

Don’t be the one who pays the rent and interest, be the one who collects the rent and interest. Then rents and interest rates that rise due to inflation are your gain!

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