Written by Summary
A FROG is a REIT that shows a Fast Rate of Growth, and is likely to outperform the market in total return in the coming year.
This article discusses how to identify a FROG, and lists all the FROGs as we head into 2022.
We also give attention to several near-FROGs, as well as some Tadpoles that would be FROGs if only they were a little larger.
Finally, we discuss how the FROG-hunting mindset differs from the more common REIT investment approach.
This idea was discussed in more depth with members of my private investing community, Hoya Capital Income Builder. Learn More »
Betty4240/iStock via Getty Images There are two kinds of REITs that investors are constantly searching for. One is COWs (Cash Only Wanted), where the object of the game is to milk the company for its safe, above-average dividend Yield. The other is FROGs (Fast Rate of Growth), where the object of the game is to maximize total return and account value by maximizing share price Gain.
I am a FROG hunter, as I explained in an article published here on Seeking Alpha in March 2021. This approach has been very successful for me thus far.
Historically, since the invention of REITs about 50 years ago, the average Yield on a REIT is about 4%, give or take a fraction of a point, while the average share price Gain is about 8%.
Total Return = Gain + Yield
So the average total return on a REIT is about 12%. (This year the average Yield is a little lower, around 3%, and the average Gain is a little higher, around 11%, for a total return around 14%.)
The Yield you sign up for tends to be the Yield you get, so it’s highly predictable. Gain is less predictable, but there is no limit on how high (or low) the Gain can go. In a good year, a well-chosen FROG can gain 30% or more. That is many years’ worth of dividends!
If you have a high need for cash, stick with COWs. There are plenty of highly competent and ethical COWhand investors that can give you good advice.
But if you are like me, FROGs are a much better way to go. I am semi-retired, so I am still able to earn an income from working, and I don’t need to draw on my dividends to pay my bills. I can just reinvest them. I’m 69 years old and in pretty good condition, so if all goes well, I may have another 10 – 15 years. That’s my horizon. My motive is to leave my kids as nice a nest egg as I can, when I pass away. So I am seeking to maximize the value of my portfolio, not just the dividend stream. How do you identify a FROG?
That question is answered in detail in that March 2021 article . For now, suffice it to say, you can do it with just 14 data points and a few simple calculations in a homemade spreadsheet. You are looking for 6 key numbers:
> Funds From Operations (FFO) growth rate (at least 10%, preferably 20%)
Total Cash From Operations (TCO) growth rate (same levels as FFO growth)
Liquidity ratio (Assets/Liabilities) (at least 1.66, preferably 2.0)
Dividend growth rate (the faster, the better. Average is currently 4.2%) Market cap (at least $1.4 billion, with sweet spot $4-$10 billion) Price Gain (the bigger, the better) Once you have identified the REITs that pass the criteria above, you add their 3-year Price Gain CAGR to their dividend score (which combines current Yield with dividend growth rate, projecting the Yield 3 years from now) to arrive at a Modeled Return. If that Modeled Return exceeds the 3-year total return for the Vanguard Real Estate ETF ( VNQ ) — currently 14.90 — then the company is a FROG. The more the Modeled Return exceeds the VNQ’s return, the better the chance the REIT in question will outperform in the coming year.Every year in January, I max out my Roth IRA, by investing in 10 or fewer REITs, so I have to be very selective. Today I am sharing my list with you, in advance. I hope it will help you in your investment decisions as we move into the New Year. (If you find it worthless, you’re no worse off than you were before, and of course, you can always re-gift it!) Source: pixabay.com Welcome To The FROG Pond, 2022 Subject to minor adjustments when […]
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