Portfolio Haircuts and Dividend Investing in the Age of Social Distancing

The world continues to be frightening and feel insane. I, like many of you, am working from home for the next couple of weeks. It’s difficult to focus on work because I keep refreshing news sites and Google Finance, only to discover that San Francisco has a “shelter in place” order in effect, the market had one of the worst days in its history, and Idris Elba has joined Tom Hanks on the (one presumes growing) list of coronaviral celebrities. Things are, uh, not great. This reminds me a lot of 2008, both in terms of the overall decline in the market and the sense of panic, bewilderment, and helplessness that accompanies it. I am beginning to wonder if this was how 1929 felt. That’s not to say that we’re heading for another Great Depression; only that the currently vertiginous nature of the Dow’s chart is, if not unprecedented, pretty damn rarely precedented.

I suspect that market watchers in 1929 had a very clear (if unsettling) sense of living in a historical moment. The past, by definition, becomes history, but it’s only rarely that we feel it happening; it’s a bit like how the Earth’s crust is always moving, but you only notice earthquakes. In my lifetime, there has been only one other time I’ve felt this way, and it was in the days after 9/11. Then as now there was a sense of solidarity with strangers, a sense that we were all in this together, and even though everyone was scared we were going to get through it. Then as now we engaged in little gestures of solidarity to let one another know that we have each other’s backs. American flags on the front porch in 2001; social media posts encouraging social distancing in 2020. This time the enemy is a microbe and we offer support by keeping one another company online, playing Words With Friends, delivering home cooked meals to an elderly relative who wasn’t able to grocery shop, etc. In terrifying times (and it’s becoming pretty clear that this is one of those), humans have always relied on one another to get through, and as I see how many people are staying home to avoid spreading the disease, disrupting their lives and their businesses to do so, it’s deeply reassuring to know that we are still capable of coming together and rising to great occasions.

Just as you can derive some comfort by focusing on the more positive aspects of the current mess we’re all in, you can also derive some comfort by focusing on the right aspects of your investment portfolio. Today was another record-breakingly bad day for the market (and REITs in particular), but for dividend investors, that means we are seeing some truly unique opportunities to buy good companies at yields higher than we’ve seen since 2008-09. It’s not easy to keep buying in the face of a plummeting market, but it gets easier when you regard your stocks not as capital gains dice rolls but as dividend factories, with each share churning out payment after payment, quarter after quarter. Dividend cuts may be coming, but if you keep a spreadsheet showing your projected dividend income (and you should), my guess is that right now your sheet shows the same number as it did 3 weeks ago. And if you just keep buying more shares, you’ll keep adding to that dividend income. The share price is going to fluctuate (and probably fluctuate like crazy in the next few weeks) but in most cases those dividends will just keep coming. I bought a few shares of Starbucks (SBUX) and Wells Fargo (WFC) today and plan to hold onto them for the next 20+ years. Anything could happen, but my guess is those dividends will trickle in right on schedule and I’ll look back in a few years and be glad that I got the deal I just got. And next week if the Dow is at 15,000, I’ll be buying more shares and saying the same thing. It takes a strong stomach to be greedy when others are fearful, and a stronger stomach to be greedy when you’re fearful yourself, but focusing on those dividends coming in year after year with every share you buy helps the medicine go down a little smoother.

Good luck everyone. It’s weird out there.

Coronavirus and the REIT Dude’s Investments: Part 2

There’s a lot going in in the REIT Dude’s life right now. I have an incredible 2-month-old baby at home. I spend my days (and the occasional night and weekend) working in the corporate world. And, it lately seems, I spend the remainder of my time looking at market news and wondering if the world (or, at a minimum, the Dow Jones Industrial Average) is going to implode. When I last posted about the Coronavirus, it was February 28, 2020. That now feels like 2 years ago, not 2 weeks ago. But the virus is still so new (so “novel,” if you will) that Chrome’s spellcheck doesn’t yet recognize its existence and identifies it with a squiggly red underline.

At the time of my last post, the Dow stood at 25,766, a situation I then described as “decidedly sub-ideal.” Since then things, uh, haven’t improved. As of this writing, the Dow dropped 9.99% today alone and now stands at 21,200. We may be at the end of the fall, or we may be nowhere close to the end. The federal government will be stepping in any minute now to conduct evasive manuevers, but what it isn’t doing–providing enough tests for the virus, establishing procedures for testing the populace and quarantining those who come up positive, and putting the country on wartime footing to devote whatever resources might be necessary to the search for a vaccine–may be more important, both biologically and to the market. Fiscal stimulus is significant, but we are faced with a biological problem and I won’t be surprised if the market continues to panic until there is a biological solution, whether that means the development of a workable vaccine or the flattening out of the new infections curve. The remainder of the NBA season was cancelled, March Madness was cancelled, and the baseball season has been postponed. I don’t want to exaggerate the importance of sports to financial markets, but I actually think all of those things matter a lot. To people who rarely watch the news and don’t follow financial markets closely, that might have been the first time they realized that the Coronavirus is a seriously big deal. The bottom line: If things were bad on February 28, they’re positively fucked now. And it’s going to get worse before it gets better.

I can’t tell you what to do, but I can tell you what I’ve done. Mrs. REIT Dude and I stocked up on the essentials (toiletries, diapers, laundry detergent, TP, non-perishable food, etc.) We also made sure not to waste precious freezer space. Our freezer is filled with frozen meat, fruits, and veggies in case we aren’t able to get fresh food for a while. There are plenty of eggs in the fridge which can be hard-boiled to extend shelf life if need be. Hand sanitizer was long gone, so I bought a couple bottles of rubbing alcohol. I also bought a substantial amount of beer, just in case quarantine gets boring. None of this required paying exorbitant prices to third-party sellers on Amazon. All told, I think we spent about $400. I’ve seen a lot of people on social media claiming that it is a sign of panic and social decay to stock up on goods like this. Perhaps so, but honestly I don’t see the harm. Even if the danger turns out to be exaggerated, this is all stuff we’re going to use anyhow. It’s not the end of the world to buy July’s toothpaste in March.

As for my investing, despite it all, nothing has changed. I contribute the same amount (as close to the max as I can get) to my 401k every month, and it’s automatically invested 80/20 into Vanguard’s total stock and total bond market funds. On top of that, I haven’t sold anything, and I continue to purchase the same individual stocks I like. If anything, as a dividend investor, there are suddenly a whole lot more stocks that seem appetizing to me. But while I haven’t sold anything, I am putting a little bit more focus into quality. At this point, bankruptcies in the travel and leisure sector are a very real possibility. This could spill over into other sectors (for instance, hurting the bottom lines of the banks that provide large revolving credit lines–sometimes unsecured large revolving credit lines–to those companies.) I will probably do a post about lodging or retail REITs I might gamble on later, but just keep in mind for now that those companies constitute gambling at this point, and that’s not what I’m in the mood for right now.

When I’m buying REITs right now, I’m looking for top-shelf blue-chip issues that aren’t in the immediate “blast zone” of the Coronavirus. This would include high-end residential REITs like Essex (ESS) and long-term triple-net REITs like Realty Income Corporation (O). Many investors believe that REITs are dangerous in a time like this, and to some degree that’s true (if only because all equity investments are dangerous in a time like this), but keep in mind that REITs are traditionally considered defensive stocks that thrive in down times. It’s only because the last big recession in 2008 involved real estate that we have the perception that REITs underperform in a recession. Now is a good time to look for high-quality companies that are getting battered with the rest of the market but that are likely to be standing tall when the Coronavirus passes.

The other alternative is not to even bother with picking individual stocks. In a bull market, the indices are soaring, and there’s a lot more incentive to look under rocks for bargains and high yields. But when the entire market is down 20, 30, even 40%… you may as well just buy the market. I would be hard-pressed to argue with anyone who devoted 100% of their investing dollars into Vanguard’s total market index fund (VTI) or its REIT cousin (VNQ) right now. As of right now, VTI yields 2.1% and VNQ yields 4.66%. Locking in yields like those on broadly diversified index funds is far from the worst idea on the planet.

Whatever you do, keep your loved ones close, and stay safe. I’m thankful to the readers of this blog (however few in number you may be), because, among other things, the internet will only become a more important source of social interaction if we all wind up in quarantine over the coming months. Stay the course with your investments, and just try to keep in mind that as share prices drop downside risk decreases correspondingly. If those dividends don’t get cut, you can lock in some sweet yields.

We’re All Going to Die of Coronavirus and it’s Time to Freak the Fuck Out.

First off, I apologize for the lapse in posting. Blogging about REITs and dividend investing may be a hobby, but I’ve also got a day job that can keep me preposterously busy from time to time. But, on the off-chance there are actually “fans” of this humble REIT blog who have been refreshing the page waiting for another post, well, great news–this is that post. I’ll certainly try to keep this more frequently updated in between work and being a new dad.

If you’re the sort of person who reads down to the second paragraph in a post on a blog about REITs, then you’re probably the sort of person who follows the market pretty closely. And if you’re the sort of person who follows the market pretty closely, you’ve probably noticed that everything is, to use a technical term they teach in B-school, completely fucked right now. The S&P 500 is down 4.42% in a single day today, and that’s following on an entire week of massive losses. A few weeks ago people were breaking out their “DOW 30,000” hats. As of right now, the Dow sits at 25,766. Things are decidedly sub-ideal.

The culprit, apparently, is a respiratory illness in China called COVID-19 or the Coronavirus, a virus which, although I am not a doctor, I can say with some certainty is less appealing than the slightly skunky Mexican beer after which it was (I assume) named. It began in Wuhan, China and has spread to Italy, Iran, South Korea, Singapore, countless other places, and, most troublingly for the Dude who is himself a lifelong Californian, California. All of this seems not great, although the Chinese government is about as trustworthy as a meth addict at the BART station asking to borrow your phone for a quick phone call, so we’re not really sure at this point how dangerous the disease actually is. I guess we’re all going to have to wait and see.

Still, the bottom line is that having your money in the market this week has been about as fun as wearing a pair of underpants made of angry bees. If your portfolio happened to be heavily weighted towards energy stocks or (for some reason) cruise line stocks, you’re probably considering just changing your name, faking your death, and starting a beachside cabana bar in Puerto Vallarta with what remains of your meager savings. (Actually, you should do that regardless of how your portfolio performed this week; it sounds like an awesome idea.) The Dude himself took heavy fire and his portfolio is not looking great. So what do we do?

Nothing. Keep investing like you always have. If you have a little extra money, invest more. Look for great companies that seem unreasonably beaten down, or just throw money into index funds since there isn’t much point looking for deals when the whole market took a dive. The point is, don’t give up; double down. I write this fully aware that the market can drop another 30% in the next 2 weeks for all I know. And, in fact, if the market does drop another 30% in the next 2 weeks, I’ll be writing the exact same thing with even more emphasis. Because as the price of a company’s shares drops, the risk involved in owning those shares does down, not up. The lower the share price, the less risky the investment. The bigger the dip, the more you buy.

The bad news is that we haven’t seen the market like this since 2008-09. The good news is that history shows us that the investors with the courage to double down every time the market dropped and keep taking the pain in those years ended up, if they held on, getting very, very rich. Ultimately, one of two things is going to occur. Either, (1.) coronavirus will be just another passing event and global capitalism will continue to march on toward new highs like it always has, or (2.) it’s really a civilization-threatening catastrophe and we’re all fucked. I genuinely don’t know which it is, although I certainly suspect the former. But if it is the latter, I won’t regret continuing to buy stock, because in a post-apocalyptic, Mad Max-style hellscape where there is no law and we are ruled by gun-toting motorcycle gangs, if I even live long enough through the outbreak to see that outcome, I will have far bigger problems than portfolio underperformance. For instance, a lack of clean underpants.

Be a Lazy Farmer With REITs, pt. 2: Gladstone Land Corporation (LAND).

Yesterday on this here REIT Blog I wrote about how you can use REITs to invest in farmland and looked at one specific agricultural property REIT–Farmland Partners, Inc. (FPI). Today, I am going to look at another agricultural REIT – Gladstone Land Corporation (ticker: LAND). Before we start looking at LAND, let’s review some of the reasons why you might want to invest in farmland:

  • Increased diversification.
  • Farmland has been a stable investment for thousands of years.
  • You can finally make an account on FarmersOnly.com. (Note: This may or may not be true.)
  • You are looking for an excuse to wear plaid shirts tucked into Wranglers.

Whether or not you have any interest in investing in farmland, the fact that it’s an option is a great illustration of why I love REITs. It used to be that if you wanted to own a diversified real estate portfolio you needed to have enough money to buy a bunch of different kinds of real estate which, suffice it to say, most of us do not have. The only way this option would be even remotely available to ordinary people would be to take on a ton of leverage – an option that is, to say the least, not without risks. Now, for about $10, you can invest in farmland thanks to REITs. Now, onto the REIT at hand, Gladstone Land Corporation:

Gladstone’s business model involves buying farmland and leasing it out, primarily on a “triple net” basis. (Note: A triple net lease is one which requires the tenant to pay for property taxes, insurance, and repairs. This is generally the most profitable, low-risk lease variety from the landlord’s view, which is why as REIT investors we always like to see triple net leases.) You can see a complete list of their farms here. Gladstone’s website provides a pretty awesome level of transparency. You can browse through their farms and actually see satellite pictures of each farm as well as information on acreage, water sources, and crops grown. Clicking through their California farms, I saw almonds, pistachios, peppers, figs, and strawberries. The wide assortment of crops across geographic regions offers protection against a dip in corn, soybean, or wheat prices. (Note: The Dude is not even going to begin to guess what will happen to commodity prices in the near future; the point is just to know that commodity prices change for whatever reason and diversification across different crops can help to buffer against that risk.) This is intentional: In a PowerPoint for investors, Gladstone expressed a belief that “farmland growing annual fresh produce (e.g., most fruits and vegetables) and certain permanent crops (e.g., blueberries and nuts) is a superior investment over land growing commodity crops (e.g., corn, wheat, and soy).

As of November 6, 2019, Gladstone owned approximately 86,534 acres of farmland across 10 states, with the biggest presence in Colorado, California, and Florida. (Source: November 6, 2019 investor presentation, p. 12.) This is the result of pretty quick growth: Gladstone’s portfolio consisted of less than 20,000 acres in 2015. (Ibid. at p. 17.) Gladstone reports the fair value of its portfolio, as of September 30, 2019, as $824.5M. (Ibid. at p. 22.)

Looking at the numbers, LAND had FFO per share of $0.49 last year, up from $0.38/share in 2018 but down from $0.53/share in 2016 and $0.54/share in 2017. Rental revenue, however, is steadily increasing at a nice rate: $11.9M in 2015, $17.3M in 2016, $25.1M in 2017, $29.3M in 2018, and $35.2M in 2019. They have almost tripled rental revenue in the past 5 years.

FFO for 2020 is projected at $0.53/share. Assuming that is correct, the current P/FFO ratio is about 26.4, which is a bit higher than I generally prefer. The dividend is $0.54/share and the shares yield 3.83%. That’s a decent yield, but I always get nervous seeing a dividend that is higher than projected FFO per share. If they can’t grow FFO, they may eventually need to either take on debt to pay the dividend or else cut it, neither of which are good outcomes for investors. Fortunately, the rocketship-like growth in rental revenue suggests to me that as long as they can keep costs under control the FFO growth will follow. The 3-year dividend growth rate of 2.58% does not amaze me, but, on the plus side, Gladstone has increased the dividend at least a little bit each never and never cut it.

Looking at the balance sheet, I see $503.7M in total liabilities. Subtracting that from the $824.5M in estimated total land value reported by Gladstone in its investor presentation, that gives us a surplus of about $320.8M. If that is correct, the shares seem slightly undervalued (notwithstanding the somewhat-lofty P/FFO ratio), as Gladstone’s current market capitalization is approximately $297.1M. This disparity suggests room for a 10% increase in share price even without a change to the company’s underlying fundamentals.

The Dude’s Final Recommendation: LAND looks like a great, fast-growing company. I may buy some shares, but I am a bit concerned about the closeness of their dividend and their FFO/share. Might be best to keep this one on a watch list and dollar-cost-average in slowly over the next year or two in order to keep an eye on FFO growth.

Be a Lazy Farmer with REITs, pt. 1: Farmland Partners, Inc. (FPI).

Throughout human history, farmland has been one of the most popular investments. In many pre-industrial societies, it was essentially the only source of generational wealth. While today’s investor has infinitely more choices, farmland remains a compelling investment for many reasons: Land has a fundamental value, and there will always be demand for crops as long as humans get hungry every few hours. Commodity prices oscillate according to market whim and geopolitical happenings, but whether the economy is red hot or ice cold people need to eat, and as long as people are eating farmers will be growing their food. But for a long time, the only way to invest in farmland was to actually buy farmland. From there you could either work the land yourself – which is the absolute opposite of passive income – or lease it out to someone else. For most individual, middle-class investors looking for passive income, adding farmland to the portfolio has always been impracticable if not impossible. REITs solved that problem, and now you can invest in farmland for a bit under $10.

This is the first in a series of posts looking at agricultural REITs, i.e., REITs that own farmland. Today we are going to focus on Farmland Partners, Inc. (ticker: FPI). According to its website, as of March 13, 2019 FPI “owns or has under contract” over 162,000 acres of farmland across the country. That property is leased to more than 125 tenants who combine to grow more than 30 crops.

According to SeekingAlpha, FFO per share has ranged from $0.40 to $0.53/share over the past few years, up from $0.20/share in 2015 and a small loss in 2014. The broader trend isn’t bad, although of course the Dude would prefer to see uninterrupted never-ending FFO growth. Forward FFO is projected to be $0.40/share, in line with the last couple of years. At the current share price of $6.79, FPI trades for 16.975 times projected FFO, which seems like a reasonable valuation.

It sounds like 2019 was a bit of a rough year due to the trade war with China (one of the largest export markets for American agricultural products) and some unusually bad weather. These issues may be weighing on the share price, and that’s not entirely unreasonable. But it would seem that there is a bit of short-term-ism at work here. Political conflicts and weather events will come and go.* I can’t tell you what U.S.-China trade policy will look like 1, 5, or 10 years from now, but I can tell you that most things eventually blow over and people have been profitably growing crops for more than 5,000 years. If anything, the current geopolitical fracas and bad weather may provide a buying opportunity for investors with a sufficiently long holding period in mind.

Looking at the balance sheet, FPI appears pretty strong. They have at last report approximately $1.072 billion in real estate assets against liabilities totaling $525.7 million. That leaves them about $547 million above water. That’s plenty of equity they can tap to make new acquisitions, weather storms relating to the trade war, and so forth. Moreover, at the current share price, FPI’s market capitalization is only $214.79 million. If FPI’s net asset value (“NAV”) is anything close to $547 million, that’s a pretty absurd discount and it suggests the potential for serious upside movement in the share price.

FPI pays a dividend of $0.20 per share, paid out quarterly in increments of $0.05. At current prices, the shares yield 2.95%. Looking at the projected FFO of $0.40/share, which is in line with results in the recent past, the dividend appears safe and well covered. The dividend history is less than ideal: FPI paid out $0.51/share in 2016, $0.355/share in 2017, and has been at $0.20/share since, which is pretty much the opposite of the trendline you want to see. Still, the current dividend looks safe, and we can hope that the payouts to shareholders will only increase from here forward.

In summary, FPI hasn’t had a perfect 2019, but the shares look cheap, the dividend looks safe, and it’s a convenient and inexpensive way to add farmland to your diversified passive income stream. This looks like a decent investment.

*Obviously there is plenty of room to debate the extent to which climate change will impact agriculture, but it seems reasonable to presume that a changing climate will effect the way farmers do business. But it would stand to reason that if the climate gets worse for some crops in some places it will get better for other crops in other places. Climate change is quite likely to be a net-negative event for the world and the Dude is all for combating it right away, but it’s not at all clear that it will be a net-negative event for North American farmers. More to the point, if climate change does completely wipe out American agriculture, then the odds are pretty good that society itself has collapsed and we are all living in a completely fucked Mad-Max-style post-apocalyptic hellscape, in which case, honestly, does it really matter whether your investment choices were good or bad? Bottom line: By all means worry about climate change when you are voting, picking a vehicle, or directing your political donation dollars, but don’t sweat it so much when you are picking a farmland REIT.

DISCLOSURE: I own some FPI shares and will probably buy more in the relatively near future.

How to Evaluate a Potential REIT Investment: Evaluating Essex Property Trust, Inc. (ESS)

Obviously REIT evaluation, like stock evaluation generally, is complex. There is really no end to the amount of data you can consider, analysis you can do, and so forth. Suffice it to say that I’m not going to be able to accurately or adequately sum up the entire process of REIT evaluation in a single blog post and it’s probably stupid to try. I’m going to do it anyway. Here’s why: If you’re making eight-figure investment decisions for a hedge fund, yeah, you’re going to need to do some analysis that goes well beyond the scope of what I’m talking about here. But most readers of the Dude’s blog probably aren’t doing that. Rather, I’m guessing that most of you are – like me – hobby investors looking for a profitable spot to park $500, $1,000, or maybe $5,000. You want to make good investing choices, and you probably enjoy investment research, but you’re also not going to spend the next 6 weeks doing a detailed breakdown of potential companies just to find the best place to park $500. The priority is just getting the money into the market – intelligently, but quickly – so that you can start earning some dividends and go back to playing MLB: The Show.

The goal of this post is to show you how to evaluate a REIT without spending more than a couple of hours. The format of this post will be a “think aloud.” A long time ago, before law school, the Dude worked as a math tutor. What I would do is show students how to solve math problems by doing the problem myself slowly and talking through each step of the process so that my “mental work” was completely transparent. That’s what I’m going to try and do here. I will pick a REIT at random, walk through the sorts of things I consider, and, at the end of the post, I’ll give you an up-or-down vote on whether I would invest $1,000 in that REIT today. (Note: I am not actually going to invest anything at the moment and I will be picking a REIT that I do not own, so this will be a hypothetical vote of confidence and not an actual disclosure of the Dude’s investments or planned investments.)

Today’s REIT will be Essex Property Trust, Inc. (ticker: ESS). Assuming that I had never heard of ESS until this moment, I would want to get a quick overview of their business, so let’s head over to Yahoo! Finance and check out their profile. According to them:

Essex Property Trust, Inc., an S&P 500 company, is a fully integrated real estate investment trust (REIT) that acquires, develops, redevelops, and manages multifamily residential properties in selected West Coast markets. Essex currently has ownership interests in 249 apartment communities comprising approximately 60,000 apartment homes with an additional 7 properties in various stages of active development.

-Yahoo! Finance

Right away what we can see is that ESS is a residential REIT. I like that. With some kind of specialty REIT (say, data centers or timberland) I would need to ask a few questions about the health of that industry before looking at the underlying numbers. With an apartment REIT, I don’t need to bother. Sure, the residential real estate market will fluctuate from time to time, but I feel pretty confident that in 10, 20, or even 100 years people will still be renting apartments. It’s about as steady as business models come. (Unless, of course, robots take over and we all end up in a postapocalyptic hellscape confined to toiling away in salt mines at the behest of our evil robotic overlords, but Andrew Yang has assured me that there is, at worst, a 50/50 shot of that happening.)

Since I am confident about the basic viability of ESS’ business model, I will move on to looking at the numbers. There are three places that I like to go for this. The first is TDAmeritrade. (If you use a different brokerage, it should also provide research data for you when you punch in the ticker symbol ESS.) The second is SeekingAlpha. And the third thing I check are the company’s SEC filings from the past year.

The first number I’m going to check is “funds from operations” or “FFO.” FFO reflects how much money the REIT earns from its properties in a given period. This number is unique to REITs. If you’re evaluating a non-REIT stock, you want to look at earnings and the ratio of price/earnings. With REITs you use FFO instead, because the earnings number reflects artificial write-downs for things like depreciation and, thus, is not an accurate picture of how much money the REIT brings in. If you use earnings instead of FFO, every REIT is likely to look insanely expensive and every REIT dividend is likely to look endangered. (There is also something called “adjusted funds from operations” or “AFFO.” We will cover the difference between FFO and AFFO in another post. For now, just know that I prefer to look at FFO.)

What I see with ESS is that FFO for the 12 months ending December, 2019 was $936.4M. There has been a very nice upward trajectory. FFO for the 12 months ending December, 2016 was $654.1M and it has increased every year since. Meaning that the business churned out $282.3M more last year than it did just three years earlier. That’s very impressive growth for a big company. ESS’ FFO per share was $13.73 last year and is predicted to be $14.04 this year. At a current share price of $317.04 that works out to a P/FFO ratio (the REIT equivalent of the P/E ratio) of 23.09 for last year and (assuming the estimates are right) 22.58 for 2020 FFO. That’s a little bit high (I like to see a P/FFO under 20 as a general matter), but not high enough to scare me off when the company’s portfolio is solid and its FFO is increasing like crazy.

The next thing I want to do is look at the dividend. As an income investor, this is a big-ass deal to me. I’m looking for three things: (1.) Is the current yield attractive? (2.) Is the current yield safe? (3.) Is the dividend likely to grow? In this case, ESS’ current dividend is $7.80/yr (paid quarterly). Relative to the current share price, that is a yield of 2.46%. Frankly, 2.46% is a pretty disappointing yield for a REIT. REITs are required to distribute a substantial percentage of their earnings as dividends, so it’s not uncommon to see yields of 4% or higher even in this low-rate, low-dividend environment. That said, yields are usually a little lower for residential REITs, and 2.46% is not unreasonable when compared to ESS’ peers (i.e., other major apartment REITs).

Is that 2.46% dividend safe? Well, nothing is certain except for death, taxes, and the Marlins being terrible, but we can make an educated guess. It’s probably safe to assume that ESS will generate at least $13.73 per share in FFO this year. I say that because (a.) they did that last year, (b.) their FFO has been increasing substantially each year, and (c.) the bigwigs who make estimates about this sort of thing seem to think they’ll do better than that. That more than allows ESS to cover a dividend of $7.80. Relative to last year’s FFO per share, that is a payout ratio of only 56.8% (pretty low for the REIT world and well within the realm of what I’d consider safe.) So we can feel confident that that $7.80 dividend isn’t getting cut, but we don’t just want it to stay static, we want that motherfucker to grow. Will it?

Well, for the answer to this, we can look to ESS’ history of dividend payment, which is excellent. They have increased their dividend every year for 25 years, meaning that they even increased between 2008 and 2010 when the entire economy was basically an out-of-control tire fire. This is a great sign. The 5-year dividend growth rate is 8.83% and the 10-year growth rate is 6.59%. The dividend has roughly doubled every decade: It was $4.16 in 2010 and $2.80 in 2000. I would not be shocked at all to see that their dividend was $16/share (or even a bit more) in 2030.

In sum, ESS’ current yield doesn’t knock my socks off, but the dividend appears extremely safe and they have an amazing history of annual dividend increases, so the shares are likely to provide a reliable and constantly increasing supply of income for owners.

Finally, I like to take a quick look at the REIT’s balance sheet. I’m looking for something called “net asset value” or “NAV.” This is a very approximate, quick-and-dirty way of guessing at NAV, but, as I said, we’re looking for the quick approach here. Doing this for real would involve (among other things) getting appraisals of a whole bunch of buildings, and that’s just not cost-effective or reasonable for the average investor. What I tend to look at are two things: (1.) The total value listed for “property/plant/equipment” (“PPE”) and (2.) total liabilities. The first shows, basically, the total value of the REIT’s real property holding. The second is their total debt load. What you want to look at is whether the REIT is up to its eyeballs in debt or whether they have a nice-looking equity cushion.

In this case, looking at ESS’ balance sheet, I see PPE for 2019 of $14.038B and total liabilities at the end of 2019 of $6.485B. That’s a “spread” of about $7.55B. The REIT isn’t underwater or even close to it. If you were to sell off all their assets, pay down all their liabilities, there would be about $7.55B left to divide to shareholders. (Looking at the current market capitalization of $21.7B, ESS appears to be trading at a premium to its NAV, but that’s not out of line for a fast-growing REIT with a history of success.)

Finally, I like to move away from the numbers and go back to the big picture. I will look at the REIT’s website, get a sense of what kinds of properties they rent out, and do a bit of research on the old Google machine to see what people are saying about them. In this case, what I see is that ESS owns fancy-pants apartments in high-priced West Coast cities like San Francisco and Seattle. I like this, because (1.) people pay absolutely obscene amounts of money to live in those cities and (2.) the growth might level off, but I don’t see them ever being cheap. Additionally, San Francisco is out of space to expand, and it’s a difficult and cumbersome process to get a new apartment high-rise approved there. This helps to prop up prices by mitigating one of the biggest risks that REITs face: Over-building. (Whether that’s a good public policy, the Dude is skeptical, but the focus for now is just on whether it’s good for an investment in ESS.)

Final Verdict: If the Dude had $1,000 to throw into ESS right now, he’d do it happily. It isn’t cheap on a P/FFO basis and the yield isn’t amazing, but the history of dividend growth is phenomenal and their portfolio of properties is impressive.