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Episode #15: Five Things to Ask Before Investing In A REIT with Matt Frankel

Matt Frankel is a Certified Financial Planner and has been a contributor since 2012. A former mathematics professor, he's highly knowledgeable about all things finance but has become one of the most knowledgeable people on the subject of REITs in the Motley Fool universe. In his work for the Millionacres premium services Mogul and Real Estate Winners he has shared his system with our members. 

In this special episode, Senior Analyst Matt Frankel shares his system for evaluating real estate investment trusts (REITS). He covers the five questions everyone should consider before investing as well as what to consider in 2020. 


Matt Frankel: It's really tough to overemphasize the importance of a good management team. It can be tough because any REIT CEO can look great on paper. I have never read about a REIT CEO that did not have an impressive resume. That's why they can became a CEO. They've either moved up through the ranks or they had a great experience elsewhere. It's really important to look at, one, what their experience is like, do they have a good track record or not? Most CEOs have had executive roles at REITs, how do those REITs perform when they were in those roles is one question to answer. Do these CEOs have a lot of skin in the game? When the pandemic hit and the market started going crazy in March, the CEOs that really believed in what they're doing and knew that this was a good long term investment were buying their own stock hand over fist. We put out a report to Mogul members that just focused on all the CEOs that were buying their own stock, and it was pretty impressive. Some were putting millions of dollars of their own money at risk. You also want management teams that have a good history of working together. I know one of my favorite management teams has been working together for 25 years in various different roles, even at predecessor companies. That's one thing to look at. In REITs, you can check this out on investor relations pages under the SEC filings, look at the proxy statement, because that tells you how the executives get paid. You want to see REIT executives get paid with a lot of stock. You want them to have a lot of skin in the game, and you want them to be highly invested in their success. I have no issues in somebody getting rich if they're making shareholders rich as well.

Deidre Woollard: You are listening to the Millionacres Podcast. Our mission at Millionacres is to educate and empower investors to make great decisions and achieve real estate investing success. We provide regular content and perspective for everyone from those just starting out to season pros with decades of experience. At Millionacres, we work every day to help demystify real estate investing and build real wealth. [MUSIC]

Deidre Woollard: Hello, I'm Deidre Woollard, an editor at Millionacres. Thank you so much for tuning in to the Millionacres Podcast. Today's podcast is a special episode that will feature Senior Analyst Matt Frankel sharing his system for evaluating real estate investments trust step-by-step. Matt is a certified financial planner and he's been a full contributor since 2012. A former mathematics professor, he's highly knowledgeable about all things finance but has become one of the most knowledgeable people on the subject of REITs in our Motley Fool universe. In his work for a Millionacres premium services Mogul and Real Estate Winners, he has shared his system for looking at REITs with numbers. Today, I asked him to give listeners a window into his thought process when he is choosing a new REIT to invest in or to recommend. Take it away, Matt.

Matt Frankel: Obviously, there's some parts of our analytical processes, especially in Mogul and Real Estate Winners that are proprietary. Having said that, I love sharing my thought process on REITs because it helps people really understand how these stocks work, how to evaluate them, what separates a bad from a good one? People always ask me how long do I spend on REITs and I can tell you how long I spend before I can identify a bad one. That's 10 seconds because of this analytical process. Normally, between point 1 or 2, you can really tell which ones are worth further consideration. With that in mind, I'm going to go through the points I look at when I consider REIT, generally in order. Number 1, the first thing you should consider when you're considering buying a real estate investment trust is how long you plan to hold it for. Real estate investment trust are best suited for long-term investors. Like any stock investment, they can be highly volatile. A lot of times, the volatility has very little to do with the company itself. We saw a lot of REITs that were doing just fine during the middle of the pandemic that were plunging. Stocks don't always behave rationally.

The biggest downside in my opinion to REITs versus other types of real estate investment is that when you say buying investment property, you don't have to constantly monitor the value of that investment. It doesn't change on a day-to-day basis. I have absolutely no idea how much the triplex I own downtown changed in value from last week. No idea and I don't care. That's not why I own it. But with a REIT, which is a publicly traded stock, you really have to keep that in mind. Generally, I won't buy a REIT if I can't see myself holding it for a decade at least. That's not to say I will necessarily, but if I wouldn't want to own it for 10 years, I would not consider a REIT. Yes, there are there other options when it comes to real estate investing if you want to not have to worry about day-to-day price fluctuations and if you have a shorter investment window. Crowdfunding commercial real estate is a new and exciting opportunity, just to name one example. A lot of those have exit periods that are targeted within 3-5 years. If you have anything shorter than a three-year investment window, don't invest in real estate, there are better vehicles for you. That's number 1, is time framed. Provided that I'm comfortable holding whatever company I'm talking about for at least 10 years, I can move onto the next step with figuring out how does the REIT make it's money? When we say REITs we're talking generally about equity REITs, which are companies that own properties as opposed to mortgage REITs which are a whole different animal and they are actually in the financial sector, not the real estate sector. They are that different. With an equity REIT, the general idea is that the company owns commercial properties, leases them to tenants and makes money. But it's not always quite that simple. Some REITs have other businesses.

For example, to be a REIT, you only have to get three quarters of your income from real estate. Some of my favorite REITs, for example, have entertainment businesses where they make money from things like ticket sales. That's something else that's worth noting. Some REITs develop properties from the ground up, some rely on being able to eventually sell those properties. They do capital recycling. There are a few different ways that REITs can make money aside from just basic buy-and-hold, rent out your real estate investing. So that's step 2 and the goal should be to be able to describe how a REIT makes its money in a couple of sentences. If you can't do that by just reading the REIT's annual report, then it's probably not a great investment for you. There is a reason I don't invest in many biotechnology stocks, for example, and it's because I don't understand what they do. I can admit that and it's fine. One of my favorite Warren Buffett quotes is that, ''The size of your circle of competence doesn't really matter, but knowing its limits does.'' The best way to interpret that is to only invest to businesses you understand well and fortunately, many REITs are very easy to understand but there are some with rather complex business models. Some have other businesses than real estate, some recycle capital and if you don't understand really the dynamics of that, then you should probably try to focus on a REIT that you do understand. So after I understand what the REIT does, I want to figure out how it grows. One, is it in a market that has a lot of growth opportunity? I will give you an example. In healthcare, there is about $1.5 trillion of healthcare real estate in the United States and only about 15 percent of it is currently owned by REITs. A disproportionate amount is owned by the physicians that use them, the hospitals whose names are on them. There's a lot of opportunity for acquisitions and consolidation within the existing healthcare industry; plus healthcare is a long-term growing market, the US population is aging, the demographic trends favor healthcare growth over the long run. So that's number 1, I want to know how a REIT is going to grow. Number 2 is how it's going to grow. Is it going to buy properties that already exist? Is it going to develop new properties? Is to going to do a combination of the two? Is it planning to recycle capital at an aggressive pace overtime, which a lot of REITs do and it can be a great way to create value if you do it correctly. That's one thing. Development versus acquisition and the reason I bring that up in particular is that they're two very different dynamics. Acquisition is designed to produce a stable revenue stream. You buy a property, especially if it already has tenants, you're essentially buying that income stream. When you develop a property from a ground up, the goal is to not only create income but to create value in the process. Just as a basic example, if you could build a property that's worth a million dollars for $700,000, you've instantly created $300,000 in equity. It's not always that simple and a lot of times, properties end up costing more to develop than they would to just buy. There's another thing that can be really great, return generator, if you do it right. I'm not saying one is necessarily better than the other, but one is a key component of understanding how a REIT makes money and it's a really key component of assessing risk. A REIT that grows primarily through development, all things being equal, will be more of a risky and volatile investment, generally, than a REIT that grows primarily through development. So I tend to gravitate toward REITs that do both. That's the first three steps. The next thing I consider is where I'm going to own this REIT. REITs make excellent investments in IRAs and other tax-advantaged accounts. The reason is, as most people know, REITs pay above-average dividend. That's one of the reasons a lot of people like investing in REITs. REITs are required to pay out at least 90 percent of their taxable income, most pay even more, and they're great income stocks. But the caveat is, REIT dividends can be very complicated for tax purposes. Their dividends is generally don't qualify for what the IRAs refers to as qualified dividend status, which gets you preferential tax rates. Essentially, treats like a long-term capital gain instead of ordinary income. So REIT generally don't qualify for that. Not only that, but REIT distributions generally are not made of all of one kind of income. At the end of the year, you will get a dividend statement. You'll see that generally most of a REITs dividend will be considered ordinary income. Some might be considered a qualified dividend depending on how the REIT got the money to distribute. Some might be considered a nontaxable return of capital, which throws another little complication in there. That ordinarily happens if a REIT has sold properties at a profit, months to distribute some of that money back to shareholders. So they can be quite complicated, and to complicate it more, this is complication in a good way. But REIT distribution is generally qualify for the 20 percent, they call it the pass-through tax deduction because it's technically considered partnership income. Like if you've earned it from an LLC or something like that. So this is why I say REITs make great investments for IRAs because then you don't have to worry about anything I just said.

You can get your entire dividend, you can reinvest your entire dividend, you can let it compound until you retire, and that could really help the long-term compounding power of real estate. On the other hand, it's okay to buy shares in a taxable account. I generally put the REITs that pay relatively low dividends in my taxable account and prioritize the higher paying dividends for my IRA or, I have a solo 401k. It's okay to put REITs in a taxable brokerage account, but you want to understand how that works before you do that. So I definitely figure out what account I would potentially allocate the REIT to if I'm buying it for my own portfolio, not necessarily if I'm recommending it. Number 5, the management team. Before I even look at any of the metrics of the business, I look at the management team. It's really tough to overstate the importance of great management. There are some types of REITs that essentially run themselves. I'd say like a self-storage REIT, it doesn't require a ton of expertise to make money. It's what Warren Buffett refers to as a ham-sandwich business. A business so simple, a ham-sandwich could run it. But there are others, especially that involve a lot of development, a lot of capital recycling, things like that, where it's really important to have somebody who really knows what they're doing steering the ship. This has been the big difference between some of the retail REITs that are doing well and the retail REITs that have crumbled during the pandemic, or the hotel REITs that are doing well and have a really good game plan after the pandemic and those that are just moving along.

So it's really tough to overemphasize the importance of a good management team. It can be tough because any REIT CEO can look great on paper. I have never read about a REIT CEO that did not have an impressive resume. That's why they can became a CEO. They've either moved up through the ranks or they had great experience elsewhere. It's really important to look at, one, what their experience is like, do they have a good track record or not? Most CEOs have had executive roles at REITs, how did those REITs perform when they were in those roles is one question to answer. Do these CEOs have a lot of skin in the game? When the pandemic hit and the market started going crazy in March, the CEOs that really believed in what they're doing and knew that this was a good long-term investment were buying their own stock hand over fist.

We put out a report to Mogul members that just focused on all the CEOs that were buying their own stock, and it was pretty impressive. Some were putting millions of dollars of their own money at risk. You also want management teams that have a good history of working together. I know one of my favorite management teams has been working together for 25 years in various different roles, even at predecessor companies. That's one thing to look at. In REITs, you can check this out on investor relations pages under the SEC filings, look at the proxy statement, because that tells you how the executives get paid. You want to see REIT executives get paid with a lot of stock. You want them to have a lot of skin in the game, and you want them to be highly invested in their success. I have no issues in somebody getting rich if they're making shareholders rich as well.

So that's one thing that you want to see. The skin in the game is one big X factor for me. So having said that, we move on to how we consider a REIT finances. I don't want to get too mathematical, Deidre I mentioned that I used to be a mathematics professor, and as soon as I start talking about the real heart, heavy mathematics of analysis, I can sense 80 percent of my listeners tuning out. So a few things to look at. The first metric you should know while you're evaluating REIT is called funds from operations or FFO. Think of this as earnings in a traditional stock sense. Without getting too heavy into the tax treatment of real estate, earnings or net income is not a great measure of how much money a REIT is actually earning, that's where FFO comes in. It makes some real estate specific adjustments to give a better picture of how much profit a REIT is actually earning and therefore has available to pay dividends to shareholders and support its growth without having to issue too much more stock and things like that. So FFO is the key metric to look at when you're looking at a REIT's earnings growth rate. Don't pay attention to net income. That's a very common misconception, especially among new REIT investors. They'll say, "This REIT had negative net income for the past four quarters. Why would I ever want to invest in that?" The answer is, if you own investment properties, you know very well, it's really easy to make your income look negative in real estate if it's actually positive. So FFO, it levels the playing field between REITs and earnings and the rest of the stock market. If you want to look at the valuation, for example, don't use the price to earnings, use the price to FFO ratio. If you want to look at growth rates, don't look at earnings growth rates, look at the FFO growth rates.

A lot of REITs have their own FFO metrics. They call adjusted FFO, core FFO. Those aren't standardized, but they generally give you a picture of how a REIT is doing at any particular moment. So FFO, number 1 metric for REIT investors to know. Going beyond that, you want to look at some other financial aspects of the REIT. Liquidity is a big one. I mentioned considering how a REIT grows, but it's also equally important to consider how a REIT is going to fund its growth. Does a REIT have a big credit line, which a lot of the really good ones do? Does a REIT have a lot of debt outstanding? The debt-to-total capitalization ratio is a popular metric among REIT investors, especially how much of the total market cap is made up of debt. I generally like to see this at 50 percent or lower, but that's flexible depending on the situation and how much I like the rest of everything about the company. In other words, if a REIT's market cap is two billion dollars, I want its debt to be two billion dollars or less. The total capitalization, in that case, will be four billion dollars, and debt would make up half of it. So that's a quick metric that you can calculate that can give you an idea of how much debt a REIT has. What I will say about debt ratios, whether you use debt-to-capitalization, interest coverage ratio, things like that, they're really most useful for comparing REITs in the same type of subsector. For example, right now, wouldn't be fair to compare the debt levels of a retail REIT with a communications REIT, for example. It's not really an apples-to-apples comparison.

So you want to consider how a REIT compares to its peers. When you want to see, does it have too much debt? Does it have enough liquidity? All things being equal, a REIT that has a billion dollars of liquidity and a REIT that has $200 million of liquidity are two different things, especially when it comes to funding future opportunities. This is especially important in today's market. We'll get into what I specifically looking at this year in a bit, but liquidity allows REITs to take advantage of opportunities as they come up without having to try to find financing ourselves stock or anything like that. If you have a credit line and an opportunity comes on the market, then buy a property then track its price. Liquidity, let's you do that. So, liquidity and debt and a REIT's credit rating is something that a lot of people overlook. A lot of REITs boast about having investment-grade credit ratings, which is good. But it's also important to note, there is a lot of different levels of credit when it comes to corporate debt. I'm not sure the exact number off the top of my head. I don't want to sound silly by quoting the wrong number, but it's a lot. There are at least, I want to say at least 10 different levels of investment-grade credit, give or take. So better credit let's a REIT borrow money cheaply. It not only gives us access to more ability to borrow, but it gives it usually lower interest rates than other competitors, which can be a major competitive advantage. If two REITs each have five billion dollars in debt, one is paying an average of six percent interest on its debt and one's paying an average of three percent interest. That's a big competitive cost advantage for the one that's paying a lower interest rate. So the interest is paying on its debt is also comes into play. It's not just the size of the debt. That's why we say a $20,000 auto loan is better than $10,000 credit card debt because you're going to be paying less interest on it. Same thing applies in the corporate world.

Deidre Woollard: That's a great place to take a break. [MUSIC] We hope you're enjoying this and every episode from Millionacres Podcast. If you have a moment, we'd love to hear from you. Please visit and tell us what you think of the podcast so far, what kind of content and guests you'd like to hear, and what else we can do to help you go smarter, happier and richer with real estate.

Deidre Woollard: We are back with Matt Frankel sharing thoughts on what an investor needs to know before deciding to purchase a REIT.

Matt Frankel: Now we'll get into the fun part, what's specifically in 2020 or are we looking for when it comes to REIT analysis? We are looking for, I mentioned lots of liquidity, especially in the troubled sectors. I think hotels, retail, hospitality, these offices are another one. These are areas where not only do you want to see a lot of liquidity to be able to make it through the tough times, because a lot of them are losing money right now, but you also want to see a lot of liquidity to take advantage of opportunities. Understand, one example, one of our favorite hotel REITs is Ryman Hospitality Properties.

I am sure Deidre is sick of me talking about it at this point. But Ryman, they have a ton of liquidity. They've enough to last 30 months at the current loss rate. Their business is terrible right now, but they have enough liquidity for 30 months, which is great. That lets them take advantage of the downtime. They kept their National Harbor property closed because it wouldn't have anyone in it. So they're taking advantage of that and renovating the rooms at this time. So when they emerge from the pandemic on the other side, those rooms will have more pricing power because they had the money to take advantage of what was going on right now. Some office REITs are actively looking to make acquisitions while this sector is so beaten down, and a lot of liquidity let you do that. In 2020, specifically, quality matters more than anything. That's in terms of management, that's in terms of balance sheet, which we already talked about. It's also in terms of the assets themselves.

We just saw two big mall REITs go bankrupt very publicly. The CBL & Associates was the really bad one. Pennsylvania Real Estate Investment Trust was the other, which looks like it's going to emerge pretty quickly. But those had what we call B-class and C-Class mall properties. Meanwhile, there are no A-Class mall operators that I know of that are in danger of going bankrupt anytime soon. They are possible exception of one, like Simon Property Group, A-Class model, is best in the business, they have great assets, that makes a big difference. Ryman, which we just mentioned, has some of the most iconic landmark hotels in their respective markets. The Gaylord National Harbor is the landmark that most people identified the National Harbor by. I was talking to a friend about it and he said, "Oh, that's where the Gaylord is." So having iconic and irreplaceable and best-in-class assets really makes a difference, not only during the pandemic, but during all tough times. These assets tend to hold up better during normal recessions, like the financial crisis. So you also want to look at a few different variables. I like non-cyclical tenants, which is a good kind of recession-proof thing to focus on if you want something a little bit safer. I mentioned healthcare earlier. Healthcare is probably the least cyclical type of real estate. You should at least know the cyclicality of your investment, especially right now. The healthcare is something you need. It's something that tenant sign long-term leases. Doctor's offices don't move every two years on average. Hospitals generally stay in the same place. So it's a very non-cyclical business. On the other hand, something like a hotel is a very cyclical business. So that's something you want to incorporate in your analysis as well. I mean, a very cyclical business at the right price could be a great investment. But it's definitely something you want to consider. You want to look at the types of tenants you have, is another thing I'm looking at when I evaluate REITs. Think of the retail industry. I mentioned malls, malls have a certain type of tenant for the most part. They have retailers that sell discretionary products, meaning things that people don't really need, generally at full retail. I mean, most stores are like, you go into the GAP, they have a sale rack, but it's generally considered a full-price retailer. On the other hand, when you look at some of the REITs that invest in freestanding retail properties that specifically focus on things like drugstores, and warehouse clubs and restaurants. These are things that are not very disruptive by e-commerce and not really struggling right now. So there could be a lot of variation within each sub-sector of real estate among the types of tenants. So don't just say, "Oh, hotels are the same." We mentioned Ryman, they focus on group events like conventions and massive gatherings of people. Whereas, hotel operators that focus on extended stay hotels are generally focusing on leisure travel and business travel. Just one person traveling, not a giant group. So a big different dynamic there in what's going on now. Leisure travel has rebounded much faster than the business travel, which has made not all hotels in the same position right now. Meanwhile, group events are not a thing. Who knows when we will have another actual in-person conference. That's one thing that really keeping in mind. Lease length is another variable. You can have a non-cyclical business, but if tenants are allowed to leave every year, apartments are a non-cyclical business, people need places to live, it's an essential item. But the average apartment only leases for a year. So tenants, if they run into tough times can vacate the property pretty easily. They have to wait till the end of their lease, but they can get out if they want a cheaper apartment or something like that. Whereas, say an office tenant, is just as non-cyclical, that's something a company needs in general, for the most part, not some of the tech giants, but a normal company who need a physical office space. That's something that you would sign a 10 to 15-year lease on at a minimum. So if a company signs and lease on an office three years down the road, they say, "We don't really need this much office space." They are locked in for another decade or so. So that's something else to consider when you're thinking about the type of tenants a REIT has in its portfolio. Now let's put all this together. Let's look at an example, and we'll give you a little bonus right here. This is one stock that we recommend to members. It's called Healthpeak Properties. Healthpeak ticker symbol is P-E-A-K. Why I picked it to recommend to Real Estate Winners' members instead of some of our other favorite healthcare REITs? When we said healthcare is a non-cyclical stock and given the time we're in, that's important. If you can get a good deal on a non-cyclical, non-unstable business, then it could be a great way to go. How does it make its money? It grows through a combination of development and acquisition, which is a really nice thing to see.

A lot of healthcare REITs especially grow just by acquisition. One of our favorite other healthcare REITs is a medical office REIT that primarily grows by just acquiring other properties. I don't think they've ever developed a property on their own. Healthpeak has a record of doing it well and making money doing that, so that combination really helped. They have a ton of liquidity, speaking of their growth and development ambitions, they have $2.6 billion of liquidity right now. They have an investment grade credit rating, a strong balance sheet, they can borrow money pretty cheaply. That's also an attractive quality relative to some of their peers. The big thing is that they were diversified. When I talked about in the last point, what are their tenants? What do their tenants look like? A lot of REITs that specialize in healthcare just invest in medical offices, some invest in just hospital properties, some invest in just senior housing facilities. Healthpeak takes a more diverse approach and that's one of the things I like the most about the stock. As far as a stable, predictable type of asset, medical offices are my favorite type of healthcare real estate, that makes up about a third of their property. Senior housing has probably the most long-term growth potential. The populations aging quickly. The 85 and older segment of the population is expected to roughly triple over the next 20 years so that will be a big catalyst for senior housing eventually. It's a shaky industry right now with COVID going on. No one's moving their order relatives into senior housing facilities right now, and who knows how long that's going to last. They only put one-third of their money roughly into that. A lot of growth potential but it's shaking in the meantime.

Then the other third, they put into life science properties, which are really new and exciting type of way to invest in healthcare that is really rare for some of these big healthcare REITs to really have their hands in. That's where they're actually doing most of their development activity. I love the life science space. I think not only with the COVID vaccines and what not but with the aging population, there's going to be a huge demand for that going forward. Most life science companies are located in really high barrier markets. Take the Silicon Valley area, for example, which is where a lot of Healthpeak's properties are. It's a great all around healthcare REIT. After going through my thought process here, I'll spare you the analytical behind the scenes stuff that I do, but after going through all that, I crunched some of the numbers and it's still trading at a pretty attractive valuation of most healthcare REITs, especially medical office REITs, I mentioned that's my favorite type of healthcare.

Those have rebounded to where they're almost at record highs right now. Healthpeak because of their senior housing exposure, they're still trading at a pretty attractive valuation. They have exposure to all the types of healthcare assets I like, they have tons of liquidity to grow. The management team is fantastic. That's the one thing I didn't mention yet but their management team has a ton of experience. They actually got a few of their managers from the Welltower, which is the biggest player in the sector. The management team has done a great job of transforming the company into a rock solid, great balance sheet company over the past few years. After going through the process, it just looked really attractive relative to the other healthcare REITs. Hopefully that gives you a little bit of insight without giving too much away but there's a freebie for you.

Deidre Woollard: Awesome, thank you. Thank you for all of that, Matt. I feel like we all have a better understanding of how to think about REIT investments. I was wondering if I could ask you just a couple of questions?

Matt Frankel: Sure.

Deidre Woollard: You mentioned recycling capital earlier. Could you explain a little bit what that means and how you should look at that if you're investing in REITs?

Matt Frankel: Sure. Let's say an apartment operator develops a brand-new apartment community from the ground up in an urban area. They spend $50 million to do this and when they're done, it's worth $80 million. They lease it up, fill it with tenants, stabilize the occupancy, and then they might decide to sell it and use that money to develop yet another property where they feel that the money could be put to better use for their shareholders. That's just a basic hypothetical example but it generally refers to taking mature properties and selling them at a profit and using that capital in a way that is likely to generate an even better return for shareholders. It's generally like, instead of just being satisfied with building a property and collecting, and making six percent of your investment on rent. It's continuously trying to parlay that into bigger and bigger income streams overtime.

Deidre Woollard: Nice. One other question. How do you feel about buying back at stock? You mentioned that during the beginning of the pandemic that CEOs, were buying back stock but is it different when the company itself is buying stock?

Matt Frankel: That's a great question, especially in the context of REITs. Buybacks are very common in other types of stocks. They're not very common in the real estate world. Generally, because REITs are required to pay out most of their income to shareholders, generally they fund their growth through issuing new stock. They do the exact opposite of buybacks in most cases. Some of my favorite REITs issue billions of dollars of new stock, every year. When a REIT buys back its stock, it's really sending the message that management thinks that the stock is cheap and that, that is the best use of the company's money at the time. There are very few REITs that regularly buyback stock. Empire State Realty Trust is one of my favorite ones, and they are buying back stock hand over fist right now. They've had a half billion dollar buyback authorization for years and have never used it until 2020. Realty Income, one of my favorite REITs does the opposite. They continually issue new stock to pay for properties. The idea is that they're going to issue stock, raise money, and then buy properties at favorable costs to increase shareholder value. They'll rarely buy back stock in the real estate world. When a non-REIT buys back stock, tend to take it with a grain of salt just because that's a pretty standard business practice elsewhere in the business world but in real estate, it's really not. I tend to put a little more weight on that when a REIT buys back its own stock.

Deidre Woollard: Interesting. Thank you. Final question, you mentioned, you decide not to invest in something or not to recommend something pretty quickly but when you're deciding the other way, how long does that take? Also I was curious, how do you track your investments? Are you a journaler or do you use Google Docs or spreadsheets? What's your system?

Matt Frankel: I use spreadsheets. I have a massive spreadsheet that has pretty much everything that I need to do my job. I track everything from how I'm evaluating stocks to what's on my list right now to what articles I still have to write to everything. I'm a spreadsheet guy. That's how I learned how to organize myself when I was very young. My dad was a computer engineer back in the '80s and taught me how spreadsheets worked really early. That's stuck with me the rest of my life. But when it comes to how much time I spend, and keep in mind that I do this for a living and I have a lot of practice. I'm pretty efficient. I would say when I'm researching an investment like, let's say we're figuring out what pick to make next month for Real Estate Winners, I'd say that the whole process because we maintain such an organized watchlist and stuff takes me a couple of hours. Having said that, if I'm looking at my watchlist, which usually has about 50 different possibilities on it, I can usually go through them pretty quickly and eliminate about 40 of them really quickly.

Like I said, I can say this one, I don't like what their management did last week. This one, I don't like the growth they put up last quarter, I wish they would have spent more money on development, things like that. There's a fatal flaw with a lot of them for me that scratches them off my list. Then once I narrow it down and decide what sub-sector, I want to go like I mentioned, healthcare, the Healthpeak one. I knew I wanted a healthcare REIT so that narrowed it down to five or six that I really like out of the healthcare space. Once I get to that point, I'll read through their latest conference call, I'll read their latest annual report. REITs are really good about having a great investor presentation on their website, if you don't want to sift through an annual report, which I get that not everybody is me and not everyone likes doing that. The investor presentations are usually very reader friendly and can really give you a great idea of what the business does, great stats, it'll show you the growth trends, and things like that. Keep in mind that these investor decks are made by the management teams themselves, so take them with a grain of salt, they're not independent research. But having said that, I'll read those few things then I will crunch a few of the numbers, see where the valuation compares to their peers. I have my own proprietary formula of how I estimate a REIT's asset value. I want to see if a REIT is trading for a premium or discount to its asset value, compare that to the other ones on my list. So I'd say, I spend a couple of hours making my next recommendation. That doesn't include actually writing it up. That's just the analytical process.

Deidre Woollard: I would say it's a lot more than a couple hours because just from what you described, it's really a evolving process.

Matt Frankel: Right. I'm sure the spreadsheet has taken me hundreds of hours to actually put together, so it's two hours on top of that.

Deidre Woollard: Exactly. Well, thank you so much for this today. It was really great to hear more about how [MUSIC] the Real Estate Winners' team thinks about REITs in general. Just a reminder for listeners, you can learn more about Matt's work on Millionacres and you can also learn more about Real Estate Winners. Thank you.

Matt Frankel: Of course. Happy to be here.

Deidre Woollard: Thank you for tuning in to the Millionacres' Podcast. I hope you liked today's show. If you enjoyed this episode, please consider subscribing through your favorite podcast provider. If you have any questions, please feel free to drop us a line at Stay well and stay invested. People on this program may have an interest in the deals, offerings, or services they discuss and Millionacres or the Motley Fool may have a formal recommendation for or against. Always consult a certified tax professional before acting on tax advice and do not buy or sell assets based solely on what you hear.