Overview – Is It Alright to Depend on a Select Few Investments?
Whenever a new real estate establishment is proposed, whether it’s a building, mall, or commercial area, one of the top priorities of any land developer is to secure tenants. However, not every tenant is equal, and land developers have a preference for large, high-profile tenants who have the ability to pay the lease/rent without issue and will do so for many years (or even decades) to come.
These large, prominent tenants are known as “anchor tenants”.
In a building, they’re the ones who occupy the most floors (or sometimes, almost the entire building), in malls, they have the largest and/or best spots (usually at the ends of the mall), and in commercial areas, they usually have the largest lots.
Land developers and property managers alike go to great lengths to secure anchor tenants because they bring in the bulk of revenue for their property. Now, this doesn’t mean smaller tenants aren’t welcome, but the hope is that even if these smaller tenants come and go, the anchor tenant (or tenants) will serve as a steady and consistent stream of revenue.
If anchor tenants are so important in the world of real estate, and subsequently, real estate investing, can investors who work with other types of investment instruments implement a similar strategy? That is, can an investor benefit by having “anchor investments” in their portfolio? Absolutely.
What Are Anchor Investments?
As we just discussed, anchor tenants are those who usually take up the most space and/or occupy the best lots. Because of their size and the amount of business they bring with them, they are a consistent stream of revenue for the land developer/property manager and are likely to attract other, smaller tenants as well (e.g., companies based in large buildings usually have other businesses on the lower floors such as food vendors, barbershops, beauty salons, daycares, etc).
If we tweak this definition a little bit, then an anchor investment is one that accounts for a sizeable portion of an investor’s portfolio while also providing some of the highest returns/value when compared to all the other holdings.
It’s not unheard of for there be to more than one anchor tenant at a given property: a common example is shopping malls, which can have up to two department stores that both serve as anchor tenants. Similarly, it’s entirely possible for a portfolio to have more than one anchor investment.
Regardless of the inevitable vicissitudes that an investor will come across, the hope is that the anchor investment(s) will continuously provide the value that investors seek, such as uninterrupted dividends from equities or consistent cash flow from rental properties.
Now, this doesn’t mean anchor investments are invincible – even the most robust investments can be adversely affected by forces well beyond an investor’s control. Rather, they serve the purpose of providing consistent value to a portfolio through thick and thin.
Why Would an Investor Want Anchor Investments in the First Place?
Now that we know what anchor investments are, what does an investor stand to gain from having them in their portfolio?
Imagine you’re given two choices: put your money into a relatively new publicly-traded company that has an unproven track record or increase your stake in a company that has been part of your portfolio for a very long time and has been a steady source of value ever since.
Put another way, would you rather try your luck on an unproven investment, or increase your stake in one that has long provided superb value to your portfolio and is likely to continue doing so in the future?
There’s a reason why land developers/property managers put in so much effort to find and retain anchor tenants: they’re very hard to come across and are equally as hard to recruit, but if they stay long enough at a given property then the long-term value they provide is immense. Losing an anchor tenant can deal a very heavy financial blow, so it comes as no surprise that they’re treated extremely well in order to convince them to stay.
Similarly, “superstar” investments are few and far in between, so if you find yourself coming across one, then the sensible thing to do would be to make it one of the cornerstones of your portfolio such that it provides the most value possible. You can’t expect a superstar investment to work wonders on your portfolio if it contributes very little to your portfolio’s book value.
Remember, anchor investments serve the purpose of providing strong, consistent value regardless of the economic or market conditions an investor faces. By having anchor investments an investor makes their portfolio that much more robust and more immune to the intermittent chaos of the markets.
During bad times, anchor investments can help keep your portfolio afloat and keep losses to a minimum. During good times, they can provide outsized returns. In the end, an investor will always come out on top with their anchor investments.
Many investors underestimate just how valuable an exceptional investment is, and just how much it can positively impact their portfolio. A handful of exceptional, anchor investments will add more value to a portfolio than dozens, or even hundreds, of mediocre ones.
Does Having Anchor Investments Mean You Have a Concentrated Portfolio?
If anchor investments provide the most value to a portfolio and make up a sizeable portion of it, then surely that means that a portfolio that contains anchor investments is one that’s very concentrated too, right? Not exactly.
It’s entirely possible to own more than one anchor investment while also owning other, smaller holdings to ensure adequate diversification is achieved.
For example, Warren Buffett’s company, Berkshire Hathway, has dozens of holdings, yet is (arguably) comprised of four anchor investments: Apple, Bank of America, American Express, and Coca-Cola. These four holdings account for approximately 64.2% of Berkshire Hathaway’s portfolio, yet there are still dozens of other holdings that account for the remaining 35.8%.
Malls can have several anchor tenants, but there are still hundreds of other stores that take up the remaining space. Just because anchor tenants take up lots of space doesn’t mean they take up all of it or even a majority of it.
Similarly, just because anchor investments take up a sizeable portion of a portfolio doesn’t mean there’s no room for diversification.
For example, it’s entirely possible for a portfolio to have four anchor investments, with each of them contributing 10% each to the overall book value, but the remaining 60% can be comprised of other, smaller investments.
Investors are free to decide how to piece together their portfolios, and just because they decide to include some anchor investments doesn’t mean they’re forced to compromise their desired composition. Adjustments may need to be made, but a complete overhaul isn’t mandatory.
There are countless ways to arrange a portfolio comprised of anchor and non-anchor investments – the only real limiting factor here is an investor’s creativity.
What to Be Aware of When Owning Anchor Investments
Although owning anchor investments comes with some very enticing benefits, this doesn’t mean that there are no downsides/risks to owning them. So unless an investor wants to get caught off guard it’s very important for them to know what those downsides/risks are.
For starters, although anchor investments are usually exceptional and have strong investment merit, this doesn’t mean they’re invincible. It’s very easy to view anchor investments as something you can simply forget about, but that isn’t the case at all. Just like any other investment, they have the potential to one day lose their merit and may end up needing to be sold.
Remember that anchor investments contribute heavily to a portfolio’s overall book value, but this cuts both ways: they have the potential to add outsized value when things are going well or leave a gaping hole if things go bad. Just like any other investment, merit must always be re-assessed on an ongoing basis.
This leads us to our next point: because anchor investments take up a large portion of your portfolio, this also means lots of investment risk will be attributable to them.
Normally, an easy way to reduce investment risk attributable to one investment would be to reduce the size of that specific holding or to diversify, but because of how anchor investments work things get a bit more complicated.
If you reduce the size of your anchor investment it may no longer contribute substantially to your portfolio, and if you were to diversify you’d need several different investments to match the size of your anchor(s). Owning more than one anchor investment may do the trick, but again this is another big responsibility you’d need to keep an eye on very closely.
Lastly, if you rely on your anchor investments as a source of income and they suddenly slash or suspend their payouts, you may quickly find yourself struggling to meet certain cash obligations. Owning other investments that also offer some sort of payout is one way to counter this, but the challenge lies in matching the payout of the anchor investment. Being asset rich yet cash poor is a very real possibility in such circumstances.
Again, anchor investments have the potential to be very beneficial, but an investor needs to be prepared for the work that comes with owning and maintaining them in their portfolio.
Wrapping Up
High-quality investment opportunities are hard to come by, but when you do come across them then the sensible thing to do would be to make sure they provide the most value possible for your portfolio. One way to do that is to turn them into anchor investments.
Anchor investments can help serve as a source of strong, consistent value. When times are tough, they can help keep an investor’s portfolio afloat, and when times are good, provide outsized returns.
When it comes to portfolio composition, it’s entirely possible to have more than one anchor investment, as well as having smaller, non-anchors to serve as a source of diversification.
Despite the benefits that anchor investments bring, they also have their fair share of downsides/risks to be aware of. Failure to understand what these downsides/risks are could lead to some complications down the road.
