The Intelligent REIT Investor The Source for REIT Investment Strategies
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? 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.
A World of New Sectors Data Centers Campus Housing
Other New Sectors Prisons Hospitals
Other New Sectors MOB’s Movie Theatres
Other New Sectors Gaming Single-Family Rentals
Why Play the Game? 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
Diversification By diversifying, you provide yourself with insurance that if one of your stocks blows up, it will not severely impact your egg's nest.
Liquidity 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.
Liquidity 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.
Liquidity 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.
Transparency 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.
REITs are FORCED to Payout Dividends By law (est. 1960), REITs MUST payout at least 90 percent of their taxable income in the form of dividends.
Traditional Stock Model“Icing on the Cake” 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
Traditional Stock Model“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”.
The REIT Model Total Return Most REITs return around 60% in the form of dividends and 40% in the form of share growth. Dividends + Share Growth = Total Return
The Most Important Thing Howard Marks: “Successful investors manage to acquire that necessary ‘trace of wisdom’ that Ben Graham calls for”.
The Most Important Thing Howard Marks: “It’s the investors job to intelligently bear risk for profit. Doing it well is what separates the best from the rest”.
A Margin of Safety Ben Graham: “The margin of safety concept may be used to distinguish the differences in a investment operation and a speculative one”.
A Margin of Safety Ben Graham: “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”.
A Margin of Safety 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.
A Margin of Safety 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.
A Margin of Safety So REITs should not only be compared to non-REIT stocks, but also to other fixed-income instruments.
The Bottom of the 3rd Inning Dr. Brad Case, Sr. VP NAREIT: “REIT earnings suffered over the last few years as real estate operating fundamentals-rent growth and occupancy levels-declined 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 environment”.
The Bottom of the 3rd Inning 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 improves”.
Triple Net REITs • Realty Income (O) • National Retail Properties (NNN) • American Realty Capital Prop. (ARCP) • EPR Properties (EPR) • Agree Realty (ADC) • W.P. Carey (WPC) • Spirit Realty Capital (SRC) • Gramercy Property Trust (GPT)
Industrial REITs • First Industrial Realty Trust (FR) • PS Business Parks (PSB) • Terreno Realty Corp. (TRNO) • Prologis, Inc. (PLD) • EastGroup Properties (EGP) • DCT Industrial Trust (DCT) • Duke Realty Corp. (DKE) • STAG Industrial (STAG) • Chambers Street Group (CSG) • Monmouth Real Estate (MNR) • Gladstone Commercial Corp. (GOOD)
Shopping Center REITs 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)
Health Care REITs 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)
MARGIN OF SAFETY “If a stock is priced way over intrinsic value, it may become vulnerable to the ‘king is wearing no clothes’ syndrome”.
My Approach 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.
That’s Called Intelligent Investing Getting in at the bottom of a stock market cycle produces better returns than getting in at the top.
Subscribe Today Brad Thomas is the Editor of The Intelligent REIT Investor, also known as iREIT Investor.