Hi. I'm trying to compare some of the private deals mentioned here with public REITs.
Looking up the income statements for Equity Residential (trades as EQR) I find a line for cost-of-goods-sold. What is this for a REIT? Is it the cost of maintaining the apartments, everything from the salary of the building manager to the cost of the new bathroom fan? What is under SG&A? Is it the sales reps, accounting department, etc?
I also see margins of 8% to 25% on public REITs (whats left over after deducting expenses from rent). For private deals mentioned elsewhere on the site, people are using a 50% rule -- expenses are 50% of rent. For these public REITs it is more like 80%. Why is this? Is an individual investor that much more efficient than a giant like Equity Residential?
Am I comparing the right things, or have I messed up somehow?
Hi, COGS could be anything from site management expenses, rental discounts for new tenants to attorney fees for lease agreements and having to change out locks. Cost accounting allows for diversity in the assignment of expensing costs to income producing activities. It is as much an art as a science. I'm afraid your analysis is like comparing apples and oragnes, comparing operations of a REIT to those of another type of RE investment. There are differences in costing for Trusts, like a non-profit than might be used for another corporate entity. Performance ratios published should provide sufficient investment information. Attempting to disect corporate or trust accounting and compare management of two different types of operations is futual. Neither entity provides enough audit data for one to be successful, and for good reason. Generally Accepted Accounting Principles govern and the SEC oversees public investments and reporting, so we have to rely on that. But, then there was Enron!
Claims as to expense ratios are influenced again from the assignment of direct and variable costs to operations. If you want to increase income performance with respect to operational expenses simply transfer allowable or discreationary items to a capital expense line item for example where it may be treated as a lump sum and depreciated rather than written off. You will have no idea of what sub-accounts may be used.
Your subjective analysis of management might better be made from financial performance over a longer period of time in light of management's published objectivies. Also, read carefully the audit opinion of the accountanting firm/CPA signing off on the financial reports. I think you should certainly get an A+ for effort!
The 50% rule is a really a goal for most individual investors in the residential rental market. Homes that fit tis rule tend to be in moderate to lower income areas. There are not too many publicly traded REITs that focus on this segment.
Also C or D class commerical properties are mostly held by smaller entities or private investors and these properties tend to fit the 50% more often then A or B classes will.
Most publicly traded REITs are about leverage not about value. They compete against one another in many cases and often times will over pay just to get a signature property. If you have a billion dollars at your disposal, your not only worried about cash flow, your worried about performance (top line and bottom line), quality of portfolio, number of units, etc.
For us individual investors it is about capital preseveration, hence the 50% rule, 2% rule, Mike's rule, etc.
Thanks for the info, maybe a micro-level comparison isn't possible. What ratios apply at a broad level? It seems like both individual deals and REITs have a total cost (equity + debt) and dividends (cashflow). Maybe that is all I need.
Are there any REITs that hold a set of properties and don't buy and sell, thereby emphasizing cashflow?
Before I buy a rental property and hire a property manager, etc, I want to see how much worse I'd do by just buying shares of a REIT, since that's the ultimate no-hassle investment.
So far, it looks like public REITs are much less profitable, with yields of 5% vs possible 12% on the hard-to-find SFR deals.
Robert, you have asked a great question. Have you analyzed a variety of RIETs before coming to your conclusion that the yields are low? I wonder if there is a hidden gem among the REITs.
While analyzing REITs, I think it is also important to take into account earnings management that often happens with public companies.
Let me know if you want to collaborate on a little project to analyze some of the REITs. It seems like it will be a lot of fun to go through their numbers to see if we can find a needle of value in the haystack of mediocrity.
don't mean to infringe on your discussion but I too am very interested in a recap of mid to large cap REITs going into 2010. I've been a r.e broker in sf for awhile and transitioned to investment advising and a handful of clients have been very subjective as to diversification objectives going into the new year. Some were able to get into cash cows 1st / 2nd qtr beating any current REIT yields (to my knowledge) but as the markets have dried up a bit in substantial cash flow opps (atleast in the bay area) i'm suggesting investments in REITs again.
Would love to share opinions on this subject, have you already made a decision since your last post?
Jesse, Robert and I are working on this together. It is a a fair bit of work but if we find anything that is a truly great investment, we will let you know. (after we finish buying, of course!)
We worked on this a while back and after looking at all of them, could not find a single one that was priced attractively enough. There were a few that looked promising on initial analysis, but on further investigation, they turned out to be not such great deals.
Nov 06 '09, 04:07 AM
