Transcript The Intelligent REIT Investor

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?
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.
The Universe of U.S. REITs
A World of New Sectors
Data Centers
Campus Housing
This is Where I Went to College
Other New Sectors
Prisons
Hospitals
Other New Sectors
MOB’s
Movie Theatres
Other New Sectors
Gaming
Single-Family Rentals
How To Play the Game Then?
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”.
Buy stocks as you would groceries
– when they are on sale
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
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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)
Where to Find “Sound” Value?
Where to Find “Sound” Value?
Where to Find “Sound” Value?
Where to Find “Sound” Value?
Where to Find “Sound” Value?
Where to Find “Sound” Value?
Where to Find “Sound” Value?
I’ll Wait For a Sunnier Day
I’ll Wait For a Sunnier Day
I’ll Wait For a Sunnier Day
I’ll Wait For a Sunnier Day
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.
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Brad Thomas is the
Editor of The
Intelligent REIT
Investor, also known
as iREIT Investor.
www.ireitinvestor.com
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