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.

What About Passively Managed REIT Funds?

In the short history of this young-but-venerable REIT blog, I have already expressed a few positions that form the cornerstones of my investing philosophy: (1.) REITs are pretty great. (2.) Diversification is pretty great. (3.) Index funds are pretty great. So it would stand to reason, then, that I must love passively managed, low-cost REIT funds, right? Well… yes and no.

I probably wouldn’t have even bothered to write this blog 5 years ago because the answer, in my mind at the time, would have been totally obvious: Don’t fool around trying to pick individual REITs; just buy Vanguard’s passively managed REIT ETF (VNQ) and call it a day. (In fact, I actually didn’t bother to write this blog 5 years ago, although the reason for that was less the awesome primacy of VNQ and more that I was too busy hanging out and being The Dude. REIT blogging is, it seems, a (slightly) older man’s game.) I want to use this post to answer three questions: (1.) What is VNQ? (2.) What’s awesome about VNQ? (3.) Why is VNQ perhaps less awesome than it was just a few years ago?

What is VNQ? VNQ is the ticker symbol for an exchange-traded fund (ETF) called the Vanguard Real Estate Index Fund ETF Shares. An exchange-traded fund or “ETF” is just a mutual fund that trades on an exchange like a stock. This means you can easily buy and sell ETFs from your brokerage account just by typing in the ticker symbol just as you would with any other stock purchase. VNQ is a passively managed fund which tracks a particular index of REITs. The fund summary provides as follows:

The investment seeks to provide a high level of income and moderate long-term capital appreciation by tracking the performance of the MSCI US Investable Market Real Estate 25/50 Index that measures the performance of publicly traded equity REITs and other real estate-related investments. The advisor attempts to track the index by investing all, or substantially all, of its assets-either directly or indirectly through a wholly owned subsidiary, which is itself a registered investment company-in the stocks that make up the index, holding each stock in approximately the same proportion as its weighting in the index. The fund is non-diversified.

– Fund summary from Yahoo! Finance

In other words, when you buy one share of VNQ, you’re basically buying an interest in a whole bunch of REITs at one time. For the price of one VNQ share (about $95 as of this writing) you get instant diversification across the REIT spectrum. In exchange for this instant diversification, you have to pay Vanguard for the service of setting up and maintaining the ETF. This payment comes in the form of an “expense ratio” which is, as of this writing, 0.12%. (Note that I am only discussing Vanguard’s REIT fund instead of other competing REIT funds because when it comes to mutual funds my belief is that you pretty much want to go Vanguard or go home if at all possible. Vanguard is a great, investor-focused company with a long track record of keeping fees low and not releasing dumb gimmicky products.) That means that for every $1,000 you invest in VNQ, the annual expense charged will be roughly $1.20. It’s always important to keep fees low when you are buying mutual funds because the effect of fees on investment performance can be profound over long periods of time, but 0.12% is pretty danged good.

What REITs are you actually getting when you buy VNQ? You can get more information on the MSCI US Investable Market Real Estate 25/50 Index (the index corresponding to VNQ) here. What you will notice, among other things, is that about a third of the index is comprised of the top-10 holdings, all of which are well-known, large-cap REITs like American Tower Corp., Prologis, and Equity Residential.

What’s Awesome About VNQ? Instant diversification for a low price. For a mere 12 basis points you get a whole slew of REITs. If one of those REITs falls on hard times, well, that’s not a very big deal, because you are exposed to plenty of others. If one of them cuts its dividend, you’re still going to be getting a dividend from VNQ that looks pretty much like it did before the cut. Diversification (as a general rule) reduces risk. This benefit isn’t free, but at 0.12%, it’s pretty cheap. (Note that this pretty-cheap-ness is really limited, in my view, to VNQ. Once you get outside of Vanguard fund fees can spiral up in a real hurry. Make sure that you carefully check all of the fees before you purchase any ETF or mutual fund.) The Dude is not long VNQ at this time, but he has owned it in the past and probably will again at some point in the future. If you just want to easily and conveniently add some REITs to your portfolio and don’t feel like spending a bunch of time doing research, I would be hard-pressed to come up with a better choice than VNQ.

If VNQ is so awesome, then why doesn’t the Dude own any? There are two primary reasons why I am a little bit less enthusiastic about VNQ (or any comparable fund) than I was just a few years ago: (1.) Brokerage costs have changed and (2.) technological changes have impacted the marketplace dramatically.

First, brokerage costs have decreased markedly between 2015 and the present. I personally use TDAmeritrade for my non-retirement investing. (This isn’t an endorsement or anything, I just happened to have a Scottrade account and TDAmeritrade bought them out.) Ever since I first opened the Scottrade account in roughly 2006, each trade cost a flat fee of $7. The $7 charge created an incentive to buy as much as I could with each purchase in order to reduce the percentage of each transaction being eaten up by fees. To illustrate the point, when each trade costs $7, you can buy $14 worth of stock and pay 50% in fees or you can buy $700 worth of stock and pay 1%. At $7 per trade, unless you are dealing with very large amounts of money (which, 5 years ago or even today, the Dude was and is not), diversification gets expensive quickly, which makes index funds look all the more appealing.

Suppose that you wanted to buy a diversified basket of REITs. You did your research and picked out 15 favorites for investment. You gathered up $1,500 to invest and were ready to get started. In order to buy shares in all 15 REITs, you would need to pay 15 different $7 purchase fees for a total of $105, leaving only $1,395 actually invested in your REITs. (And if you ever sold, that $7 fee would rear its ugly head again.) Relative to your $1,395 investment, you’d have paid more than 7.5% in fees. That’s a spicy meatball, and it’s also a hell of a lot worse than paying one $7 fee plus a 0.12% expense ratio to buy VNQ.

Things are different now. Within the past year, most major brokerages (including TDAmeritrade) have switched to a zero-commission model where you can buy and sell stocks willy nilly for free. This means that instead of paying 7.5% to invest $1,500 in 15 different REITs you are actually paying nothing, zip, zero, nada, zilch. Suddenly VNQ’s 0.12% expense ratio, while still low as those things go, doesn’t look so good by comparison. The elimination of commissions in online brokerage accounts means that diversification just got a whole lot cheaper, and as a result index funds with a fee, however low that fee, are less appealing.

As far as technological changes go, this is a bit more speculative, but it is no secret that Amazon has been absolutely crushing the retail sector in recent years. Brick-and-mortar retail is on the decline (for now at least), and I don’t see that reversing. Neither I nor anyone I know has been to a mall more than once in the last 2-3 years, and even then it’s usually just to get an Apple product repaired. Buying things online is just an easier, better, more convenient, and often cheaper experience. I could be wrong about this, but I don’t see the trend of consolidation in the physical retail space reversing for a long time, if ever. While not as dramatic as the contraction in retail, we may also begin to see a reduction in the demand for commercial office properties as more and more employees take advantage of improving network technology to telecommute (and as telecommuting grows more socially acceptable for employers.) As a general matter (and there are certainly exceptions which will be the subject of future posts here on this very REIT blog) I want to stay away from retail and I’m leery about commercial in general. According to MSCI, the index tracked by VNQ consists of 9.44% office properties and 11.41% retail properties. Meaning that roughly 20% of what you’re buying with VNQ is stuff I’m nervous about. Maybe I am wrong (the Dude has been wrong before, will be wrong again, and mostly just hopes to be right occasionally), but since diversification is free now, I prefer to chart my own course between the Scylla of strip malls and the Charybdis of off-the-freeway exurban office towers. Plus it’s just fun to research individual REITs (or at least it is for the Dude who, quite possibly, needs hobbies.)

On Diversification and Home Ownership

In a previous post, I wrote that I like investing in REITs because it gives me more exposure to real estate (i.e., more diversification) than I’d get from buying index funds alone. (Recall that the typical market-capitalization-weighted S&P 500 index fund is going to be about 3% REITs.)* I think that real estate is a decent investment, but I’m too lazy to handle 2 a.m. calls from tenants about clogged toilets. So, for me, REITs are perfect. I want more than 3% of my portfolio in real estate, I don’t want to deal with taking tenants to court or fixing their plumbing, so I buy REIT shares.

But, you might be asking, what about your personal residence? If someone is a homeowner with a bit of equity in their property, aren’t they already “overweight” real estate? Is it really smart to be adding REITs to the portfolio on top of that personal residence? Consider the example of Hypothetical Harold (“HH”). HH, despite his old-mannish-sounding first name, is a 30-year-old white collar worker in a moderate cost of living city. A couple years ago he purchased his first home for $350,000, putting 20% ($75,000) down because he is a prudent dude who makes good financial decisions. As he continues to pay off his mortgage and his house continues to appreciate, he now has $100,000 in equity. HH also contributes regularly to his 401(k), which is invested 90% in a low-cost S&P 500 index fund and 10% in bonds. Right now, the balance of his 401(k) is $100,000. He holds no other investments.

So what is HH’s asset allocation? Of that $90,000 in S&P 500 index fund shares, about 3% ($2,700, more or less) would be REITs. Do we add that to his $100,000 in home equity and conclude that he has roughly $102,700, or about 51% of his invested capital, devoted to real estate? In my view, the answer here is no. His REIT allocation is ~3%, not ~51%. Here’s why: The ugly truth is that for most people, your personal residence is not an investment and shouldn’t be considered in your asset allocation. You can read the linked article if you wish (and you should, because it makes the argument more eloquently and succinctly than I could), but the bottom line is that your personal residence is not (unless you are renting out a spare bedroom on Airbnb or something unusual) an income-producing asset.

That’s not to say that you shouldn’t buy a house if you are financially able to do so. By all means, be my guest. (Or, more accurately, don’t be my guest, because you just bought your own house and don’t need a place to stay.) It’s not like home-ownership can’t be financially beneficial for many people, especially with interest rates remaining in the 3% range. There are plenty of benefits to owning a home:

  • Your monthly living costs stabilize (assuming you get a fixed-rate mortgage), which means that (assuming your income continues to increase and inflation continues to exist) the effect of that payment on your budget gets less and less severe each month. This contrasts favorably with rent, which is likely to increase every year at lease renewal time. Consider an example: Suppose that before HH bought his house, he paid $1,300/mo to rent an apartment, and now his mortgage payment is $1,600. That’s a step up, sure, but if that apartment rental increases by 5% per year his rent would be $1,659 (i.e., more than his mortgage payment) after only 5 years. After 10 years, his old apartment would cost about $2,093/mo, and that $1,600 mortgage payment starts to look like a bargain. One of the biggest benefits of a mortgage is that it fixes living costs for decades at a time.
  • The equity belongs to you, it builds every month when you make payments, and you can access it in an emergency by taking out a HELOC or selling the house. Nobody wants to sell their house to pay some emergency bill, but it beats going bankrupt. If you pay extra on your mortgage, you get a guaranteed rate of return equal to the rate of interest on the loan.
  • Depending on where the property is and a whole host of other factors, it’s likely to appreciate, although the amount is going to vary widely from place to place and year to year.
  • If you move out of the house and keep it, it can eventually become an income-producing investment.

But if you’re like HH, just a regular person living in his or her house and not using it to produce income, then despite the fact that there are very real financial benefits incident to home-ownership, your house is not an investment and should not be included in your asset allocation.

In summary:

  • You should probably buy a house if you can afford it, but understand that your primary residence is not a great investment and should not count when you evaluate your asset allocation. (Keep this in mind when some realtor tells you that your personal residence is going to be the best investment you ever make, recall that they are paid on commission, and maybe consider buying less house than you can afford instead of leveraging yourself to the gills and straining your budget.)
  • If you devote 20-30% of your portfolio to REITs and own a home, you do not need to worry (in my humble opinion) that you are “too much” in real estate.
  • If you rent out some portion of your home (or, to use a profoundly annoying term that has gained credence in recent years, “house hack”), the above may not apply to you. In that case, your personal residence is an income-producing asset and may need to be included in your asset allocation.

*Note: The 3% figure is a little bit out of date as it comes from a January, 2019 article. If I had to guess, though, I would say that the current number is smaller because the trend in the past year has been for a small number of gigantic companies at the top to comprise a larger and larger share of the S&P 500’s total market capitalization. I also don’t know what percentage of the total stock market (as opposed to the S&P 500) is comprised of REITs, so if you buy shares of a low-cost total market index fund like VTI (which you should), the REIT composition is probably somewhat close to 3% but may be a bit off in one direction or another. The broader point, though, is that if you want 20%, 30%, or even more of your portfolio to be devoted to income-producing real estate, you’ll want to add some REITs to those broad-market index funds.

Why Not Just Buy Index Funds?

For any reasonably aware investor, the first question for the REIT Dude would be “Why bother with any of this?  Why not just invest in a low-cost S&P 500 index fund like SPY or, even better, a low cost total-market index fund like VTI/VTSAX?  Why, You the Hypothetical Discerning Investor (“YTHDI”) might ask, should you bother increasing your exposure to REITs relative to what can be found in those index funds?  The answer, in all honesty, is that you would be just fine to do that.  You can get extremely wealthy without ever buying a single share of a single REIT.  (In fact, those broad-based index funds will give you some REIT exposure.  Roughly 3% of the S&P 500’s market capitalization consists of REITs.) 

At the end of the day, if you earn a decent living, save a substantial percentage (the Dude recommends 50% but you’re probably fine with less) of it, and plow those savings into reasonably intelligent investments (index funds being maybe the best example here) month after month, you are very likely to end up getting pretty wealthy whether or not you fool with individual REITs.  In fact, the Dude is an index investor himself.  100% of the Dude’s 401(k) is invested in passively managed Vanguard funds.  REITs are a percentage of my portfolio, but not the entire thing or even the majority.

That’s the open secret behind this blog:  Absolutely nothing here is need-to-know information.  You can get rich without paying any attention to REITs, and I can’t even promise that buying carefully studied REITs will make you richer than index funds alone.  This blog exists because (1.) I happen to like REITs, (2.) I happen to like writing, and (3.) I figured I would combine my hobby of learning about REITs with my hobby of writing on the off-chance that anyone on the internet cared.  So, if you’re already a REIT investor or think you might want to become one, stick around, and we can learn together.  If you don’t have the slightest interest in REITs, that’s just fine.  Investing is a bit like cooking, by which I mean (1.) you should do it after several glasses of wine whilst singing along to 80s hair metal ballads and (2.) everyone makes the special sauce their own way.  If you put every dollar you invest into VTI or pay off your mortgage before investing outside of your 401(k), you won’t get any argument from me.  You won’t hear me telling anyone that they need to do things my way. 

But if you want to know why I do things my way, well, here’s a brief overview.

First, REITs provide diversification.  Having exposure to real estate can certainly be a bad thing (the Dude was in his formative post-college years when the 2008 crash hit), but as a general matter having exposure to multiple less-than-totally-correlated asset classes is a good thing.  The 3-ish% REITs I get when I buy a capitalization-weighted S&P 500 index fund doesn’t feel like enough real estate exposure to leave me sufficiently diversified, so I beef it up by adding REITs to the portfolio. 

Second, REITs provide yield.  I explained in my first post why I love dividends.  Passive income is the goal for me, and REITs are a great source of it.  The current dividend yield of the S&P 500 is a bit under 2%, and it’s nowhere near uncommon to find a REIT with a stable payout 3 times that.  If you want to goose up the overall yield of a portfolio, a few well-chosen REITs can really do wonders.

Third, REITs let me be a lazy landlord.  If I wanted to make money on real estate the old fashioned way, I would need to go out, get a loan, buy a property, find a tenant, hope the tenant isn’t some kind of psychopath who is going to turn my new rental property into a wolverine breeding operation/meth lab, collect rent from the tenant, take the tenant’s calls at 2 a.m. when he clogs the toilet, and so forth.  That’s fine for a lot of people, but it’s way too much work for the Dude.  I prefer a laid-back lifestyle of sipping IPAs and watching the San Francisco 49ers take care of business while the dividend payments roll in like waves.  Plus which, I have the mechanical sense of a DMT-addled ferret, which means that I cannot do even the simplest home repairs and would have to hire someone every time something in my rental house breaks.  That would cut into the margin severely – the best landlords are handy, industrious folks.  The Dude is neither of those things.

REITs, by contrast, let me leave the actual work of landlording to someone else.  Granted, I get a smaller return on my invested capital because I have to pay for overhead (the REIT’s office, salaries for the REIT’s employees, strippers for the REIT’s annual holiday party, that sort of thing), but, within reason, I’m happy to do it, because I have outsourced 100% of the work and all I’m doing is cashing dividend checks.  Being a good landlord is a lot of work.  Owning a REIT involves spending 2 seconds on TDAmeritrade buying a couple of shares.  The smaller return (relative to direct landlording) is well worth it to me every time I think about how nice it is that nobody is calling me in the middle of the night to tell me that they burned down my house because they got stoned and forgot that a Mama Celeste pizza was in the oven or that they’re going to sue me because it’s January and the heater isn’t working. So that’s why I like REITs.  You might agree, or you might not.  Either way is fine with the Dude.  My job here is to educate and entertain, not persuade.  But I certainly hope that you’ll stick around and tell your friends.

Why This Blog Exists

Who am I? I am a litigator in my early 30s from California. I don’t have an MBA, I’ve never worked on Wall Street, and the closest I’ve come to starting a hedge fund is getting together some funds to buy a hedge in the Home Depot garden department. I am, in short, an amateur, a nobody, another anonymous voice within the vast chorus of into-the-void screamers that is the internet. There is nothing that makes me special, but there are, perhaps, a few things that make me unusual.

Ever since I was a kid, I’ve been drawn to hobbies that involve numbers. When I was in 5th grade, I found a paperback almanac on my parents’ bookshelf and it contained a list of the 50 largest U.S. cities ranked by population according to the 1990 Census. I memorized the list, and ever since then I’ve had a weird tendency to memorize city populations. To this day, if you give me a major U.S. city, I could probably give you a pretty good approximation of its city-limits population. Shortly after that, I started collecting baseball cards, during which phase I spent innumerable hours poring over the statistics on the back of the cards. (This interest would, in fact, never go away, and would indeed become somewhat weaponized with the subsequent advent of sabermetrics and the creation of sites like Fangraphs. One should probably expect that this blog, being subject only to the editorial whims of its creator, will likely feature the occasional post about fantasy baseball.) So it was probably only a matter of time until I discovered investing.

This is, of course, a blog about investing – more specifically, dividend investing, and, even more specifically, REIT investing. (I’ll do some basic introductory what-is-a-REIT type posts later, I’m sure, but for now I’m going to assume that if you took time out of your day to find and read a blog about REITs you probably already know the basics.) Any blog devoted to a particular investment strategy should, in my view, begin by concisely answering two questions: First, why do you choose to invest this way? Second, why are you blogging about it?

The answer to both questions, of course, is that life has no intrinsic meaning and we are all hurtling through space around a dying star en route to a certain death and so, since nothing matters, we may as well fill our days with cold beer, spicy tacos, and REIT blogging. Anything to avoid the void. Of course that’s kind of a “higher level” answer which may leave some readers a bit unsatisfied. The less-existential-dread-laden answers are as follows:

Why I invest in REITs: I should say at the outset that I do not invest exclusively or even primarily in REITs. The majority of my portfolio consists of passively managed, low-fee Vanguard index funds and that will continue to be the case. However, in addition to the Vanguard Total Stock Market Fund (VTSAX or VTI, depending on how you invest), I also purchase individual stocks. My personal philosophy on individual stock purchases is that I exclusively purchase dividend-paying stocks. There is no pre-determined minimum yield, but as a rule of thumb I shoot for stocks that yield more than an S&P 500-tracking index fund (currently about 1.7%.) There are a few reasons for this:

  1. One of the most persuasive investing books I’ve ever read was The Future for Investors by Jeremy Siegel. This will be the subject of a future post for sure, but for now suffice it to say that Siegel makes a great case for owning dividend stocks. At the end of the day, the main reason I like dividends is simple: I believe that a higher-yielding portfolio will eventually make me richer than would the alternatives.
  2. I like the income stream produced by a high-dividend portfolio. One of the cornerstones of the FI (financial independence) crowd is the 4 Percent Rule, which provides that you will probably be fine in perpetuity if you spend 4% of your invested capital each year. If your portfolio yields 4%, that makes life really easy, because you can support your lifestyle without ever reducing your equity positions.
  3. I’m a pretty conservative investor, and the companies that pay healthy dividends tend also to be the sorts of companies I like to invest in – e.g., banks, consumer staple firms, and, of course, REITs. I have no doubt that I could make more money if I picked the right high-flying growth stocks and exciting biotech small-caps, but the likelihood that I would actually pick the right high-flying growth stocks and exciting biotech small-caps is slightly lower than the likelihood that I will be abducted and rectally probed by extraterrestrials within the next 72 hours. (I was, after all, a history major, which means that as far as I know everyone inside a biotech firm’s office spends all of his or her time wearing a white coat, swirling green goo around inside of an Erlenmeyer flask, and pensively saying “hmmmm.”)

So, that’s why I like dividend stocks, but why REITs? Well, obviously one big reason is that REITs pay great dividends. In fact, they are required by law to do so.

The other reason I love REITs is that they are relatively stable, immune from technological disruption*, and easy to understand. I firmly believe that you should only invest in businesses that you understand. You are, after all, becoming an owner of the business when you buy shares. You may never know when to buy and sell with any stock, but you’ll certainly never know when to buy and sell if you don’t have a clue what the company does. Most of the time with REITs, you can be as dumb as I am and still understand the business pretty well: It buys real property and leases the space out to tenants who pay rent. There’s always going to be some demand because, well, human beings exist within the space-time continuum and, as a side-effect of that fact, require physical spaces in which to live and work. This being a capitalist society, most of those physical spaces cost money to occupy, and, if you own REIT shares, some of that money ends up going into your pocket.

Why start a REIT blog? I spend a decent percentage of my free time learning about REITs, and this blog is a vehicle for me to share what I’ve learned with the (probably somewhat small) group of individuals who might actually find it interesting. (My wife, who is an absolutely wonderful woman and far too good for me in every respect, is, weirdly enough, not terribly keen to hear me wax on about yearly fluctuations in AFFO.) Frankly, my hope is that doing the research and writing involved in the maintenance of this blog will make me a better REIT investor. If it can make someone else a better REIT investor too, well, that would be a pretty badass outcome.

Here’s what this blog is not: It is not another “financial independence” or “FIRE” blog. I don’t have anything against the FIRE crowd, and, in fact, I more or less am one of them. I just don’t think the world needs another less-funny version of Mr. Money Mustache, which is what I would be if I wrote a FIRE blog. Besides which, a lot of the content on those blogs is pretty dreadful. There is really only so much you can actually say about personal finance: (1.) Make as much money as you can. (2.) Don’t buy a bunch of bullshit you don’t need. (3.) Do profitable stuff with the surplus. (4.) Repeat until you are rich. There, I’ve spoiled the ending for you. People can go back and forth about whether it’s better to pay off student loans or buy VTI shares, but at the end of the day anyone who does those four things for a long enough period of time is going to end up pretty well-situated. You as a Citizen of the Financial Internet do not need me to tell you to turn off lights when you aren’t using the room, and I would derive no pleasure in typing out that pointless reminder. I would, however, derive a not-insignificant degree of pleasure in analyzing various real estate investments, and, since the internet does not appear to be awash in other, better-written REIT blogs, it might actually be useful. So here we are.

So that’s the manifesto. I’m glad you are here. I don’t really intend to promote this blog, and I have no idea if people will ever end up reading it. But if you want to hang out and talk REITs with the Dude, I would encourage you to stick around. You might find that it… pays dividends. (Oh, yeah, there will also be dad jokes.)

*Not totally immune, of course. Just ask mall REIT owners how they feel about Amazon or hotel REIT owners if they love AirBNB.