REITs are a fantastic way to get into real estate and collect a dividend income stream! Best of all, you don't have to deal with calls at 3am to fix burst water pipes.
In addition to FFO payout ratios and all that, I also look at Debt/Assets, Debt/Equity, and EBITDA/Interest Expense. These are additional "sniff checks" for me to see how well management is handling debt. The last one is interesting because it shows how many times over their earnings are used to pay for interest expenses. The REIT could have so much expensive debt that all of their earnings are being funneled to not paying down debt but just paying their lenders interest!
Some investors also get confused about the ever rising share count for the typical REIT. I'll see complaints about this in the comments section of Seeking Alpha.
"My ownership is being diluted!"
"Management is careless!"
"New stock issuance is killing my stock price!"
Many don't know or understand that REITs are obligated under law to pay out at least 90% of profits to shareholders. After doing that most REITs have almost no money left over to grow their portfolios. The only course of action they can do to raise money (other than sell a property) is to issue stock. Yes, this will cause a momentary drop in the stock price. Use that as a buying opportunity! Strawberry FIelds recently issued something like $35M of stock (~3.3M shares). The stock price fell by 24% or so, from $12.42 to $9.40. Management's test is how they use the proceeds. Is this capital cheaper so that it can replace more pricey capital? Are they going to use this capital to buy some way, way, way underpriced property that will bring in rent by the truckload? Or, is management going to throw a daily pizza party for employees and buy a private jet.
You won't see explosive growth like you would with NVIDIA. REITs are for those who want steady-eddy dividends so they can comfortably and reliably live their lives.
The balance sheet is definitely something to look carefully at when you're considering a REIT - the real estate is almost always a levered asset, so seeing how management is handling that is important.
Like you pointed out, they're not allowed to retain earnings to grow, which leaves them with the choice of debt or equity. Good management will constantly be considering both and using the cheaper of the two to grow.
REITs are a fantastic way to get into real estate and collect a dividend income stream! Best of all, you don't have to deal with calls at 3am to fix burst water pipes.
In addition to FFO payout ratios and all that, I also look at Debt/Assets, Debt/Equity, and EBITDA/Interest Expense. These are additional "sniff checks" for me to see how well management is handling debt. The last one is interesting because it shows how many times over their earnings are used to pay for interest expenses. The REIT could have so much expensive debt that all of their earnings are being funneled to not paying down debt but just paying their lenders interest!
Some investors also get confused about the ever rising share count for the typical REIT. I'll see complaints about this in the comments section of Seeking Alpha.
"My ownership is being diluted!"
"Management is careless!"
"New stock issuance is killing my stock price!"
Many don't know or understand that REITs are obligated under law to pay out at least 90% of profits to shareholders. After doing that most REITs have almost no money left over to grow their portfolios. The only course of action they can do to raise money (other than sell a property) is to issue stock. Yes, this will cause a momentary drop in the stock price. Use that as a buying opportunity! Strawberry FIelds recently issued something like $35M of stock (~3.3M shares). The stock price fell by 24% or so, from $12.42 to $9.40. Management's test is how they use the proceeds. Is this capital cheaper so that it can replace more pricey capital? Are they going to use this capital to buy some way, way, way underpriced property that will bring in rent by the truckload? Or, is management going to throw a daily pizza party for employees and buy a private jet.
You won't see explosive growth like you would with NVIDIA. REITs are for those who want steady-eddy dividends so they can comfortably and reliably live their lives.
The balance sheet is definitely something to look carefully at when you're considering a REIT - the real estate is almost always a levered asset, so seeing how management is handling that is important.
Like you pointed out, they're not allowed to retain earnings to grow, which leaves them with the choice of debt or equity. Good management will constantly be considering both and using the cheaper of the two to grow.
This was a great article, TJ. Thanks for writing it.
How does a REIT compare to an ETF that tracks real estate, like VNQ?
In the future, will you be providing examples of specific REITs that you feel are interesting investment opportunities?