REIT stands for Real Estate Investment Trust. Even though it can be acquired through the Home Broker just like a stock, the concept is different. This type of investment is related to real estate. It can own, finance, or operate income-generating assets. Unlike physical real estate assets, publicly traded REITs are liquid and you can sell them at any time.
According to this source, REITs must invest at least 75% in real estate, and also 75% of their gross income must come from real estate as well. In addition to this, REITs must pay a minimum of 90% of taxable income as dividends. To put things short: You are buying a share of a real estate trust and you will be eligible for a portion of its income paid monthly (if any).
Analyzing a REIT is completely different than analyzing a stock since the dynamic is different. The quality of the real estate owned, market conditions, and team quality will highly impact the success of a REIT. In this article, we are going to show some REIT options and metrics.
Types of REITs
The majority of the REITs manage income-producing real estate and are within the group of Equity REITs. The revenue comes from the rents received that must be paid as dividends.
Instead of the big players financing you, you can also finance big players that build real estate through Mortgage REITs. The revenue comes from the spread between the interest and mortgage loans. Engaging with this kind of REITs greatly exposes your portfolio to the economic interest rate.
There also exist hybrid REITs that, as the name says itself, combine both characteristics of Equity and Mortgage REITs.
According to this source, the top-3 REITs are:
1. Prologis (PLD) – Market Cap $115B: According to their website, they “acquire, develop, and maintain the largest collection of high-quality logistics real estate in the world.” Definitely an industrial giant with a well-spread portfolio.
2. American Tower (AMT) – Market Cap: $104B: One of the largest global REITs. You can check their website here. This corporation is a “global provider of wireless communications infrastructure”. The numbers are quite impressive: 6 continents, 25 countries, and over 6,000 employees. If you want to pick some dividends coming from the rent of towers for 4G and 5G coverage, then this is your chance.
3. Equinix (EQIX) – Market Cap: $65B. This is the largest global data center provider for corporative networks and cloud computing. If you check their website, then you’ll find big partners like Netflix and Cisco. Interesting that some very well-known hedge fund managers like Jim Chanos have a heavily short position on EQIX, since he believes that the company will face major competition from its own partners. You can read more about it here.
Now is the time to take a look at Figure 1 (PLD), Figure 2 (AMT), and Figure 3 (EQIX). Each one of them shows the 1W Price Chart along with Total Revenue (FQ), Cash from operating activities (FQ), and Dividends per share (FQ).
It can be interesting to compare the performance of these REITs with our recent article about “Blue chip stocks that pay dividends“. Make sure to take a look at it.
PLD shows an increasing Quarterly revenue. Similar behavior can also be seen in the Cash flow. This means that the revenue that comes from the income statement is fastly turned into cash.
Note that the dividends per share keep growing. In relation to 2019, the dividends have grown 36%. Note also that they are paid on a regular basis. In this case, the dividends are paid quarterly. You can take a better look here.
Considering a quarterly dividend of $0,79, the annual value is simply $0,79 x 4 = $3,16. Divide this number by the current price ($121) and you will get the dividend yield (~2,60%).
AMT has a similar behavior: fast-growing revenue and dividends per share. The cash flow showed a particular behavior in September 2021 with $2B generated. Diving a little deeper here, it looks like this is due to a “non-recurring advance payment received from a tenant in Q3 2021”.
The dividends are also paid quarterly. Using simple math, the dividend yield lies between 2.5% and 2.6%.
The same goes for EQIX: increasing revenue, cash flow, and dividends per share. The revenue has grown by 9% a year. The payment is also paid quarterly. Note that this source indicates this one as a “Moderate Buy” with a dividend yield of 1,76%.
What if you bought PLD on 01/02/2018 and carried it out until now? How much would you have got? Let’s make the test for $100.000. The values are an approximation.
$100.000 would have bought about 1.648 PLD shares on the 1st of February 2018. On the left, we have the Price axis ($60,68 initial value) and the dividends accumulated axis ($0 initial value). On the right is the Investment value ($100.000 initial value). Note that the first dividend payment within this time period was on March 2018 ($ 0,48).
The value of the dividends accumulated in March 2018 is equal to $791,04 (number of stocks 1.648 x quarterly payment of 0,48 ). After that time, the initial investment is now worthed $219.727,84 (+120%), and the dividends received are equal to 20% of the initial investment.
Now forget how much you have. You don’t have $219.727,84. You are not selling your piece of the real estate. You are keeping it. Let’s take a look at the yields. When you bought this REIT at $60 you were receiving 1,92 a year (3,2% of dividend yield).
About 5 years later, you are receiving $3,16 a year. If we compare this with your price of purchase, then the yield is 5,26%. Considering the approximate accumulated inflation (US CPI) of 18% between 2018 and 2023, we would have to adjust your initial investment to $118.000.
How much have you got?
- You invested $100.000 to buy 1.648 shares;
- Now your shares are worth $219.727;
- You have received $19.841,92 of dividends;
- The inflation dragon destroyed $18.000;
- Your current YOC (Yield on Cost) surpasses 5% and it keeps climbing;
- If the dividends keep climbing at a rate of 10% a year, you should receive about $5.800 next year.
This was just a simple exercise with only 1 REIT for a short period of 5 years. What do you think can happen after doing this for 20 years on a balanced portfolio of passive income?
Isn’t easy to analyze a REIT. Assessing the asset’s quality requires great knowledge of real estate as a whole. In addition to this, each REIT operates a different niche of real estate like communication infrastructure, data centers, commercial buildings, logistics, etc.
After this short exercise with PLD, something is very clear to me: do never underestimate the power of interest over interest. Your retirement can be built on this. If you keep the chicken today, then you will have eggs for dinner tomorrow. But if you kill the chicken to make soup, then tomorrow you will have nothing. It’s all a matter of choice.
A low dividend yield can make miracles in the long run if well invested. Quality assets are capable of generating highly growing income over time. Don’t kill the chicken. Let it be.
The stock analysis presented on Echo Chamber site is meant to be used for educational purposes and doesn’t represent any kind of financial advice such as buying, selling, or holding shares of any particular stock. Past performance is no guarantee of future results. Investments in variable income can result in the loss of wealth.
The objective of this analysis is to didactically present just a few metrics that can be used to analyze an asset. A full analysis must go further and consider many other financial statements like the income statement, balance sheet, and complete cash flow.
In addition to that, knowing the company, the sector, the economy, and the administration’s guidelines about the company’s future along with basic knowledge of corporate finance are required in order to perform a full stock valuation.
It’s strongly advisable that any investor conduct their own research on any company prior to investing in it. Any suggestion from third parties should be carefully analyzed and used as input, a part of the information needed in the investment decision-making process.
The choice of using the TradingView platform it’s personal without any commercial purpose. I consider this platform one of the best available in the market. The free version offers enough resources for a good analysis, but the paid plans can also offer much more value depending on the investor’s objectives and expertise to use the information available.