How Can Winning Monopoly Make Me A Better REIT Investor?

Includes: DLR, O, TGT
by: Brad Thomas

Over the holidays my kids wanted to play a board game, so my oldest daughter drove over to Target (NYSE:TGT) to buy one. I was not too keen on playing a board game since I was under a deadline to finish my REIT newsletter, however, when my daughter returned home she announced that we were all going to play Monopoly - she stressed that ALL were playing.

I was not very excited about spending my critical writing hours instead on a game; however, I thought that I could also teach my kids a valuable lesson on real estate investing. After all, my strategies have never changed throughout the years, and I was certain that I could help my kids sharpen their skills while also revealing some of my secrets for creating wealth.

I started by explaining to my kids that "monopoly" simply means that at the end of the game there will be one, and only one, person left standing. My oldest daughter is a first-year college student, and after taking an Economics 101 course she understands how companies are able to build large moats to create competitive advantages and how some are able to monopolize in order to create a barrier to entry and ultimately control and defeat the competition.

A few years ago I read a book called When the Game is Over it All Goes Back in the Box. The author, John Ortberg provided these inspiring words:

Let me tell you about my grandmother. She was a wonderful person. But she was one of the most ruthless Monopoly players I have ever known. I would always land on her property, once too often, and I would have to give her my last dollar and quit in utter defeat … and she would always say to me, 'Don't worry about it Johnny. One day you'll learn how to play the game.

Ortberg went on to say that he later learned how to truly play the game. He said:

It gradually dawned on me; money is how you keep score. You've gotta acquire everything you own. By the time fall came around, I was more ruthless than my grandmother and I literally drove her off the board.

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How Can I Win the REIT Game?

As most know, one of the keys to winning Monopoly is to gain a tactical competitive advantage by dominance; that is, acquiring real estate and utilities that charge the highest prices. By creating a diversified portfolio, the gamer can scale his assets in order to raise prices or exclude competitors.

I'm sure that you have heard the old saying, "You get what you pay for." A friend of mine explained the same concept when he told me, "When you pay in peanuts, you always get monkeys." The simple truth is, we have all bought "junkers" or in some cases "lemons." There is just no substitute for buying high quality merchandise whether it is cars, houses, stocks or REITs.

Buying the best does not always pave the way to success. Modeling a portfolio with high quality REITs is a good way to build an enduring income stream with long-term appreciation; however, the secret to the game is to identify those sound investments through the application of a margin of safety.

By surveying a list of filtered REIT investment opportunities, the value investor considers which (if any) of the companies are worthy of ownership. This involves some consideration of the company's industry, its current competitive position within that industry, and the "economic moat" around the company; that is, a sustainable competitive advantage that helps preserve long-term pricing power and profitability.

Like Monopoly, it's important to be patient. Sometimes the roll of the dice will not always get you to your favorite property right away. It may take a few turns for you to land on the property that you desire the most.

Likewise, Mr. Market does not always give us what we want. A value investor should "always wait patiently for the storm to subside, knowing that a sunnier and more plentiful time is bound, as a law of nature, to resume in due course." As the legendary investor Ben Graham once said, "A stock does not become a sound investment merely because it can be bought at close to its asset value."

Pick the Winners, Not the Losers

Earlier this week I wrote an article on several "blue chip" REITs, deemed "financially strong and widely respected" with "access to the additional equity and debt capital that fuels the engine". Compared to the Monopoly game, these blue chip REITs would similar to the gems we know as Boardwalk, Park Place, and Pennsylvania Avenue.

Although it's rare to pick up Boardwalk or Park Place at a bargain price, it's more common that these properties will provide the best total returns over a longer period of time. The key to the game is to find the best possible prices with some kind of buffer to protect against market fluctuations. That secret formula is simply the difference between the real (or intrinsic) value and the price assigned to that security at the moment.

In my play book, Realty Income (NYSE:O) and Digital Realty (NYSE:DLR) represent two of the best "blue chip" REIT buys in REIT-dom. These durable dividend payers have always been on the playing board; however, the price of the shares has fallen to a level where there is a wider margin of safety, lower risk and a greater potential for gain.

I'll stress again. These REITs have always been on the board and I even recommended buying them prior to May 22nd when the sell-off commenced. The difference now is that there is a significantly wider margin of safety - a reduced danger of risking capital and a lot higher reward. Here's a snapshot of Digital Realty trading at $49.86 with a dividend yield of 6.3%:

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Here's a snapshot of Realty Income trading at $38.12 with a 5.7% dividend yield:

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One of the best parts of John Ortberg's book (referenced above) is the final lesson that his grandmother taught him. It was a revealing lesson with an inspirational message for all gamers. Ortberg explained:

Then I had one more lesson. When the game is over it all goes back in the box. All that money, all that property, all those hotels go back in the box.

In closing, I will provide you with a measure of my humility. I tried hard to win. I was patient and I worked feverishly to buy the blue chips and even a utility. I tried to preserve enough cash so I could pounce on the bargains when they called my number. I did everything to win.

But I lost. My third grader beat me. No, she clobbered me. Then I remember the lines from Ortberg's book and I yelled, "That's ok because when the game is over it all goes back in the box".

Click to enlargeREIT Newsletter: Check out my REIT newsletter and learn more about SWAN (sleep well at night) investing.

Source: FAST Graphs.

Disclaimer: This article is intended to provide information to interested parties. As I have no knowledge of individual investor circumstances, goals, and/or portfolio concentration or diversification, readers are expected to complete their own due diligence before purchasing any stocks mentioned or recommended.

Disclosure: I am long O, DLR, VTR, HTA, STAG, UMH, CSG, GPT, ARCP, ROIC, MPW, HCN, OHI, LXP, KIM. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.