Send Message
View as an RSS Feed
  • How Do REITs Pay More Than They Earn?  [View article]
    Mark, there's a big difference between the dot coms and equity REITs. I agree with you wholeheartedly re the dot coms. Their only assets were in the limited intellectual capacity of the employees who walked out the door every night. They invented metrics such as price/sales as valuation metrics -- they couldn't use price/earnings since there were no earnings -- period.

    But REITs with buildings as assets are different. The buildings generate rents, and the rents generate income -- cash income that is (the best kind).

    Individuals who invest directly in real estate are only concerned with the "cash-on-cash" return. Whether some of the investment is financed with borrowed money, the principle is the same -- how much of their own cash did they invest, and how much do they get back (on an annual basis)? They don't use GAAP accounting, and their only concern with depreciation is that at tax time it counts as a deduction and reduces the tax bite.

    For REIT investors, the position is very similar to that of the individual direct investor. REITs are a convenient way for the individual to invest directly in real estate. But since we are talking about publicly traded corporations, the SEC insists that they use GAAP accounting, regardless of whether it is appropriate or not.

    The trouble is, for reasons that I and others have outlined above, GAAP accounting does not work very well for companies whose major assets are land and buildings. GAAP accounting fails in 2 main areas. First, it understates real net income, through the depreciation deduction. But building rents have an overall average tendency to rise over time, whether due to increased demand at that particular loacation, or whether simply from inflation. If rents increase, so does net operating income, and so does cash flow. cash flow increases generate higher NPVs, and higher building values! GAAP accounting does not measure the income gain through appreciation until the building is actually sold, taking depreciation instead.

    The second problem with GAAP accounting is that, by applying depreciation write-downs to book assets, it understates the value of the properties. As a result, book value for an equity REIT is almost always understated, unless all or most of the assets are recently acquired.

    I once owned shares in a REIT named Town and Country Trust (TCT). TCT maintained the properties well and generally held on to them. The property values on the books steadily declined. Meanwhile, TCT paid out handsome dividends, which were well in excess of GAAP net income. Nevertheless, rents went up, and, from time to time, TCT was able to refinance its debt in higher amounts. Much of the excess cash also funded dividends.

    With property values written down, higher debt on the books, and excess cash paid out as dividends, the inevitable happened. Book value went negative. But the fact of the matter was that NAV (net asset value, based on the actual market value of the buildings), was stil a big positive!

    In due course, TCT was taken out in a merger with another REIT. The value received by TCT shareholders was, as I recall, something in the range of $30 to $40 per share
    Mar 21, 2016. 05:41 PM | 1 Like Like |Link to Comment
  • How Do REITs Pay More Than They Earn?  [View article]
    Of course, triple nets, like other equity REITs, do have depreciation. They own the buildings, after all! Triple net means that the tenant is responsible for: 1) property taxes, 2) insurance, and, 3) maintenance expense, such as sweeping the parking lots occasionally, and fixing leaky toilets. But triple net REITs do have depreciation expense -- lots of it.
    Mar 21, 2016. 03:33 PM | 1 Like Like |Link to Comment
  • How Do REITs Pay More Than They Earn?  [View article]
    To arrive at AFFO, the starting point is FFO. Depending on the analyst (or the reporting REIT), there are 3 or 4 different adjustments that might be made. The most common adjustment is to deduct the portion of capital expenditures that is allocated to property maintenance. Another adjustment might be to "straight line" the rent level over the life of the lease. Also, one can deduct capitalized interest.

    Based on reports I have seen from Citigroup, these adjustments usually amount to just a few pennies per share for most REITs, but the result is, indeed, a more accurate reflection of cash available for distribution (CAD),
    Mar 21, 2016. 02:38 PM | Likes Like |Link to Comment
  • How Do REITs Pay More Than They Earn?  [View article]
    You said: """It's a non-GAAP metric, so typically won't appear in a SEC 10-K"""

    Not true! Virtually all equity REITs report NAREIT-defined FFO per share in their quarterly and annual earnings reports, and also in their 10-K reports. In the case of Realty Income (O), for instance, FFO is reported on page 46 of the 10-K report recently filed for 2015, together with a reconciliation vs GAAP net income.

    From comments above I take it that you are not an investor in REITs. IMO, you also clearly do not understand the business model. But because of low correlation with other market sectors, one could improve overall portfolio performance and reduce risk through an allocation to REITs. In fact, over the past 10 years, REIT performance has almost matched that of the S&P index -- VNQ, the Vanguard REIT ETF is up by 89%, while the SPY is up by 93%. And if you checked the 10-year period from 2000 to 2010, I'm pretty sure you would find that REITs beat the S&P on total return.
    Mar 20, 2016. 07:07 PM | Likes Like |Link to Comment
  • How Do REITs Pay More Than They Earn?  [View article]
    Let's try that link again:

    (I'm traveling in Spain, with just an iPad and a slow internet connection, living on my REIT dividends.)
    Mar 20, 2016. 04:16 PM | Likes Like |Link to Comment
  • How Do REITs Pay More Than They Earn?  [View article]
    For all equity REITs, go to the Yahoo 'Analyst Estimates' page. On this page, everything in the 'Earnings Est' section actually refers to FFO ps, not EPS. The Price/Earnings line gives the Price/FFO multiple.
    Mar 20, 2016. 08:04 AM | Likes Like |Link to Comment
  • How Do REITs Pay More Than They Earn?  [View article]
    Reuben, usually your REIT articles are worth reading. This one is not. It misses the point completely!

    The point is that properly maintained, well located, and actively managed real estate usually appreciates over time, instead of depreciating. Therefore, in a practical sense, there is no need to retain funds for replacement, in the way the typical manufacturing company might have to. Yes, some properties might lose value in some deteriorating neighborhoods, but on average, commercial real estate has appreciated substantially over the past 10, 20, or 50 years.

    The true earnings of a REIT are the accounting net income + the appreciation, less an allowance for maintenance capex. As a proxy, and as a starting point for determining funds available for distribution, analysts use FFO -- net income with depreciation added back and with adjustments for asset sales. Some use AFFO, but there is no rigid definition of the latter.

    Finally, payout ratios for equity REITs are usually determined as a percentage of FFO, not of net income.
    Mar 17, 2016. 08:40 PM | 1 Like Like |Link to Comment
  • U.S. Shale Has A Hidden Oversupply Problem  [View article]
    Alarm bells for nothing? I think so. With the crude export ban lifted, more LTO will move out of the USA in the period ahead. The reason we have not seen much in the way of crude oil exports is simply that the lifting of the ban is so recent.

    Exxon's recent shipment of a cargo to Europe will be followed by other cargoes. Most European refineries are simple topping/reforming refineries that are well suited to light crude. The premium of Brent over WTI will diminish. In other words, the market will take care of the "problem".
    Mar 15, 2016. 01:31 AM | Likes Like |Link to Comment
  • Don't Sell Chevron  [View article]
    IEA is the International Energy Agency, an organization based in Paris that provides a monthly report report on oil supply and demand (including forecasts), and reports on other oil matters.

    EIA is the Energy Information Agency, a branch of the US Department of Energy, that supplies numerous weekly, monthly, annual, and special reports on oil, coal, and other energy sources.
    Mar 11, 2016. 03:39 PM | 2 Likes Like |Link to Comment
  • Possible Acquisition Candidates For Exxon Mobil  [View article]
    The USA does not need any new refineries. In fact, the US is a net exporter of petroleum products. In the latest month (December), the US exported over 3.1 million barrels per day of products, while importing just 0.67.

    To the extent that additional capacity in required in some local areas, it is far more profitable to expand an existing refinery than to build a new one.

    Just the facts, man.
    Mar 10, 2016. 08:49 AM | Likes Like |Link to Comment
  • Devon Energy Could Possibly Triple In Price  [View article]
    How is the ability (actually the necessity) to issue new stock a strength?

    Clearly, issuing new stock dilutes the position of existing shareholders, and shows that Devon was in a weak financial position. New stock issuance is not an indicator of strength.
    Mar 9, 2016. 09:25 AM | Likes Like |Link to Comment
  • How Exxon Mobil Could Become A Gas Giant  [View article]
    Re: How Exxon Mobil Could Become A Gas Giant

    The title of this article is a little silly, ExxonMobil already is a gas giant!
    Mar 8, 2016. 01:00 AM | 8 Likes Like |Link to Comment
  • Is Exxon Mobil Planning A Big Acquisition?  [View article]
    ExxonMobil has come a long way since the days of John D, and according to their website, they believe that "Increasing carbon emissions in the atmosphere are having a warming effect." But you're still back in the 19th century with John D.

    Here is the link to their website:
    Mar 7, 2016. 04:55 PM | 1 Like Like |Link to Comment
  • Toll Brothers optimistic about spring selling season  [View news story]
    The presentation projects strength for housing, and in particular, luxury housing. The top 1% are doing well, and TOL appears to be ready to gain from it.

    Disclosure: I am long CAA, LEN, and UCP, and am considering an investment in TOL. The top 1% are doing just fine, thank you.
    Mar 7, 2016. 04:39 PM | Likes Like |Link to Comment
  • Possible Acquisition Candidates For Exxon Mobil  [View article]
    """I would hope Xexxon [sic] fights it a judicial courts and shows up climate change ignotology [sic] for what it is."""

    ExxonMobil believes, according to their website, that: "Increasing carbon emissions in the atmosphere are having a warming effect." In other words, they won't be fighting any "ignotology", whatever that is. Here is their more complete statement:

    ""The risk of climate change is clear and the risk warrants action. Increasing carbon emissions in the atmosphere are having a warming effect. There is a broad scientific and policy consensus that action must be taken to further quantify and assess the risks.

    ""ExxonMobil is taking action by reducing greenhouse gas emissions in its operations, helping consumers reduce their emissions, supporting research that leads to technology breakthroughs and participating in constructive dialogue on policy options.""
    Mar 7, 2016. 03:56 PM | Likes Like |Link to Comment