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Where We Are Today

Plato was not the only influential philosopher who had the time to spend thinking and teaching because of the income from real estate.

Aristotle, Seneca, and Epicurus were three of the greatest philosophers in recorded history. They also had substantial real estate holdings that produced a comfortable level of income that allowed them to focus on grander matters.

One of the cornerstones of our way of life is property rights. Another is religious freedom and tolerance. You can thank English philosopher John Locke for making these concepts a focus of modern political and moral thought.

He was free to spend time on the weightier questions of a government based on the consent of the governed and the natural rights of man, including life, liberty, and property because he was a well-paid property manager who invested his excess cash in income-producing properties.

I must be careful not to slip off into a long discussion, perhaps even a rant, on various philosophical subjects. The study of philosophy is a passion of mine, and I occasionally get carried away.

The major driving point is that real estate, especially income-producing real estate, has been the cornerstone of some of the greatest fortunes in the world's history.

What You Can Do About It

Having a steady flow of income from property makes it possible to spend your life doing what you love, whether golfing, gardening, fishing, playing with the grandchildren, or exploring the great truth of man's reasons for being.

The Real Income Report wants to help make that possible for you.

We are not hands-on owners of properties, so we must view the opportunity a little differently than if we were developing and owning the properties ourselves.

Of course, not being hands-on does free up some time for all those other activities.

As outside investors, we want to ensure that we own real estate that will perform over time and deliver consistent cash payments.

We want to buy when no one else is interested and consider strategically selling properties when real estate is the hottest commodity.

We want to have a margin of safety from a rock-solid balance sheet that can withstand whatever the economy and irresponsible politicians throw at it.

Our method is simple, but do not mistake simplicity for ease. We look for REITs trading below intrinsic value, with strong balance sheets and the ability to withstand economic hurricanes.

We are not interested in perpetual discounts; we want to identify mispriced assets that the market will eventually recognize.

There are some REITs I will not touch at any price because the management or the external managers have such horrid track records of shareholder abuse and neglect.

Here is what we focus on:

• Quality of the property portfolio and stability of income

• Balance sheet strength and debt structure

• Economic resilience

• Discount to Net Asset Value (NAV)

Let us break these down. When analyzing a REIT’s portfolio, we ask:

• Are these properties essential to the tenants’ operations?

• Can these properties be easily replaced or replicated?

• How have these properties performed in past downturns?

If we cannot answer these questions satisfactorily, we move on. There are too many fish in the sea to waste time on minnows.

We love REITs that generate real cash flow and maintain conservative balance sheets. A REIT’s debt maturity profile should be as smooth as bourbon whiskey, not as lumpy as bad porridge.

We want a well-laddered maturity schedule that does not leave the REIT vulnerable to refinancing risk.

The REIT should have multiple sources of capital. Relying on a single bank or the whims of the equity market is a recipe for disaster.

We are not looking for REITs that only perform in fair weather. We want the ones that can sail through economic hurricanes. This means a diverse tenant base, a high percentage of investment-grade tenants, and essential properties even when the economy takes a nosedive.

We scrutinize a REIT’s performance during past recessions. Did occupancy rates hold up? Did they maintain their dividend? Did they have to dilute shareholders with a desperate equity raise? If a REIT could not handle past storms, we are not betting on them for the next one.

Here is where the rubber meets the road. We are looking for REITs trading at a significant discount to NAV - at least 10%, but preferably more. But let us be clear: NAV is not a number handed down from on high. It requires skepticism and independent analysis.

We calculate our own NAV estimates using current market cap rates, recent comparable sales, and replacement costs. We then compare our estimates to the REIT’s reported NAV. If there is a big discrepancy, we dig deeper. Either we are missing something, or the market is. Both scenarios warrant investigation.

But a discount alone is not enough. We are looking for catalysts that could close the gap between price and value. This could be improving market conditions, a change in strategy, or even the potential for M&A activity. Without a catalyst, a discount can persist indefinitely, and as investors, our time is valuable.

Investing in equity REITs using this credit-focused approach is not for the faint of heart or the impatient. It requires discipline to wait for the right opportunity and the courage to act when others are fearful.

As Sam Zell once said, “The simple fact is that supply and demand imbalances have always created opportunity.” Our job is to identify these imbalances, ensure we have a margin of safety, and then act decisively.

Remember, we are not looking for perfection. We are looking for mispriced bets where the odds are heavily in our favor. In the words of Charlie Munger, “The goal is not to be smarter than the rest, but to be more rational than the rest.”

That’s what we have in the Big Five REITs - five leading, underpriced, high-quality REITs that cover all the major sectors of the real estate market.

But if you’re looking for even higher potential returns, on mispriced REITs with the best track-records and highest quality assets and management, then the Total Return portfolio might be for you. Check out your preview now, or upgrade to Premium now for full access.

Or consider the Real Income portfolio, designed to maximize cash-flow to you, so you too can spend less time worrying and more time doing the things you like to do - philosophize, spend time with the grand-children, or what have you.

Today’s Stock of the Week is a prominent real estate investment trust (REIT) specializing in open-air, grocery-anchored shopping centers. The company's strategy revolves around acquiring, developing, and managing centers that cater to daily needs, with a focus on stable and recurring cash flow generation.

This REIT’s strategy has been to focus on densely populated, high-income regions where demand for retail space remains robust, perfectly positioning it - and you - for profit. Let me show you…

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