A Modern Romance: Yield Hunters And Real Estate

A yield hunter walks into a bar, sees a bunch of nice-looking men and women, but then gasps in delight. Not at the men and women, but at the other side of the room. Could they be casting agents working for HGTV or “Million Dollar Listing?” Not quite, but almost as good. Its a crowd of beautiful-yielding REITS looking for love. How can our intrepid yield hunter choose? Here’s an idea: Get to know them not as equity vehicles but based on inner beauty . . . as sincere, genuine portfolios of real estate; dirt, bricks, mortar, tenants, rent checks, etc.

Land, land, land. Now all we need is a beautiful dividend. Cue the REITs (and the violins). Photographer: James MacDonald/Bloomberg

The inner soul versus the outer surface of a business

Suppose you buy shares of Apple (AAPL). Legally speaking, you are indeed, a part owner of the business and accordingly, have a stake in whether Tim Cook continues as CEO, how the newest generation of phones should be priced and what their specs will be, etc. Yeah, right.

The technical fact of legal ownership is just that . . . a hyper-technical fact and your percentage stake is likely to round to 0% unless you extend the computation to a lot of decimal places. And the legalities of the corporate structure makes it highly unlikely you were consulted by anybody else connected with Apple about much of anything, other than which credit card you want to use when you buy one of the company’s products at an Apple Store. And, by the way, don’t even think of asking detailed questions of the sort any diligent business owner should be expected to routinely ask, lest you and whoever gave you the answers, wind up indicted or worse for insider trading.

So assuming I can avoid sleeping and snoring too loudly as gurus yammer about how shareholders should think of themselves a business owners, I go right back to doing what shareholders in the public market must do simply by virtue of the legal characteristics and scale of the public market—choosing and analyzing pieces of paper (or nowadays, bits of digital storage we use in lieu of paper stock certificates).

Publicly traded REITs, although trusts rather than corporations, share much the same characteristics when it comes to information and operational control. So the natural inclination is to similarly treat REITs as pieces of paper and work with the information we find in public filings. Details of the items we look at may differ (funds from operations, for example, instead of net income) and we may evaluate conventional things differently (debt leverage is more routine for this kind of business) but at the end of the day, all that changes are the details: The process, working with 10Qs and 10Ks, is the same.

So far, it looks like it’s Outer Surface: 1, Inner Soul: 0.

A case for thinking differently 

Suppose we really could evaluate Apple as if it were, in substance and not just in legal form, an ongoing real-world business in which we had a stake. Would you do it? I sure as heck would. Having really good information and bona fide control is preferable if you can get it. That’s why takeovers are typically priced at premiums to public market valuations. It’s why the legal consequences of sticking your nose into places where it shouldn’t be can be severe. The Feds understand the temptation and really need to deter.

Interestingly, though, with REITS, while we can’t get the true insider’s view nor can we exercise insiders’ control, the nature of the available data and the characteristics of the business allow us to move a step closer to the ideal than we can with many other kinds of businesses. 

I’m an investment professional, rather than a real estate pro. But my wife is involved in real estate as are many others we know and as a lawyer in New York, I availed myself of the opportunity to quickly get a Real Estate Broker’s license. And to keep my marriage intact, I became a full-fledged realtor and power-user of the local MLS (multiple listing service) platform. (New York City is infamous for not having an MLS, but that’s just Manhattan; I’m in Queens which, having joined forces with Long Island, is part of the third-largest realtor board and MLS in the U.S.)