How Rentals (Like REITs) Can Make You A Billionaire

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Includes: ELS, EQC, EQR, PSA, PSB, SPG
by: Brad Thomas
Summary

The American economy runs off of rentals.

Whole entire fortunes have been accumulated based on the concept.

Let’s take a closer look at the billionaire REIT investors to determine who has delivered the best returns.

You’ve probably never thought about this before, since it's a rather unique way of looking at life.

But much of the American economy runs off of rentals.

(Sorry Dunkin’ Donuts.)

Think about it though. While the website Trading Economics does purport that, as of Q1-19, 64.2% of Americans owned their own home… that’s still 35.8% of citizens who presumably rent. Which is a fairly large chunk of residential life.

Yes, you might say, but a “fairly large chunk” doesn’t a majority make.

Fair enough. However, I’m hardly done listing off the reasons why I’ve said what I’ve said. The truth is you might be surprised at how many of the businesses you frequent – even rely on – don’t actually own the property or the facilities they operate out of.

Grocery stores. Doctor’s offices. Hospitals. Pharmacies. Fast food joints. Classier food joints. Clothing stores. Shoe stores. The list goes on with bricks-and-mortar businesses that you physically walk into on a regular or semi-regular basis – that very well could be operating off of leased space.

Owning comes with risks, not to mention bigger upfront payments. And there are plenty of companies that don’t think it’s worth it.

They’d much rather rent.

As for e-commerce institutions, those entities still need places to store what they sell. So if they’re bigger than a mom and pop operation, chances are decent that, in the end, they’re renting too.

When you add it all up together, it’s difficult not to come back to my original statement, which I’m sticking with. The American economy runs off of rentals.

As such, even if you’re not renting yourself – and you probably are in some way, shape or form – you’re no doubt buying “stuff” from those that do.

Shawn “Jay-Z” Carter is officially a “billionaire”

Blockbuster, RedBox, and a Few Billion Dollars

I’m not saying that renting is a bad thing. Not even close. Renting has its benefits all around.

On the renter’s side of things, for instance, there’s some serious money to be made. Whole entire fortunes have been accumulated based on the concept.

Take Blockbuster Video. I know it’s almost entirely defunct now and has been for what feels like a very long time. But the man who made it what it was in its heyday, H. Wayne Huizenga, died a billionaire just last year.

If you missed it, that’s “billionaire.” With a B.

He had an eye for consolidate-able businesses, beginning with literal trash. According to Forbes – which, incidentally, listed his departing net worth at $2.8 billion – he was 25 when he started his own waste pickup service. And by the time he was 30, he had bought up another 100 such operations to form Waste Management (WM).

Clearly, that’s not a rental service. But Blockbuster definitely was.

Remember the good old days when you could browse movie selections at your leisure inside of a well-stocked store? It was convenient. It was cheap…

And it was really big business while Wayne Huizenga was running it. He wasn’t around when Blockbuster began to fall apart. Not the first time nor the last time. He’d already long since sold the company for $8.4 billion by then.

For that matter, Blockbuster didn’t fail because rentals were no longer big business. If that was the case, RedBox wouldn’t exist. And it definitely wouldn’t be doing just fine for itself, with locations at seemingly every other grocery store and gas station.

So the lesson to learn here? It’s that selling rentals can make you very, very rich.

REIT-Specific Billionaires

And Huizenga is hardly the only person to make a very, very successful living based on the rental system.

There’s also Sam Zell, who’s not only the largest owner of RV and mobile home parks in the country. He also founded two real estate investment trusts, or REITs: Equity Lifestyle (ELS) and Equity Residential (EQR) and has a controlling interest in Equity Commonwealth (EQC).

As you no doubt know, REITs operate entirely or almost entirely on rentals. On leases. They have physical or electronic space to offer, and people pay to utilize that space, borrowing it, if you will.

Thanks to that model, Zell’s net worth is $5.59 billion.

On the “poorer” end of that equation is David E Simon, the longstanding CEO of Simon Property Group (SPG). Since he “only” makes $5.12 million a year at his job, his net worth just cracks a billion.

Yet it’s still up there all the same.

Then we have Bradley Wayne Hughes, who falls in the middle of the two with $3.1 billion. Here’s how Forbes’ describes this 804th richest billionaire (out of an apparent 2,153 worldwide):

  • B. Wayne Hughes cofounded Public Storage (PSA) in 1972 and has since made a fortune storing Americans’ excess junk.
  • In addition, PSA has significant ownership in PS Business (PSB) that owns 7.2 million shares of PSB's common stock and 7.3 million common units of PSB's Operating Partnership (100.0% of the common units not owned by PSB).
  • The $2.6 billion (sales) company is the world’s largest self-storage business, with more than 2,300 locations throughout the U.S. and Europe.
  • In 2011, he formed American Homes 4 Rent (NYSE:AMH), another publicly-traded REIT that owns and rents out nearly 50,000 single-family homes across 22 states.

Oh yeah, and “Both Hughes’ daughter, Tamara Hughes Gustavson, and his son, B. Wayne Hughes Jr., are billionaires” too. No doubt, that’s at least in part thanks to the “rental” system.

More Rentals, More Rewards

So, we all know that these investors have been savvy owners of real estate and they have earned extraordinary track records for managing risk – in good times and bad.

Let’s take a closer look at the billionaire REIT investors to determine who has delivered the best returns.

Sam Zell: As viewed below, EQC has out-performed the Vanguard Real Estate ETF (VNQ) year to date, while EQR and ELS have under-performed:

Source: Yahoo Finance

As you can see below, Zell has accumulated more than $1 billion in REIT shares (our source for data is Yahoo Finance):

Source: Yahoo Finance

The next billionaire on the list of Bradley Wayne Hughes (I like his name) and here are how his REIT shares have performed lately:

Source: Yahoo Finance

As you can see, all three of Hughes’ REITs have outperformed VNQ.

According to Forbes Hughes’ daughter, Tamara Hughes Gustavson, is PSA’s largest shareholder (11% stake) and her brother, B. Wayne Hughes Jr., also is a billionaire. She sits on the board of PSA and also AMH. This is our calculation of the shares owned by Gustavson (based on market close prices):

Source: Yahoo Finance

The final billionaire on the list is Herb Simon, who according to Forbes is worth $3.3 billion and along with his brother Melvin (d. 2009) founded Simon Property Group. He also owns the Indiana Pacers, which he bought with his brother, and is worth $1.175 billion. Herb Simon is chairman emeritus of the SPG Board, and his nephew, David (Melvin's son) has been CEO since 1995.

Let’s take a look at this billionaire holding:

Source: Yahoo Finance

According to Sentieo, Herb Simon owns 12.523 million shares valued at approximately $2.1 billion (down approximately $800 million since July 2016).

Source: Sentieo

In Closing

You can see the diversity across these billionaire holdings and their underlying performance (below). It’s clear that the key to creating wealth in real estate is to own shares in businesses that have an everlasting model of repeatability. As Wayne Huizenga learned, the secret to making a blockbuster business model is to build a product that can generate impressive returns by renting it to others.

By owning shares in REITs, you are effectively the landlord and the success of your investment is directly correlated to the quality of income that the business generates. Source: FAST Graphs

As Chris Zook, author of Repeatability: Build Enduring Businesses for a World of Constant Change, explains - "differentiation is the essence of strategy, the prime source of competitive advantage. You earn money not just by performing a valuable task but by being different from your competitors in a manner that lets you service your core customers better and more profitably."

Author's note: Brad Thomas is a Wall Street writer, and that means he's not always right with his predictions or recommendations. Since that also applies to his grammar, please excuse any typos you may find. Also, this article is free, and the sole purpose for writing it is to assist with research, while also providing a forum for second-level thinking.

Disclosure: I am/we are long SPG, PSB. 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.