Summary
As a REIT investor, you have a significant opportunity before you.
Most professional REIT investors seek to maximize Yield, and in so doing, sacrifice a measure of total return.
By focusing on Gain rather than Yield, you can achieve total returns that outperform many professional REIT investors.
This article outlines a proven approach to REIT investing that maximizes total return. I call it FROG hunting (stands for “Fast Rate of Growth”).
I identify 16 FROGs, and 5 up-and-coming Tadpoles.
This idea was discussed in more depth with members of my private investing community, Hoya Capital Income Builder. Learn More »
BrianLasenby/iStock via Getty Images Opportunity knocks
As a REIT investor, you have a surprising opportunity before you. Most professional REIT investors seek to maximize Yield. To do so, they sacrifice a measure of total return. By focusing on Gain rather than Yield, you can achieve total returns that outperform many professional REIT investors!
I know this approach works, because I have been developing and deploying it for 5 years, and I have benchmarked it against every meaningful and well-respected portfolio I can find. I have published these findings in an article and a blog post . (Results for 2021 are not in yet. I will report on them soon.)
If I can show you how to take a few commonly available data points you can process in your spare time, to probably generate returns better than many of the best professional REIT investors in the world, would you be interested? If so, read on. Total return = yield + gain
The return on any REIT investment consists of two components: Yield (dividend divided by share price), and Gain (percentage increase or decrease in share price). Yield and Gain tend to move in opposite directions. As Hoya Capital says in a seminal article , The highest-yielding REITs have persistently underperformed while the lowest-yielding REITs have delivered outperformance by roughly 3.6% per year over the REIT average. So the higher the Yield, usually the lower the Gain, and vice-versa. As a REIT investor, you can focus on Yield, to maximize your dividend cash stream, and that’s what many professional REIT investors do. But they usually sacrifice a significant measure of Gain in the process, and end up with inferior Total Returns.
3.6% per year is a huge edge! At that rate, in 5 years’ time, you are beating the Yield chasers by 20%! But my studies strongly suggest the actual edge enjoyed by the FROG hunting approach is significantly bigger than 3.6% per year.
Here is how the FROG hunting approach compared to 4 benchmarks over calendar year 2020. First, let’s look at the performance of the benchmarks. 2020 Benchmark Yield Gain Total Return Vanguard Real Estate ETF 3.93% -7.70% -3.77% Brad Thomas top 10 REITs 2020 4.22% -16.08% -11.86% John Waggoner top 10 REITs 3.33% -12.83% -9.50% Seeking Alpha Quant Ratings top 10 3.96% 5.77% 9.73% Seeking Alpha Sell Side Ratings top 10 3.89% 4.60% 8.49% Average of Professional investors 3.87% -5.25% -1.38% Now let’s look at how these benchmarks compared to the top 10 FROGs identified by my system:
So the margin for 2020 was not a mere 3.60%, as the overall average from the research would indicate, but 19%! That is because we are only investing in carefully selected companies.
This is just one year’s results, but benchmarks from previous years have shown consistent outperformance, anywhere from 5 to 20%. Which would you rather do: Hunt FROGs or milk COWs?
REITdom can be roughly divided into two types of companies: COWs and FROGs.
COW stands for “Cash Only Wanted.” These are REITs with high Yields and low Gains. The COWs, like the animals on the farm, are slow-moving and predictable, and produce lavish amounts of milk (cash dividends in this analogy). Two examples of COWs are Physicians Realty Trust ( DOC ) and Simon Property Group ( SPG ). Both are stable Yield payers whose price Gain over the past 5 years has been approximately zero.
FROGs (stands for “Fast Rate of Growth”) come in all sizes, but they tend to be smaller than COWs, pay lower Yields, and achieve higher Gains.Historically, the average total return on a REIT is about 12%. Of that, the Yield averages about 4%, give or take a fraction of a point, so the Gain averages about 8%.The Yield at purchase (YAP) tends to be the Yield you get, so it’s highly predictable. Gain is not as predictable, but there is no limit on how high […]
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