Intro to Stocks Lesson 7
Real Estate Investment Trusts

There are four basic formats of Real Esstate Investment Trusts or REITs.  My earliest interest in them was for *residential* REITs, companies which own residential buildings and land for rentals to otherwise homeless persons.  It seemed to me that that was likely to be a genuine perpetuity business.  Later I allowed some *commercial* REITs into my portfolio, companies which own such things as shopping centers, warehouses, hotels, business offices and so forth and lease them to capital conserving commercial companies.  Still later, I allowed some *mortgage* REITs into my portfolio, companies which trade on the *spread* between what they can get servicing mortgages and what it costs to borrow the funds to finance the activity.  Most recently, I allowed some *business development companies* which are basically *lending* REITs, companies which again trade on the *spread* between what they can get by lending to otherwise difficult to finance companies and what it costs to borrow the funds to finance the activity.  As you can already see, there are two basic styles of REITs:  property owners whose distributions depend on rentals and spread playuhs whose distributions depend on the difference between lending profits and lending costs.
      All REITs have a peculiar status for taxation of their distributions.  For most of them, what they pay in January of any subsequent taxable year is treated as having been received and therefore taxable in the prior year.  Many of them have the annoying practice of "distributing" a chunk of their total "yield" as Return of Capital, a counter productive practice since it means they no longer retain those amounts for investment in whatever they were supposed to be investing in and that they weren't using the money productively in their "business".  The point of Return of Capital a/k/a NonTaxable Distributions is to create the *illusion* of providing a significantly higher yield than what they're actually earning or paying.
  Analysis of each of the different styles of REITs, property owners as distinct from spread playuhs, is requisitely different.  They all begin with substantially the same Balance Sheet analysis detailed in Lesson 2.  Gather the information needed to compute Net Tangible Equity.  Then gather the information needed to compute long term liabilities as percents of claimed capitalization and tangible capitalization.  That alone is likely to be sufficient to exclude most of the spread playuhs who typically leverage themselves ludicrously up into egregious 80% to more than 90% debt loading as a percent of total capitalization.  They wind up being gamers of the Long Term Capital Management style which scam wound up having to be liquidated when their pretentious overly leveraged transactions created vast swaths of counterparties eager to prove that the reality of the instruments with which they were playing did NOT work the way that LTCM's "computer models" suggested that they worked.  Contrary to what Wikipedia claims, the one large investment banking firm demanded by His British Lordship the criminal mastermind Greedspan to participate in the "recapitaliation" (bailout) of LTCM which REFUSED to help was Lehman Brothers.  As a result of that refusal, the same criminal mastermind Greedspan refused to bail out Lehman Brothers when they got into serious trouble during the wind down of Greedspan's Surreal Estate Bubble, with attendant bunko rapecy of the former Lehman Brothers in 2008, while squandering vast chunks of taxpayer money to bail out every other malfeasant "lender" which participated in his Bubble Economics.  "Vengeance is mine" sayeth Lord Greedspan.
      During Lesson 1, little attention was paid to the "Dividends Only" choice in the "Historical Data" page on the Yahoo web site but for REITs it may be the most important decision factor.  So for any REIT analysis, go there, specify the ticker symbol of the REIT you want to analyze, change the "Time Period" column to "max", change the "Show" column to "Dividends Only", and (if you want to, it might not make any difference) change the "Frequency" column to "Monthly", then click on "Apply" to bring up the history of distributions paid by the REIT you are analyzing.  Begin a "*YYMMDD divs $#.###" line in your note file using the date of the most recent distribution paid and include its dollar amount.  Then add " since YYMMDD" and identify the least recent date on which the same distribution was paid.  Look at the actual dates involved in that time period and add "/mo" or "/qtr" to the dollar amount of the most recent distribution.  Then continue with the word " previous #.### " followed by "YYMMDD thru YYMMDD, " for the span of dates on which that previous amount was being paid.  Continue back with that process of identifying the distribution stream for at least five years into the past (if the REIT you're analyzing has been paying for at least that long).  Then based on the most recent distribution paid, annualize the amount (x12 or x4 depending on whether it was monthly or quarterly) and record "indic $#.##/year which allows for a maximum paying price of $##.##/sh to obtain a 10% yield."  Divide the indicated annual distributions by .10 to obtain the maximum paying price.  As discussed at length in Lesson 6 "Municipal Bond Funds" the rigging of interest rates to absurd low levels since January 2001 requires such a higher specification of yield expectation than the minimum 8% which was formerly relevant for interest rate dependent securities.  The acquiescence of the otherwise rational Chairman Powell of the FRB to the belligerent demands of the debt drunk bankruptcy inflicting Presidunce Trump that even the 190226 rigging to the negligible 2.25% which may not even cover thefts of purchasing power via "inflation"  is unlikely to be improved upon any time soon.  So until such time as rates rise back towards the pre criminal theft system began in January 2001 rate of 6%, that 10% is the relevant specification.  Even if rates do rise, the reduction in the 10% specificaition towards the minimum 8% should be no more than the proportional difference between the new rates and the 6% previous norm.

Property Owners.  There are some special calculations for residential or commercial REITs which are different from the "ordinary" stock's computation of Price/ Revenues Greater Than Seven and estimated or actual Revenues and whether any LOSS has been involved to reduce the currently reported Net Tangible Equity to a more realistic estimate of NTE projected one year out.  After completing the Net Tangible Equity and Debt Load sections of the Balance Sheet Analysis, go into the Statement of "Earnings" in the Form 10Q or 10K.  Locate the "Net Income to Stockholders" amount for whatever longest available reporting period is included.  Also locate the amount in that Statement for "Depreciation and Amortization".  You wind up with an addition to the Net Tangible Equity and Debt Load analyses line which looks something like, e.g. ", also 9mos FFO incl Net Incm 114.283 + Deprec/Amort 76.839 = 191.122 x4/3= $5.47/sh estd Ann FFO and FFO/divs of 1.37x.  The divisor for the total annualized FFO is the same number of shares out already appearing in your analysis.  If the estd Ann FFO itself is less than one seventh of current market price it is already an exclusion for the conclusions area at the top of your Note File "
"PRICE REVENUES GREATER THAN SEVEN".  The FFO/divs computation is simply the amount you are able to compute as estimated or actual Annual Funds From Operations divided by the indicated yield computed from your "*YYMMDD divs" line.  Anything less than 1.15x is seriously inadequate, suggesting difficulty maintaining even the current apparent rate of distributions and potential bunko rapecy.  I record such situations in the conclusions area at the top of such an analysis as a "PRICE REVENUES GREATER THAN SEVEN" exclusion with parenthetical mention of e.g. "(FFO/divs 0.85x)".  As the FFO/divs rises above that minimum 1.15x, it indicates not only better coverage for the dividend stream but also the prospect of growth in the Net Tangible Equity of the potential holding as the retained excess is used to invest in the same kinds of property already qualifying the REIT for purchase.

Spread Playuhs.  Back in 2001 when the CNBC hype and hoop lala web site was maintaining a discussion area, there was much affection for the then active spread playuhs which then appeared to have a quite adequate spread between incoming and outgoing interest amounts.  That was a feature of previously established income producing holdings significantly exceeding interest costs, especially as His British Lordship the criminal mastermind Greedspan began the criminal theft system against elderly interest income dependent retired persons for the benefit of the BUNKO members of his Frauderal Reserve Bored and the creation of his Surreal Estate Bubble as they "loaned" essentially *free* money to persons who couldn't conceivably pay off the mortgages they took during the Bubbilicious increases in real estate prices.  It was a declining interest rate environment which maintained the spread "for awhile".  After now eighteen years of continuous criminal thefts, the situation has reversed, even if the FRB goes no further than the negligible 2.25% rigging currently in effect.  The spread simply isn't there for the overly leveraged spread playuhs (and more relevantly we beleaguered stuckholders) to profit from.  As demonstration of the resulting absurdities, I have purchased a group of eleven "apparently" yielding spread playuhs in recent years.  Their overall current market value is DOWN -19.1% from my cost bases and many of their former dividend streams have been significantly reduced.  Only two of the eleven are currently above water.  Until interest rates rise materially above current levels so that reasonable spreads might become available for the spread playuhs to profit from, I have to suggest avoiding all of the mortgage REITs and "business development companies".

Now as to pricing of possible purchase of Property Owner REITs, they're all trading at or near long term highs contradicting the prospect of obtaining any shares for a "buy low, sell high" oriented investor.  They're also at radically lower yields than the current minimum 10% requirement.  Three examples should serve to demonstrate why this Lesson 7 is a "prospective" learning experience rather than being likely to provide any immediate rational commitments.
      My ongoing holdings of Camden Properties (CPT) were purchased 980831 and now have a PFS Ratio of 3.84x, Market/Basis of 4.02x, 180930 Net Tangible Equity of $33.41/sh with debt load 45.9% of tangible cap, FFO/divs of 1.58x, and actual current yield of 3.16%.  The VLIS estimated full value is $101.34 while 190226 current market is $97.46, very nearly calling for a *sale* of the shares (protected by my PFS ratio), quite a long way above even the unadjusted E=25% at $43.95/sh let alone the 10% yield requirement at $30.80/sh.  Even adding the current NTE to the yield calculated amount is only $64.21/sh which is -34.1% from current market.
      My ongoing holdings of Mid-America Apartment Communities (MAA) were purchased 981201 and how have a PFS Ratio of 5.42x, Market/Basis of 8.67x, 180930 Net Tangible Equity of $53.35/sh with debt load 44.0% of tangible cap, FFO/divs of 1.67x, and actual current yield of 3.69%.  The VLIS estimated full value is $139.00 while 190226 market is $104.00, quite a long way above even the unadjusted E=25% at $58.51 let alone the 10% yield requirement at $38.40/sh.  Even adding the current NTE to the yield calculated amount is only $91.75 which is -11.8% from current market.
      A commercial REIT that I bought near its price nadir in 0903 now has a PFS Ratio of 1.96x, Market/Basis of 7.85x, 180630 Net Tangible Equity of $21.17/sh with debt load 50.8% of tangible cap, FFO/divs of 1.49x and actual current yield of only 3.39% and has become my largest single portfolio holding.  It isn't covered in the VLIS so I can't comment on their estimated full value but current market is $65.41/sh and even adding the current NTE to the yield calculated amount of $22.20/sh is only $43.37/sh which is -33.7% from current market.
      So the bottom line is that yes, there are times such as 1998 or 2009 when Property Owner REITs can be purchased for subsequent profitability but now isn't one of those times.  The purpose of developing Note Files of possible *future* actionability is so you will know at what prices the market would have to drop to for you to reasonably consider purchasing even those Property Owner REITs which otherwise qualify.

    Bob Grumbine    :-)##               Onward to Lesson 8               back to Bob Grumbine's Central Blogging Site