Real Estate Investment Trusts, REITS, are a specialized form of business organization that have the privilege of passing through earnings to investors free of income taxes, as long as at least 90% of their earnings are paid out as dividends. While the dividends are subject to usual taxation for individuals, the advantage of the organization operating at the Investment Trust level has been shown to offer past wealth-building growth capabilities in excess of average equity investments.
Those underlying advantages can be magnified significantly by skillful selection of REITs when their current prices lead investment professionals to alter their own behavior in ways that indicate that future prices may provide exceptional non-recurring gains.
A behavioral analysis method has existed for over a decade which has demonstrated the ability to guide investors to such gain opportunities, and has a track record that allows the rational comparisons between stocks, ETFs, and REITs as frequently as daily, if desired. The method employs the self-protecting hedging actions of market-makers as they put their capital at risk in specific securities in the process of serving their big-money clients, hedge funds, mutual funds, endowments, and trusts.
Here is a current listing of over two dozen REITs, describing the future price prospects implied by their hedging actions, and the kinds of results that simple standard investment discipline has offered in the past 3-5 years.
Kilroy Realty Corp. (KRC) is a Los Angeles-based REIT specializing in office properties. The top line of the table above shows a range of specific prices which are held likely enough to occur in the next few weeks to months that Market-Makers [MMs] are compelled to purchase price-change protection against their coming to pass. The difference between the Forecast High price and the Price Now is the percentage gain potential shown in the Sell Target column.
The potential risk in KRC is measured by an average of its Worst-Case price drawdowns seen if an investor were to have bought the REIT every time in the past five years when the forecast prices had the balance between upside opportunity and downside exposure that they have now.
That balance between up and down possibilities is expressed in the Range Index, whose number measures the percentage of the entire forecast price range that lies below the then current market quote. The KRC case is interestingly pathological (although not highly unusual) in that the current price is actually below the low end of the forecast range, so the RI has a negative value.
We use the RI to identify prior days when investments would have been called for, at today's appraisal. For KRC, the right-hand columns of the table show that has happened only 4 times out of 1230 market days, or in well over 4 years. Since the remaining columns of the table reflect such actions, the scope of these numbers is important. Many cautious investors might regard taking any action based on only 4 examples as inadvisable. Others might reflect that such a small number out of so many possible observations gives additional significance to the results. This is a matter of personal preference.
We put the hypothetical investments to a test that enters a commitment at the end of day after the forecast, and exits from it as soon as a subsequent day's ending price reaches or exceeds the high of the forecast range, or when a holding period patience limit of 3 months (63 market days) is reached. The results of these experiences are averaged, and for KRC at this level of RI, the 4 closed out positions gained an average of +11%, were held an average of 28 market days, which on a 252 market-day year were an attractive +154% annual rate. All 4 commitments were profitable (a 100% score on Odds).
Other REIT experiences were less extreme, although several were quite appealing.
Federal Realty Investment Trust (FRT), a REIT specializing in retail store properties, has a MM forecast with only 2% of its range below the current price. Despite that minimal forecast exposure, real life provided average moments of more than -7% maximum stress for holders of the stock during 18 similar forecast periods. Still, 89% of the outings turned out to be profitable, with +11.2% gains in 48-day (2+ months of 21 market days) holding periods. An annual return of +74% is at a rate nearly 24 times the stock's 3.1% dividend yield.
Brascan Corp. (BAM) is a real estate developer rather than a REIT, so we may skip over it if that is a fatal flaw for the investor. If not, its 14 RI triggers 38 prior experiences from the last 4 ½ years, with 7 out of 8 profitable, over 7% average gains in nearly 12 weeks and an annual rate of gain of 34%, 20 times its dividend yield of only 1.7%.
Essex Property Trust (ESS) and Equity Residential (EQR) are both apartment complex residential REITs with somewhat less desirable balances to their forecasts, but still able to find over 200 instances each in which at least 80 out of every 100 offered profits, at annual rates upwards of +36%, or more than ten times their dividend yields.
The best dividend yielder in these half-dozen REITs is Omega Healthcare Investors (OHI), which has had 131 prior instances of forecasts equivalent to the present Range Index of 37. With less than twice as much upside than down, it may seem verging on an ordinary kind of value. But we have discovered over the years that every stock, ETF, and REIT has its own particular character, derived from the investment audience it attracts. Here 82% of these many opportunities provided profit opportunities averaging better than 7% in just two months (including the effect of the 18% that were at a loss), to gain at a rate above 50% a year.
The frequency of opportunity in these last three REITs is more than 35-40 days each year, which provides ample opportunity to revisit this profit well time and again in any year, justifying the calculation of annual rates that compound the simple percentage payoffs being experienced each average time. All that is required is to recognize that active investment management of the REIT investment capital can be typically far more productive than the conventional approach of buy and hold (and forget), numbed by a parade of trivial dividends.