What Austin Bought And Sold In February 2025

This is the next installment in our monthly series on the portfolio of our macro analyst, Austin Rogers. Please note that our main focus will remain on the HYL Portfolios, but since many of you have expressed interest in knowing how Austin manages his portfolio, we are posting this to give you extra value.

February was a quiet month for me as far as portfolio recycling goes. I didn't sell or trim anything.

I just reinvested dividends and used what little savings I had this month to beef up my positions in several high-conviction picks right now, including American Tower (AMT), CareTrust REIT (CTRE), and American Homes 4 Rent (AMH).

Instead of the usual "portfolio recycling" section, I'll offer some thoughts on a few other aspects of REIT investing right now, followed by an update on my top 10 holdings.

Why I Don't Recommend Real Estate ETFs For Anyone

Allow me to preach to the choir for a moment.

Jussi and I have both written in the past about what's wrong with passive real estate ETFs like the Vanguard Real Estate ETF (VNQ).

For one thing, most passive real estate ETFs are market cap-weighted, which overwhelmingly concentrates funds into the largest REITs. But large isn't necessarily correlated with better quality or faster growth. In fact, the sheer amount of AUM in passive real estate ETFs like VNQ has arguably distorted the public REIT market and caused cap-weighted ETFs to underperform.

Consider the fact that equal-weighted REITs (RSPR) have significantly outperformed the VNQ since the former's inception in late 2015:

Data by YCharts

That is despite RSPR's higher expense ratio of 0.4%, compared to VNQ's 0.13%.

Now, to be fair, another major difference between RSPR and VNQ is that the former is an equal-weighting of only the REITs in the S&P 500, whereas the VNQ is a cap-weighted basket of all real estate companies.

If we compare RSPR to a cap-weighted ETF of only the S&P 500 REITs (XLRE), we find extremely similar performance and even some slight outperformance of the cap-weighted index:

Data by YCharts

But a more fundamental complaint against real estate ETFs is that they are relatively easy to beat.

Research put out by REIT experts at Cohen & Steers shows that, due to the wide array of idiosyncrasies in the public real estate space as well as the minimal analyst coverage, actively managed REIT portfolios outperform their passive benchmarks more than any other sector or area of the stock market.

In the broader stock market, almost no actively managed portfolios overweight the biggest tech companies that command huge shares of the passive index and lead the market, and this necessarily leads to underperformance.

But experts in both real estate and stock selection have an easier time beating their benchmarks, because those benchmarks are less efficient.

Low-cost, passive ETFs definitely have their uses and are overall a fabulous financial invention, but as with heart surgery, car repairs, and legal representation, it pays to consult experts in REIT investing.

Potential Medicaid Cuts' Effect On Healthcare REITs

Competing bills and amendments in Congress are proposing various ways to modify and reduce Medicaid and (to a lesser extent) Medicare funding.

• One proposal is to convert all Medicaid funding to block grants that would be agnostic to actual costs.

• Another would be to reduce the percentage of costs Medicaid covers, thereby increasing patient copays.

• Yet another would be to institute work requirements in order to winnow Medicaid rolls.

These funding cut proposals seem to have spooked the skilled nursing REIT space, as SNF operators derive a huge portion of total revenue from Medicaid.

While most healthcare REITs are flat to up this year, the SNF REITs like Omega Healthcare Investors (OHI), CareTrust REIT (CTRE), and Sabra Health Care (SBRA) are down between 5-8% year-to-date:

Data by YCharts

But this selloff appears to be a "sell first and ask questions later" kind of situation.

Keep in mind that President Trump very recently stated that Medicaid wouldn't be touched, and that Senate Republicans intend to repeal the unrealistically high staffing requirement for nursing homes that has been a burden to many operators. By all accounts, meaningfully cutting Medicaid spending is an uphill battle that invites a wide array of pushback.

At the same time, the corresponding budget bill being advanced in the House of Representatives would order various committees to find $880 billion in cuts, much of which would have to come from Medicaid. And yet, even within the House, there are at least 10 congressional Republicans who have indicated hesitation about Medicaid cuts.

Here's CTRE's CEO Dave Sedgwick from the Q4 2024 earnings conference call:

Of course, there's some noise and speculation about what the new administration means for skilled nursing. It's too early to be definitive, but our conversation with policymakers, lobbyists, operators, all leads us to believe that the minimum staffing rule will be reversed and that Medicaid and Medicare will continue to be unchanged as the cornerstones of healthcare in general and skilled nursing in particular.

... Speaker Johnson, just Tuesday said Medicaid has never been on the chopping block and that they're just looking for fraud, waste and abuse, which, of course, we would applaud as well. They have -- there's bipartisan support for Medicaid as it is today and you have a Trump administration who in the first administration was incredibly supportive to the skilled nursing space. And we expect that, that same type of understanding of the importance of Medicaid and the bipartisan support for it to continue.

... There's just no room really to cut for Medicaid for skilled nursing. And I think the states and the federal government are more aware of that today than they ever have been based on what happened with the pandemic.

OHI's SVP of Operations, Megan Krull, similarly expressed confidence on the Q4 conference call that if any Medicaid cuts are passed, they are most likely to pertain to Medicaid expansion that covers non-elderly adults.

SBRA's CEO Rick Matros concurred on his company's Q4 earnings call:

As it pertains specifically to Medicaid cuts, Congress has been historically protective of the elderly population, particularly those vulnerable institutionalized folks. The Medicaid budget, inclusive of matching funds is critical to the governors of all states, both red and blue. And in fact, the red states have been the greater recipients of Medicare, of Medicaid access, the expansion of Medicaid access in recent years.

... The House budget has $880 million of unspecified Medicaid -- $880 billion of unspecified Medicaid cuts. The Senate version has no Medicaid cuts and overturns the staffing mandate.

While anything could happen, I view the current selloff as a good opportunity to buy more of my favorite SNF REIT -- CareTrust.

What's Going On With Single-Family Rental REITs?

The gap between the affordability of renting and buying a home are huge right now, and Redfin forecasts that this affordability gap will widen further in 2025 as home prices and mortgage rates both remain high.

Globe Street notes that this setup may provide a further benefit to big SFR investors this year, as developers may be more willing to cut deals to sell homes to investors (including SFR REITs) if they have trouble selling them to owner-occupiers.

So why have SFR REITs been underperforming the broader real estate index year-to-date as well as the last 6 months?

Data by YCharts

One reason is simply the fact that a huge amount of housing, both single-family and multifamily, was delivered last year. It will take time to absorb that amount of housing, and in the process, rent growth for single-family and especially multifamily (especially in certain Sunbelt markets) should remain muted.

Another factor is that tariffs, especially on Canadian lumber, could significantly increase the cost of construction, which is especially relevant for AMH since it has an internal development program.

Yet another potential factor that could affect homebuilders, including AMH, is deportations, since a significant portion of residential construction workers are unauthorized immigrants. So far, though, this does not seem to have meaningfully impacted homebuilders' operations.

And then there's potential regulatory issues down the road.

At the tail end of Biden's presidency, in January 2025, Lina Khan's Federal Trade Commission initiated a study on "mega" SFR investors that own over 1,000 homes, seeking to understand how these institutional investors have impacted home prices and rent rates.

The assertion is that mega SFR investors drive up home prices and rent rates.

But some evidence suggests that the impact of major SFR investors is far more benign.

For example, a 2023 study by Joshua Coven of NYU Stern School of Business found that while major SFR investors have increased home prices by 7.4 percentage points per 1 percentage point of ownership in a given market, they have also greatly increased the supply of high-quality rental homes on the market. As a result, SFR rent rates decline by 2.3 points for every 1 point of major SFR investor ownership in a given market.

To quote the study's abstract:

The findings suggest that institutional investors made it harder for people to purchase homes, but easier for renters to access neighborhoods that previously had few rentals.

Major SFR landlords are less a thoroughgoing negative than a tradeoff.

Moreover, using data from the 10-Ks of Invitation Homes (INVH) and American Homes 4 Rent (AMH), the Urban Institute notes that SFR REITs typically spend between $15,000 and $40,000 on upgrades to homes acquired from the existing home market, whereas the typical owner-occupier spends only $6,300 on upgrades.

Their extensive experience, internal capacity, reliable vendor relationships, and discounts yield more cost-effective renovation than a homeowner could generally achieve for the same work.

This could be because SFR REITs are more likely to buy "fixer-uppers," or maybe owner-occupiers are simply more willing to live with outdated or lower-quality amenities.

In either case, the result is a higher quality housing stock.

Lastly, as someone who used to work at a residential management company, I would assert that another underappreciated benefit of highly scaled SFR ownership is professional management. Big SFR landlords like INVH, AMH, and Tricon Residential (acquired by Blackstone) have the scale to manage a large portfolio of rental homes in their markets with speed and efficiency. This is a benefit both to the landlord and the tenant.

Compare this to small landlords, who generally lack scale and efficiency, and third-party management companies that generally aren't incentivized to manage and maintain properties as much as the owners themselves.

Top 10 Holdings