The Intelligent REIT Investor. The Source for REIT Investment Strategies. Why REITs?. Real Estate Was the First Asset Class. Will Rogers said: “Buy land. They ain’t making any more of the stuff.”. What Type of Real Estate?.
The Intelligent REIT Investor
The Source for REIT Investment Strategies
Will Rogers said:
“Buy land. They ain’t making any more of the stuff.”
Today, there are 25 countries around the world that have adopted the REIT (or REIT-like) structure as a tax-efficient way for small investors to achieve the many benefits of owning an indirect interest in high-quality, well-located, and professionally-managed, income-producing real estate.
REITs provide excellent diversification by reducing risk without inhibiting returns. The more money you have to invest in REITs, the bigger your average position size should be, particularly if you are trying to achieve an optimally concentrated portfolio. I generally recommend that one should own between 10% to 20% in REITs and in some cases, depending on risk tolerances of course, 25% to 30% may seem reasonable
By diversifying, you provide yourself with insurance that if one of your stocks blows up, it will not severely impact your egg's nest.
As a result of their liquidity, REITs have become the most efficient way for investors and investment managers across the globe to gain exposure to commercial real estate; an effective way for professional investment managers to manage their investment exposure to real estate; and a meaningful way to reduce the risk of illiquidity.
As the investor base for listed real estate has grown over the past decade, average daily dollar trading volume in the U.S. has soared – from about $100 million in 1994 to more than $4 billion today.
2013 was notable for the robust REIT IPO activity – topping off the year with a total of 16 REIT IPOs on the NYSE which raised over $4.4 billion.
REITs provide tax transparency, meaning that the REIT pays no corporate tax in exchange for paying out strong, consistent dividends. Rather, taxes are paid only at the individual shareholder level.
In addition, REITs provide operating transparency, meaning that listed REITs are registered and regulated by the Securities and Exchange Commission and adhere to high standards of corporate governance, financial reporting and information disclosure. They are also covered by a robust group of Wall Street and independent analysts.
By law (est. 1960), REITs MUST payout at least 90 percent of their taxable income in the form of dividends.
Non-REITs are not forced to payout a dividend so the majority of their TOTAL RETURN consists of capital appreciation, not dividends.
So when these stocks pay a dividend, it’s just icing on the cake
Benjamin Graham wrote:
“Paying out a dividend does not guarantee great results, but it does improve the return of the typical stock by yanking at least some cash out of the manager’s hands before they squander it or squirrel it away”.
Most REITs return around 60%
in the form of dividends and
40% in the form of share
Dividends + Share Growth =
manage to acquire that
of wisdom’ that Ben
Graham calls for”.
“It’s the investors job to
intelligently bear risk for
profit. Doing it well is
what separates the best
from the rest”.
“The margin of safety
concept may be used to
distinguish the differences
in a investment operation
and a speculative one”.
“The margin of safety is the essence of value investing because it is the metric by which hazardous speculations are segregated from bona fide investment opportunities”.
It's important not to use P/E for REITs, or to
compare P/E for REITs with P/E for non-REIT
stocks. Funds from Operations, or FFO, is a
standardized metric, though not GAAP; AFFO is
not standardized, and equity analysts have
different ways of constructing it. Both of them
are better than earnings for valuing REITs.
By utilizing price to FFO valuation, analysts and
investors can determine the trading history of each
REIT by itself and relative to the entire REIT sector.
Accordingly, payout ratios are based on AFFO (adjusted
funds from operations) because it more accurately
measures cash flow when compared to net income
(due to depreciation), and given the contractual nature
of lease payments today, earnings growth rates are
higher than the S&P.
So REITs should not only
be compared to non-REIT
stocks, but also to other
Dr. Brad Case, Sr. VP NAREIT:
“REIT earnings suffered over the last
few years as real estate operating
fundamentals-rent growth and
dramatically. With the economy
starting to recover, both rent growth
and occupancies have started to
improve, but REIT earnings are still
low relative to a normal market
Dr. Brad Case, Sr. VP NAREIT:
“ Investors like REITs not just
because they have strong
current dividend yields relative
to other income assets, but
also because investors expect
their operating earnings to
grow strongly as the economy
Federal Realty Regency Centers (FRT)
Equity One (EQY)
Brixmor Property Group (BRX)
DDR Corp. (DDR)
Retail Opportunity Investment (ROIC)
Weingarten Realty (WRI)
Kimco Realty (KIM)
AmREIT Inc. (AMRE)
Retail Properties of America (RPAI)
Inland Real Estate Corp. (IRC)
Urstadt Biddle (UBA)
Excel Trust (EXL)
Whitestone REIT (WSR)
Wheeler Real Estate (WHLR)
Ventas, Inc. (VTR)
National Health Investors (NHI)
Sabra Health Care (SRBA)
Healthcare Realty Trust (HR)
Healthcare Trust of America (HTA)
HCP, Inc. (HCP)
LTC Properties (LTC)
Health Care REIT (HCN)
Aviv REIT (AVIV)
Medical Properties Trust (MPW)
Physicians Realty (DOC)
Senior Housing Prop. Trust (SNH)
“If a stock is priced way
over intrinsic value, it may
become vulnerable to the
‘king is wearing no
Like the legendary Ben
Graham, I’m a student of
intrinsic value as a
method of determining
what a company is worth
– because when applied
properly, I have an edge
over the market.
Getting in at the
bottom of a stock
returns than getting
in at the top.
Brad Thomas is the
Editor of The
Investor, also known
as iREIT Investor.