Whirling Dervish

Are REITs Relevant II?

Last article covered the basics of some misconceptions of REITs. In part II we address how managers “add value” and dodge restrictions imposed on them. The term “adding value” is short hand to justify management overhead. That value is supposed to be the profit, realized or not yet realized in a business that management created solely though its skill and expertise. The easiest way in the last 20+ years is to cut costs.The “Do more with less” ethos does work. But at the cost of employee attrition rates and wide knowledge gaps from senior employees leaving. Customer service levels also suffer because of low moral and chronic understaffing. The other most popular way is accounting slight of hand. The transition from GAAP to IFRS accounting has enabled REITs to capitalize things like window cleaning, carpet cleaning, lawn mowing, and the labor that goes into those activities. All serving to increase the “value” of the properties. This practice is not endemic to just REITs, O&G companies can do this as well. When a geologist drills … Read more


Are REITs Relevant?

Created in the USA during the Eisenhower era, REITs have dominated real estate investment capital and in the past have returned healthy yields. Unchanged, they were introduced to Canada in the early 90’s and have flourished in popularity. Their primary attractiveness being their monthly dividend. This series aims to examine REITs, their structure, environment in which they operate and their risk to returns.The question being are they relevant in today’s marketplace?Started as an investment vehicle for real estate to compete in mutual funds, its often sited that REITs are superior structures as they dividend almost 75 to 95% of all excess cash. One of the main foundational documents of this thinking was written in the seminal 1986 paper entitled “Agency cost of free cash flow, corporate finance, and takovers”.  Here, the author Michael Jensen explored the notion of principal-agent http://papers.ssrn.com/sol3/papers.cfm?abstract_id=99580 The thesis of principal agent, was tied into several sectors, principally oil pipelines. http://en.wikipedia.org/wiki/Principal%E2%80%93agent_problem Summarized, both state that if left … Read more