What is truly astonishing is that after all these years this fantastic investment tool is almost unknown to the general public in spite of its impressive performance.
The benchmark against which stock market performance is measured is the Standard & Poor’s 500, which is the index of the 500 largest and bluest stocks in America. It is universally referred to as the S&P 500.
Since 1972, the REIT index has blown away the S&P 500 but almost no one is aware of this fact. Since that year, the REIT sector has delivered compound average annual returns of 11.9% a year. Compared to only 9.8% for the benchmark S&P 500 index. It is interesting to note that 60% of that return has been in dividends. It is not hard to figure out why this is the case. REITs are a privileged investment asset. As long as they pay out 90% of their earnings in dividends, they are not required to pay corporate income taxes.
As a result, REITs pay unusually high dividends. Six percent and higher are not unusual.
I have been cashing in on REITs high dividends for many years and they are the core of my income portfolio. In my own investing with rare exceptions, I insist on a dividend yield of at least six percent. The current period is one of the rare exceptions. Since the March 2009 stock market bottom, REITs have had a spectacular rally and I have had to lower my sights to about five percent. However, I think you will find my REIT portfolio to be of some interest. Dividend yields are as of March 7, 2011.
The small investor has always longed to buy into commercial real estate but it has always been a bridge too far. Simply put it has always been beyond his resources. And yet the investment tool that could enable him to buy not just commercial real estate but multimillion-dollar blue chip commercial real estate has been readily available to him since 1972 when the first Real Estate Investment Trusts or REITs as they are called arrived on the scene.
CBL & Associates (CBL) pays 4.83%
CBL & Associates- ordinarily I would have kicked out any REIT from my portfolio that was paying such a low dividend but CBL is a champion. In 2007, this stock sold for $50 a share and paid a dividend of $2.00 a share. In 2009 at the bottom of the crash, it had cut its dividend to 80 cents a share and it was selling for an unbelievable $1.92 a share. What were these lunatics thinking of? Today the price has recovered to $17.54 and it has just announced a 5% dividend increase. A return to the region of a $2.00 dividend and its old high of $50 a share in the next two years is not unthinkable because it asset base is largely unimpaired. Its assets are not inconsiderable. They own a controlling interest in 75 malls located throughout the country with a total GLA (gross leasable area) of 71,264,850 square feet.
Innvest REIT- this is a Canadian outfit. It is the largest hotel REIT in Canada with 148 hotel properties and 19,381 guest rooms which are located in every province in Canada. This stock peaked in 2007 at $13.39 a share and its crash low was $1.90 a share. Almost identical to CBL’s crash low. It has now recovered to $7.00 a share and as the economy recovers, it could return to its old $13 a share range.
Commonwealth REIT- this REIT invests in office and industrial properties. It owns a mix of 518 office and industrial properties with a total size of 66.8 million square feet. This is another case of the investment follies. At its 2007 high, it sold at $54.68 a share. During the crash, it was knocked down to $6.28 a share. It is now selling at $27.00. Those who stick around will be rewarded.
Hospitality Properties Trust- this is another recovering hotel REIT. It owns 289 hotels with a total of 42,880 rooms. Its 2007 high was $51.46. During the crash, it fell to $6.88. It is now selling at $22 a share. Do you see a pattern here?
Medical Properties Trust- this hospital REIT owns 51 hospitals in 21 states. It has $1.3 billion in total assets. The 2007 high of this stock was $16.70. During the crash, the buffoons took it down to $2.76. It is now selling at $11.50. You are being well paid to wait for the return to its old high and more.
National Retail Properties- this retail REIT has increased its dividend every year for the last 20 years. It specializes in stand-alone single tenant, long term, and net-leased properties of national importance. It has 1,015 properties with a total GLA of 11.4 million square feet. The long-term net leases that they utilize are typically for 15-20 years. This is an unusual strategy for REITs. A net lease strategy shifts all property operating costs such as maintenance, taxes insurance, etc. from the owner to the tenant. This results in a far more stable cash flow. Their typical clients are national outfits like Best Buy, Barnes & Noble and Denny’s. As a result of its unique strengths it withstood the crash well. Its low of $10.03 a share has been exceeded and it now sells at $25 a share.
Sun Communities- specializes in 136 high-class mobile home/recreational home communities with 47,385 rental sites. Its 2007 high was $35.54. During the crash it shares fell to $6.76 and have since rallied back to $34 a share.
Riocan REIT- is Canada’s largest REIT. It has a portfolio of 246 shopping centers with 54.5 million square feet of GLA. Its 2007 high was $27.34 a share and its crash low was $11.23 a share. It has since rallied to $25 a share. It is a powerhouse that has shopping centers in every province in Canada and has started to acquire properties in the United States.
There is one more unique characteristic of REITs that must be discussed. The first thing that the wise investor does when he is researching a high dividend paying stock is to check out its EPS or earnings per share to insure that the dividend is safely covered. In other words, the EPS per share must comfortably exceed the dividend per share or the dividend is at risk.
It is more than common for alleged stock market professionals to discover to their horror that the dividend being paid by REITs exceeds their EPS. Our alleged professional then flees in terror from what he regards as an unwise investment.
It is a unique characteristic of REITs that the metric that determines their ability to pay dividends is not EPS but FFO or Funds From Operations. REITs by virtue of their enormous commercial real estate holdings generate massive amounts of depreciation every year. According to GAAP (generally accepted accounting principals) to calculate EPS you are required to first subtract depreciation from the EPS figure.
Let’s pull a figure out of the air to see how this works. Your REIT earns $100 million this year. This amount is cash on hand, money in the till that is available to pay dividends or other discretionary purposes. In REITs, this figure is referred to as FFO. Your depreciation for the year is $25 million. According to GAAP, you are required to subtract this $25 million from your FFO to arrive at EPS. Thus according to GAAP your REIT earned not $100 million this year but only $75 million. The $25 million that you were required to deduct is a fictional accounting expense. The reality is that you have in the till not $75 million but $100 million in cold hard cash.
Now let’s take a look at why I am so keen on CBL. In 2010, its EPS was 21 cents a share and yet it paid out 84 cents a share in dividends. How does this work? It works because its FFO was $2.03 a share. Theoretically, it could have paid out $2.03 a share because that was what was in the till. It would not surprise me to see CBL raise it divided perhaps as often as every quarter for the next year or two.
Fred Carach
The benchmark against which stock market performance is measured is the Standard & Poor’s 500, which is the index of the 500 largest and bluest stocks in America. It is universally referred to as the S&P 500.
Since 1972, the REIT index has blown away the S&P 500 but almost no one is aware of this fact. Since that year, the REIT sector has delivered compound average annual returns of 11.9% a year. Compared to only 9.8% for the benchmark S&P 500 index. It is interesting to note that 60% of that return has been in dividends. It is not hard to figure out why this is the case. REITs are a privileged investment asset. As long as they pay out 90% of their earnings in dividends, they are not required to pay corporate income taxes.
As a result, REITs pay unusually high dividends. Six percent and higher are not unusual.
I have been cashing in on REITs high dividends for many years and they are the core of my income portfolio. In my own investing with rare exceptions, I insist on a dividend yield of at least six percent. The current period is one of the rare exceptions. Since the March 2009 stock market bottom, REITs have had a spectacular rally and I have had to lower my sights to about five percent. However, I think you will find my REIT portfolio to be of some interest. Dividend yields are as of March 7, 2011.
The small investor has always longed to buy into commercial real estate but it has always been a bridge too far. Simply put it has always been beyond his resources. And yet the investment tool that could enable him to buy not just commercial real estate but multimillion-dollar blue chip commercial real estate has been readily available to him since 1972 when the first Real Estate Investment Trusts or REITs as they are called arrived on the scene.
CBL & Associates (CBL) pays 4.83%
Innvest REIT (IVRVF) pays 7.34%
Commonwealth REIT (CWH) pays 7.47%
Hospitality Properties Trust (HPT) pays 7.96%
Medical Properties Trust (MPW) pays 6.94%
National Retail Properties (NNN) pays 5.93%
Sun Communities (SUI) pays 7.38%
Riocan REIT (RIOCF) pays 5.84%
CBL & Associates- ordinarily I would have kicked out any REIT from my portfolio that was paying such a low dividend but CBL is a champion. In 2007, this stock sold for $50 a share and paid a dividend of $2.00 a share. In 2009 at the bottom of the crash, it had cut its dividend to 80 cents a share and it was selling for an unbelievable $1.92 a share. What were these lunatics thinking of? Today the price has recovered to $17.54 and it has just announced a 5% dividend increase. A return to the region of a $2.00 dividend and its old high of $50 a share in the next two years is not unthinkable because it asset base is largely unimpaired. Its assets are not inconsiderable. They own a controlling interest in 75 malls located throughout the country with a total GLA (gross leasable area) of 71,264,850 square feet.
Innvest REIT- this is a Canadian outfit. It is the largest hotel REIT in Canada with 148 hotel properties and 19,381 guest rooms which are located in every province in Canada. This stock peaked in 2007 at $13.39 a share and its crash low was $1.90 a share. Almost identical to CBL’s crash low. It has now recovered to $7.00 a share and as the economy recovers, it could return to its old $13 a share range.
Commonwealth REIT- this REIT invests in office and industrial properties. It owns a mix of 518 office and industrial properties with a total size of 66.8 million square feet. This is another case of the investment follies. At its 2007 high, it sold at $54.68 a share. During the crash, it was knocked down to $6.28 a share. It is now selling at $27.00. Those who stick around will be rewarded.
Hospitality Properties Trust- this is another recovering hotel REIT. It owns 289 hotels with a total of 42,880 rooms. Its 2007 high was $51.46. During the crash, it fell to $6.88. It is now selling at $22 a share. Do you see a pattern here?
Medical Properties Trust- this hospital REIT owns 51 hospitals in 21 states. It has $1.3 billion in total assets. The 2007 high of this stock was $16.70. During the crash, the buffoons took it down to $2.76. It is now selling at $11.50. You are being well paid to wait for the return to its old high and more.
National Retail Properties- this retail REIT has increased its dividend every year for the last 20 years. It specializes in stand-alone single tenant, long term, and net-leased properties of national importance. It has 1,015 properties with a total GLA of 11.4 million square feet. The long-term net leases that they utilize are typically for 15-20 years. This is an unusual strategy for REITs. A net lease strategy shifts all property operating costs such as maintenance, taxes insurance, etc. from the owner to the tenant. This results in a far more stable cash flow. Their typical clients are national outfits like Best Buy, Barnes & Noble and Denny’s. As a result of its unique strengths it withstood the crash well. Its low of $10.03 a share has been exceeded and it now sells at $25 a share.
Sun Communities- specializes in 136 high-class mobile home/recreational home communities with 47,385 rental sites. Its 2007 high was $35.54. During the crash it shares fell to $6.76 and have since rallied back to $34 a share.
Riocan REIT- is Canada’s largest REIT. It has a portfolio of 246 shopping centers with 54.5 million square feet of GLA. Its 2007 high was $27.34 a share and its crash low was $11.23 a share. It has since rallied to $25 a share. It is a powerhouse that has shopping centers in every province in Canada and has started to acquire properties in the United States.
There is one more unique characteristic of REITs that must be discussed. The first thing that the wise investor does when he is researching a high dividend paying stock is to check out its EPS or earnings per share to insure that the dividend is safely covered. In other words, the EPS per share must comfortably exceed the dividend per share or the dividend is at risk.
It is more than common for alleged stock market professionals to discover to their horror that the dividend being paid by REITs exceeds their EPS. Our alleged professional then flees in terror from what he regards as an unwise investment.
It is a unique characteristic of REITs that the metric that determines their ability to pay dividends is not EPS but FFO or Funds From Operations. REITs by virtue of their enormous commercial real estate holdings generate massive amounts of depreciation every year. According to GAAP (generally accepted accounting principals) to calculate EPS you are required to first subtract depreciation from the EPS figure.
Let’s pull a figure out of the air to see how this works. Your REIT earns $100 million this year. This amount is cash on hand, money in the till that is available to pay dividends or other discretionary purposes. In REITs, this figure is referred to as FFO. Your depreciation for the year is $25 million. According to GAAP, you are required to subtract this $25 million from your FFO to arrive at EPS. Thus according to GAAP your REIT earned not $100 million this year but only $75 million. The $25 million that you were required to deduct is a fictional accounting expense. The reality is that you have in the till not $75 million but $100 million in cold hard cash.
Now let’s take a look at why I am so keen on CBL. In 2010, its EPS was 21 cents a share and yet it paid out 84 cents a share in dividends. How does this work? It works because its FFO was $2.03 a share. Theoretically, it could have paid out $2.03 a share because that was what was in the till. It would not surprise me to see CBL raise it divided perhaps as often as every quarter for the next year or two.
Fred Carach
Forty Years a Speculator
Fred Carach
Oakland Park, FL 33309
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