098 - Why You Can’t Evaluate REITs Like Regular Stocks

Most investors analyze REITs the wrong way, and it’s costing them. In this episode, we break down the key metrics that we look at when evaluating REITs. Traditional stock metrics like P/E ratios just don’t cut it and AFFO isn't the holy grail. 

Using Realty Income (O) and Arbor Realty Trust (ABR) as real-world case studies, we cover:

✅ The difference between Equity & Mortgage REITs—and why most investors get it wrong
✅ Why Realty Income (O) has red flags despite its reputation as a dividend growth favorite
✅ How to spot a dividend cut before it happens —ABR likely has one coming
✅ What metrics actually matter for REIT investing (AFFO, payout ratios, debt levels & more)

If you’re serious about dividend investing and want to avoid costly mistakes, this episode will help you evaluate if a REIT is worth holding. 

Follow Along Visually --> Youtube Video

Want FREE weekly market updates, Tim's top 10 dividend picks, and our portfolio updates delivered right to your inbox? Subscribe to our email list.

Stay connected. Follow us on social!

**DISCLAIMER**
Ticker metrics change as markets and companies change, so always do your own research. The content in this podcast is based on personal experience and is for educational purposes, not financial advice. See full disclaimer here.

Episode music was created using Loudly.

Transcript

Welcome to roaming returns a podcast about generating a passive income with dividend stocks so you can secure your finances and liberate your life. 

Not all dividend stocks are created equal, especially when it comes to REITs. If you’re evaluating them the same way you do regular stocks, you’re making a big mistake. 

In this episode, we break down how we analyze REITs, using Realty Income (O) and Arbor (ABR) as real-world examples. We’ll cover payout ratios, AFFO vs. FFO, debt levels, and the warning signs we’re seeing that could lead to dividend cuts.

If you want to build a strong, cash-flow portfolio, this is a must-listen! Now let’s look at the metrics so you aren’t caught with your pants down. 

Sup y'all, remember last week we said we were going to talk about evaluating REITs because we got so much hate. We had a rather testy exchange on social media about REITs and O in particular, not like all REITs, just O. People have like a huge hard on for O, which is cool if that's how you want to invest. I got the insecurity vibe thing going on based on the commentary that was slinging.
It's all good. They seem to think there's only like one proper way to evaluate a REIT and their method may work for them, but I have found in my experience that it doesn't really work for me. So I'm going to break down today what metrics that I use.
And this again will vary from reader to reader and listener to listener. Like other people might look at just one area. I look at a lot.
Because why do you do this? Just to get more data. The more data I have. The more data.
The better decision, right? The better decision I can make about valuation. And this is basically our life income. So risk needs to be mitigated as much as possible and that's how we look at it.
I'm basically looking to make sure A, that the REIT is undervalued and B, that the dividend is secure-ish. Because REITs, like a lot of REITs will have variable dividends and I don't really like those. But what I mean by having the dividends secure is that they can keep growing it or maintain where it's at.
Yeah, definitely not cut it. I want consistent payments. Because I use REITs differently than I do say with yield maxes or the REX things.
The REX things I use for income whereas REITs, I'm actually like there, I want a more- Core piece of the portfolio. Like consistent in stone type things. I know exactly how much I'm reinvesting back in and things of that nature.
And it's good to have the valuation because if you understand when something is overvalued, you can turn the drip on and off depending on valuation and it actually, I guess, accrue more cash during periods when it's overvalued. Save that cash and say your THTA fund and then whenever your REIT is actually undervalued, you just take all the cash that would have been reinvested back into it and then you just reinvest it when it's undervalued. That way you get more shares at a better price.
So it's up to you. But the first thing that we have to clarify is there are two main categories of REITs. There's equity REITs, REITs that actually own properties and they rent the properties out to tenants like think in hotels or casinos, things of that nature.
Equity REITs and you have mortgage REITs. Mortgage REITs are REITs that just take like when you pay your mortgage to your bank. If you had a mortgage REIT, they would actually – you'd be paying your mortgage to them and they would take their fees off and then just distribute the money to the bank at that point.
So like one actually holds buildings. The other one holds paper. Equity REITs generate income through the collection of rent and from sales of properties that they own for the long term.
There are different type of equity REITs. There are retail, residential, office, medical, industrial, blah, blah, blah, blah. There's a whole bunch of them.
If you think of any building, the building can be in retail, it can be in industrial, it can be in commercial, it can be in office. So like there's REITs that hold all those different buildings and – You mean some specialize and some hold like baskets? Yeah. Like some REITs only handle residential and some will actually only handle medical.
So there are different types of properties within equity REITs. When you research – when you go into the research, you should be able to determine what they are based on their 10K, which we'll get into. The 10K is ridiculously boring, but it will actually tell you what they own.
Like NPW is a medical REIT, whereas – BGS hold – like they handle grocery stores or things of that nature. So it varies based on base. And then the other hand, mortgage REITs invest in mortgages or mortgage securities tied to commercial and or residential properties.
Again, they handle the paper, the money aspect, whereas the equity handles the physical properties. Mortgage REITs generate income from the interest on their investments and generally what the – how they do that is they take on the mortgage REIT, they will charge a higher interest rate than what they're paying on the money that they borrowed to cover the mortgage. So like so say – So obviously they have to profit.
Like in our case, if they wanted to – if a mortgage REIT wanted to take over our condo, they would make sure that the – their borrowing rate was lower than the mortgage rate that they would charge us. So that's an interest spread or something like that. That's what they call it.
That's what banks do, right? Yeah. Yeah. So there's a huge difference between equity REITs and mortgage REITs and as such, each category has different metrics that I use to evaluate them.
We're going to start with equity REITs, go through a few points and then I'll pull up a real life example of an equity REIT that everyone loves so we can see like why I feel that it's overvalued as opposed to everyone else that thinks it's the best thing since – Overvalued and high risk, right? Yeah. Higher risk than worth warrant. Equity REITs.
The very first thing I identify when dealing with an equity REIT is what properties they hold. By this I mean are there tenants, quality tenants, do they have like a lot of late payments or not? Then I look at the diversification. I want to see do they hold residential, do they hold retail, do they hold whatever.
I don't want them to be too diversified though because if you have too much diversification, you can't focus on one sector inside. You can't focus on being good at any one area. So there's a delicate balance between being over diversified and too little diversification.
Not diversified enough. So if you just do residential buildings, to me that's not a REIT that I want to invest in because what happens if the housing market crashes? They have a problem. But say they have residential and retail, well like common sense Tim would say, well those are both really risky areas to be in because retail is dependent on the consumer sentiment and consumer spending.
Which we know right now is kind of sketchy. But let's say they're diversified across 18 different things, well they might be able to combat like a decline in the housing market and a decline in retail funds but they're not going to be able to put their money and expansion and everything into one area because they have eight different areas. I don't like REITs that are too diversified.
Other people do because they think it's like an index fund type thing and to me REITs are not. If I wanted to do that, I would just get a closed ended fund or an ETF that just deals with REITs and I would just say that way they would hold all the different REITs. I wouldn't actually want my individual stocks to be like an ETF.
So that's the first thing we look at is their diversification and their clients and I'm sorry their tenants and things of that nature. Second thing that I look at is the financial page. In the financial page we're looking at the net income, depreciation and amortization.
Gain on sale of assets and funds from operation. We do this obviously from the latest earnings but we do like to look back a couple of years to make sure funds aren't in decline. Using the information I just mentioned, you can actually come up with a funds from operation number that's generally referred to as the FFO per share.
Basically you're going to take your net income plus your depreciation plus your gains on sales of assets equals your funds from operation. We're going to go through all this on an actual real life example. This is very similar if you own like a piece of real estate so the depreciation is always something that's factored in.
That was one of the things people were harping on which is valid to some extent but it's not the only thing we look at. So then once you know what the funds from operations are, you then divide that by the total number of outstanding shares. You can actually get the funds from operations per share.
The third thing I look at is the dividend. We take the annual dividend rate. Obviously I double check to make sure that there are no special dividends or one off payments.
You'll come across some that will have a consistent like say 25 cent dividend and they'll have like a $2 one. We omit the $2 one because that's an extended money circumstances. We're just looking at the base dividend rate.
Why I do that is because I actually subtract the total and the annual dividend from the FFO to make sure that the FFO can actually cover the annual dividend rate. If it can't, then I don't have to look at any further in the research. I can stop at step three as opposed to going through like the additional steps.
The very next layer I have in the research is to determine the AFFO which is the adjusted funds from operation. To determine this, we take the FFO from above and then we subtract reoccurring capital expenditures. That's basically the cost associated with owning the properties.
You're going to think maintenance, lawn care, repairs, equipment replacement, things of that nature is what we mean by reoccurring capital expenditures. You subtract that from your FFO and then you also subtract straight line rents. Basically that's an accounting method used to determine the monthly rent rate because sometimes when you go to a place, you can rent something for 12 months but only pay 10 months.
Then you obviously would take the 10 months and divide it by 12 so that's how they come up with the straight line rent rate. Once we subtract those two totals from the FFO, that'll give us the AFFO. To get the AFFO per share, you would divide that by the total number of outstanding shares.
This number should be lower than the FFO. If it's not, then recheck your math. Generally, I think 99% of the time I do this, the AFFO is actually lower than the FFO because you're actually subtracting things out.
If it's not, is that bad? Like red flag? No. Like if your math checks out? Okay. It's not red flag.
The reason we do that is because the FFO just gives you a snapshot whereas the AFFO actually gives you a deeper understanding of the finances of the REIT. Then we go back to the dividend and we're going to subtract the annual dividend rate from the AFFO number. Again, we want to make sure that the adjusted funds from operation can actually pay for the dividend rate.
What I mean by the annual dividend rate is say you have one that pays 10 cents a month, well the annual dividend rate would be $1.20. You're going to be taking your AFFO number per share, subtracting $1.20. If your AFFO comes out at $1.65 and you subtract the $1.20, you're going to have an AFFO of 45 cents per share. After I do that and the math checks out and that's a positive number so their AFFO can actually cover the annual dividend rate, then I go into the controversial area of looking at profit margins, payout ratios and things of that nature. REITs by their nature, because they're required to pay out 90% of their taxable income, are going to have a higher payout ratio.
I understand that. The reason I do that though is if their payout ratio is like 400%, to me that means I have to look a little bit deeper. A little bit.
A lot a bit deeper to justify what the heck's going on. When we posted this on social media, O has a payout ratio of 260-some percent. To me that's a bit high.
Did it come down? It was 311 when we looked. It came down a little bit because their stock price depreciated and things of that nature. But 265% payout to me is something that warrants more research.
It's not something you just shrug your shoulders and say, but it's O. It's raised their dividend for 30 straight years. That's like turning a blind eye to a red flag in my opinion. People were saying that the AFFO, you can't use the payout ratio because it doesn't encompass the depreciation, which is then extra cash flow.
Which is valid, 100% valid, but there comes a tipping point where you're sitting on quicksand. The reason I do that is to add another layer of data. A lot of REITs have broad diversification and sometimes the AFFO and FFO don't capture the whole picture.
By this I mean that some REITs will generate a bulk of their business not from property related ventures, but from other things. Is it one of those? Like ABR for example. They're considered a mortgage REIT, even though they have a 30% of the revenue comes from actual properties.
Because not every REIT's going to be an equity REIT or a mortgage REIT. They're going to have a little bit of both and they might be dabbling in venture capitalism and things of that nature. So I want to make sure the payout ratio is not like 500%.
But it makes sense. Then finally after all that we look at the EPS, earnings per share. We look at the PE, price to earnings, PE versus the peers, the PEG, revenue, debt, asset value, etc.
from the financials. We look at the one year, but also multiple years just to verify that revenue is increasing and debt is decreasing, blah, blah, blah. Then after I get all this information I then have a risk reward equation basically that I put into place by this.
I mean are you willing to take on the risk posed with the data for the yield offer? What I came up with with O is I am not willing to take on the risk associated with the financial data that I came up with for a 5% yield. For me to actually invest in O the yield would have to be probably 9-11% before I'd even consider investing in O based on the financials. So we're actually going to go into O so you can see where I locate all this stuff and we'll highlight the different things and whatever, but this is from their quarter 4 earnings which they reported on February 24th, 2025.
So O is very diversified first and foremost, almost too much so. They have retail, industrial, office, casinos, convenience stores, data centers, etc. They have a lot of diversification.
Like we've mentioned before, diversification is good because not one area is going to bring down your bottom line, but just like stocks being too diversified can hinder your financials 80% of O's revenue though does come from the retail sector. So it's not too diversified, but 80% is coming from the retail sector which I'm not fond of the retail sector right now. I think because they have 80% of their diversification in the retail sector, even if it's Home Depot and Walmart and things like that, it's still like their revenue is going to go down.
When their revenue goes down, you're going to see all the other numbers go down. So O I think is overvalued. That's why the risk reward for O is not up my cup of tea because I think O is going to come down in price a good amount.
Well, it would have to if it's in the retail sector because people aren't spending money with this cusp of recession which has been confirmed pretty much by everybody at this point. So now we're going to dive into O's financials from their last earnings report. Now you can click over to Schwabby.
Oh, now I can click over to Schwabby. And Schwab, a lot of the times whenever you're researching a company, they actually have a link that goes right to the company which is super nice, investors. If you go into their 10Ks, you'll be able to see what they actually have money invested in.
You'll see right here, O has all of these things. Advertising, apparel, automotive, childcare, beverages, consumer appliances, electronics and goods, convenience stores. All of those.
Dollar stores. Are properties they own. Drug stores.
Yeah. A whole lot of stuff. Jewelry.
Yeah. Nobody is going to be buying jewelry in a recession. But I'm saying like when they're like.
Office supplies. Packaging. Too diversified.
I believe they're too diversified. Okay. That would make sense.
I would concur with this assessment. That's my opinion. What does my opinion count? Apparently not according to these people.
That was just in America. Now we have other countries. Pet supply stores, restaurants, shoe stores, sporting goods, telecommunications, theaters, transportation services, warehouse and storage.
So they have 15,622 properties that they hold at the end of Q4 in 2024. That was just U.S. Then they have stuff in Europe? Yeah. Jesus.
Okay. Lots of diversification is the point here. Cost of real estate sold.
That's one of the numbers you're looking for. Cost of real estate sold here. And thousands.
So that would be $658 million that they made in real estate sold in 2024. Because their whole report is going to be in cost of thousands. You don't really have to worry about the actual adding numbers.
You're just looking at that number. So $658. $658.
This is shit that I do for you guys. So if you've subscribed to the email and you get my valuation charts, you don't have to worry about this crap. If you watch the podcast, generally you don't have to worry about this crap.
But I'm going to show this because this apparently is super important. I don't read all their disclaimers. I could care less.
I'm just looking for numbers. I'm going to show you how to find it in the 10K, but then we're going to go back to Schwab once we find stuff. Because sometimes Schwab has it in a different location.
My awesome. So you're looking for net income, which is $867 million. You'll see that the net income is actually less than it was the last two years.
Then we're looking for depreciation and amortization. So we've got the first figure. Depreciation and amortization is right there at $2.395 billion.
So they're claiming more depreciation than they did the last two years as well. So now we have the $2.396 billion right there in depreciation, if I could spell. Now we're looking for gains on assets.
Remember we highlighted that at the beginning. Gains of sales on assets. So we actually came up, if you add those numbers together from their actual report, you get $3.374 billion.
If you go into Schwab, you can find the total number of outstanding shares right there, $891.77. So you go back to our equation. You take the $3.374 billion divided by $891 million, that gives you $378 per share. So then we have their dividend, which is $0.27 per month for an annualized dividend rate of $3.22. So you subtract that from the FFO, which gives us $0.56. So that's positive.
So we can continue to the AFFO now. That means it checks out. It's worth actually digging deeper.
Correct? Correct. Correct. So now we already know the FFO.
So now we have to go back into the data and find the capital expenditures. So since we cannot find it in the ridiculous document. Because they sometimes label shit all weird.
Go down to the financial page. So they didn't break it out. So we're going to go into Schwab because Schwab makes it way easier.
But here's what happened. We couldn't find it in the freaking thing. We couldn't find it in Schwab because I don't know if they're labeling or whatever.
So we Google searched it and it took us back to their freaking website. And now we're seeing it in ridiculously small print here. And I just did a control find because reasons.
And here it is. Okay. Okay.
That took forever. There's the 402. The straight line of rents is right below it and it's $171,171,887.
Funds from operation at $3.37. Then we found the reoccurring capital. So we take that minus this minus that minus that which gives us $2.8,113,000. FFO minus capital recurring expenditures minus straight line rents and we get. That $2.8 billion.
You divide that by the total shares outstanding again which is $891. You get an AFFO of $3.14. $3.14. So if you take the annual dividend which is $3.22 subtracted from the AFFO which is $3.14 you actually have a negative .08. That's bad, right? So that's a red flag. Red flag.
That means they can't pay with what they're earning, right? Now if you go to their actual reports they actually do a bunch of accounting. We saw that when we were trying to find that other number. Manipulation where it looks like it's $4 but if you do the standard accounting formula to find AFFO which is the FFO minus the reoccurring capital expenditures minus the straight line rents divided by the total number of shares.
That's how you come up with AFFO. So whatever they're doing they actually have their AFFO way higher. They have their like almost a dollar higher but we're just doing our math so it comes out negative 0.8. So we have that.
So now we go and remember I look at- So companies have been known to manipulate their stuff to look better than they actually are. During earnings reports they'll do whatever they can to keep shareholders confident. Just keep share prices high.
Yep, that too. So we found their profit margin is 16.45%. If you go into Schwab you'll be able to pull this. This is easy.
I know exactly where this is at. So there's their net profit margin, 16.45. Schwab does it for you which is nice. Very nice.
And we're looking for their payout ratio so you scroll up, 317.46%. Now the dividend coverage ratio, some people use that. What that basically is you click on the question mark, I'll tell you what it is. I don't use that.
I actually use the payout ratio but the dividend coverage ratio- Says ratio of income available to common stockholders excluding extraordinary items for the most recent trailing 12 months to gross dividends paid to common shareholders expressed as a percent. That's a mouthful. And you find that not relevant? Basically that means with their current cash, how many times could they pay their dividend out? With their current cash flow they could pay their dividend out one third of the time.
You want this, the top number to be under 100% generally, the payout ratio. You want this dividend coverage ratio to be above 100%. And it's only 31%.
So that's- Well the payout ratio being below the 100%, again I don't think that's necessarily valid for REITs specifically because they have to pay out that 90% plus you have the depreciation that fighters in. So that's why that can conceivably be above 100%. We will reiterate that because that is something that's different about these bad boys.
Okay. So we found their profit margin 16.45. We found their payout ratio is 317%. To me that number is too high.
I don't like the 317. Anyway. We find in the same page, you find the EPS is 98 cents.
You find their price to earnings current is 57.83. They have a forward price to earnings of 38.06. They have their PEG which is price to earnings versus growth at 4.61. Generally you want your PEG to be around 1. So that means they're pretty overvalued. That's really high. If you have Schwab you have this all at the tip of your fingertips.
You'll have their EPS of 98 cents. You have their price to earnings which is their current price to earnings, I guess their current price to earnings for the last 12 months is 57.88. The forward price to earnings is their next 4 to 12 months is 38.01. You see their price to earnings growth at 4.62. If you have Schwab this is all consolidated in a really tiny chart, that's phenomenal. Then here, if you go into income statement, you'll see the revenue has grown the last five years from 1.6, I don't know if it's billions or millions, I don't know, but it's grown from that to that.
But you'll see at the same time... Net income has gone down. Not from like after COVID, but like the last couple of years it's down. That's not super important, but that's just something that I just, my eyes automatically go to that and click on income or a balance sheet, and you'll see at the same time their debt has like just went ballistic the last five years.
Ballooned. Ballooned. So it's in... It went from 8,000... So it's in millions.
So it went from 8... .8 million. 8.8 billion up to 26.3 billion. So it's like their debt's just... Oh yeah, this is in billions.
Jesus. 8.8 billion up to 26.3 billion. We say billion because you look down here in the small print, it says value in millions, so you put six zeros at the end of that.
Jesus. Okay. So then we saw their revenue is up 29% over the last 12 months and up 220% over the last four years with that chart we just showed you.
And their debt is up 22% over the last 12 months and up 198% over the last four years. So then after you accumulate all this data, you do your risk-reward scenario. And this particular scenario with O is a 5.7 yield worth all the red flags of 80% of the rents collected via retail, which could get killed in the recession.
A negative AFFO number, a super high payout ratio, a super high PE, both current and forward compared to their peers. In Schwab, if you look underneath the ticker for the actual company, they have something that's bolded. I'll go to valuation.
They have a link that takes you right to competitors, right? Direct competitors. This is all their peers. And it has it all nice and concise for you.
So all the retail reach, their total price earnings on average is 32.97. Realty is currently at 57.88. That's a lot higher. I don't really look at the trailing 12 months as much as I look at the forward one. So the forward of 3806 is still above the 32.
So it's overvalued compared to all of its peers. For the last 12 months currently and for the future. So you have a ridiculous high PE and the revenue barely keeping up with their debt.
A lot of people won't agree with me, but to me, it was a few years from a dividend cut at these current rates. What's going to end up happening because they have 30 years of dividend growth. They're going to take on more debt to make sure they can actually keep raising the dividend every year.
Whatever their status is, I don't know if they're an aristocrat or a cheaper or whatever the heck they are. I think it's a king. I'm not sure.
So if they're a king, even more freaking ante for them to keep their dividend payout because the people get in those dividend growers to consistently have those dividend growth. That's like the security thing. So like people would freak out if that thing got cut.
So they're going to do everything to manipulate their balance sheets and whatever to like, I don't want to say skew the data, but they're going to put it in specific places so that it looks better than it actually is. It's one of the things I hate about data manipulation. Because they're so dependent on retail, the reason why I think that's possibly a few years from a dividend cut is because they're so dependent on retail, which I can see getting smashed in a recession.
Recession is coming. It's coming. So then you have to like think, okay, so if a company, a REIT that has so much retail exposure, how much is it going to drop in a recession? To me, it's going to drop more than the 5.7% each year that you get in the dividend yield, meaning that you're actually losing a lot of money.
So the dividend actually won't cover the price loss. That's part of the reason that like when we're in yield maxes, like whenever like say CONY goes down 50%, I'm not entirely too worried with that because the yield is 100%. So even if we lose 50% of our principal, we're still getting 100% in yield.
So we can actually make up that principal difference pretty quickly. Whereas a recession in retail could take five, six, seven, eight years for O to actually recover the amount of their stock loss. And if you're only getting like less than 6% each year, to me, that's not a risk war that I'm willing to take on.
And if they're taking on debt at higher interest rates, because the interest rates are still up. But however, long-term, if the debt...

If they get their debt under control, meaning the total spent on interest, right currently, like their last earnings report, they're spending $1.02 billion on interest and fees just on their debt. So their interest is actually higher than their net income. If they could get their interest spent on their debt under their net income, I would be more inclined to look at this one.
But for me, I don't like this one. I know this is a simplified approach, believe it or not. There's people that go way more thorough line-to-line analysis to make some of the numbers better or worse.
They'll go through every line on the earnings report to justify whether they want to hold it or not. I just like the simple... That's okay, but... The simplified approach to me seems to work well enough. Yeah, well enough.
Even with the simplified approach, there's too many red flags for me to actually invest in everyone's favorite REIT. That's my opinion. Oh, and the other cool part is that Tim gets those emails we always talk about, hundreds-a-day type deal.
What started trickling in with the other people that you follow? There's people that are saying, oh, it was... It was about a week after we had our post that everybody was ridiculing. Oh, it was overvalued. Oh, it was dividend might be cut.
I'm not the only person. There's a lot of the experts out there that think, oh, it was overvalued. When you're buying a REIT, the whole purpose of buying a REIT is you know you're going to get a pretty decent dividend yield because that's just how they're created.
You want to make sure... Carm and I were discussing this. If you can get something at the right valuation, whatever happens, happens. It doesn't matter because you got it at the right valuation.
Yeah, that's that safety margin. You don't want to buy something that's overvalued and then go into a recession. She said, well, are you going to... The one we did in the mortgage REITs is ABR, and ABR is actually... Yeah, this is going to be interesting.
...not looking too good right now. She said, are we going to sell it? I said, hell no. We got it for like $8 or some shit like that.
Why would we sell it? The most important component with BDCs, the yield max ETFs, the REX things, REITs, anything that has a higher interest rate that's deemed riskier, you have to make sure you have the proper metrics in place to give you the best chance of getting at the proper valuation. And you have to have a good strategy when things go awry like with the Coney experiment, which we did going into that. But like so if you can like... There's like the first couple of these that you go through when you're trying to evaluate a REIT, it's going to take you some time to find this shit.
But once you actually... Once you get used to it. ...get used to it, it only takes like... I can probably do... And if you can't find something, seriously, just Google it because that's what we did. We couldn't find it in the freaking thing because it wasn't... I could probably do like 10 of these an hour now as opposed to when I first started taking the... I probably like I could do two an hour.
So like I've increased... But you don't just blindly... ...and this is where the importance of doing the screeners to narrow down your pool the things you have to dig deeper into. That really takes you from that thousands of stocks down to a handful, and then you can blast through what you need. Well, if you use my top 10, like even if there's REITs on the top 10, like I've done some of like most of the research already.
When that happens, like if you remember when we went through that, I go to the dividendinvesting.com and I get their ex-dividend counter. I go through and I like I go through all this one's yielding 12%, I should take a look at it. I go through like the very simplified approach is basically looking at the revenue, the debt, the profit margin, and the payout ratio and shit like that.
And like I find things that I'm like, oh, that's pretty cool. If you're not on the email, this is this week's. So like IIPR is a REIT.
It's a pot REIT, but I see it has 11.7% yield. So I'm like, well, that's going to require some more investigation. But this is a very simplified approach where you see the 52% profit margin, which is awesome.
And you see that its price to earnings versus its peers is super low compared to what its peers are. So I would actually then dig into this one deeper to look at, make sure that the financials are all in line. That's how I do all this.
And I did, I found out IIPR is a kick-ass REIT. So that's why it's on the list. It's in my mom's retirement account.
And this is something we give away every week. Tim goes through this every single week to give ideas to dig deeper. So he just does it from a less deep thing.
I saw what a lot of people do is they will, that's like, there's a lot of lists out there, the top 10 highest yielding stocks going a dividend. And to me, the highest yielding doesn't give you any data whatsoever. That's literally just, oh, these are yield like 20%.
Like, well, are they good? Are they bad? So this is a way where I could, if any of these peak your interest, you can be like, well, I like this one here. This Trinity here, it has a 50% profit margin and it's like a third of what its peers are. So I might want to look into that one further.
Well, once you guys are reading this, the next dividend dates will be passed. So you won't be able to get into this. So the whole reason to get onto the email is to get this the Friday before.
So you can actually take advantage of the next dividend drop and not have to wait 30 days to 90 days. But this is meant to be like, as I've mentioned numerous times, this is meant to be like, okay, I need to research these 10, make sure they fit your risk appetite. Make sure they fit your portfolio, what you're trying to create, make sure they fit your diversification.
You don't want to have like, cause a lot of these are BDCs. Like that's a BDC, that's a BDC, that's a BDC, that's a BDC. There's like five BDCs on here.
And then there's like one, two, there's a, IFPR is a REIT, AGNC is a mortgage REIT. I think NLY is a mortgage REIT. So there's, and EFC is a mortgage REIT.
So you have these three, these three, right? Seven, eight, nine are mortgage REITs. You don't want to have a portfolio that has three mortgage REITs, and then it has like five BDCs on it. So you don't, obviously you wouldn't invest in all of these, but these are an idea for you to say, okay, the most important number in this is the profit margin, because if the profit margin's higher, that means they can afford their current dividend.
But again, that's a little different for the REITs and stuff, but this is just to get you started. Yeah. So now we're going to do mortgage REITs cause we just brought them up with the EFC, NLY, and AGNC.
They are all three mortgage REITs. Yay. Mortgage REITs are evaluated a little bit differently.
Ooh, shocker. Mortgage REITs, like with equity REITs, the first thing I do is I want to look at what the mortgage REIT holds. I want to see their, I want to see broad diversification.
Unlike with equity REITs, where it's too much diversification is bad, mortgage REITs, the more diversification is better because if like one or two of their clients go bankrupt or something like that, you have 98 more to fill in to keep the revenue kind of where it's at. Yeah. They're not the ones that are doing the business and having to do the legwork.
They're just managing the papers. So the diversification actually puts less risk on them. The only area where like too much diversification is bad is the geographical area.
Like if they say they have a hundred different clients, but they're all in, say, we live in Pennsylvania, so they have a hundred different clients in Pennsylvania. Well, that would be bad because what if the real estate market in Pennsylvania goes to shit? They have all their eggs in the Pennsylvania basket. So if you want to find a mortgage REIT that has their eggs in like 15, 20 different geographical regions.
The next thing I look at in mortgage REITs is how often they issue new shares. If they are always issuing new shares, that is not a good thing due to when the, obviously the more shares on the market means higher dilution, which means you're getting, you're getting less money for your shares because there's more shares out there. So the dividend will probably be cut and the share price is probably going to go down.
So like, you're just going to like, it's not good. If they're always issuing new shares, that's not good because it's going to affect your dividend yield and it's going to affect your share price. Share price will always fall because when you offer new shares, you're adding like a hundred million new shares to the market, the share price is going to go down.
It's just how it is. It always go down. It could be the biggest red flag.
It's in the top five red flags. If a company is always issuing new shares, that's huge red flags. The next thing we evaluate when looking at mortgage REITs is the debt to equity.
To determine this ratio, you simply divide the total liabilities by the total shareholder equity. The lower this number, the better, but M-REITs by nature will have higher ratios. Personally, I feel that anything under 4X is a good starting place.
And we'll go through that whenever we look at ABR. Then I look at the PE just to verify that the PE is currently under what the M-REITs on the whole average is. Currently, when I did this, it was last week, the average for all 39 M-REITs was 15.3 PE.
So that obviously means that if there's 39 of them and the average is 15, you're going to have more that are above that, and you're going to have more that are below that. So you kind of want to pick out the ones that are below that as long as the financial stock stack up. Then I'll look at the dividend.
Here, I'm looking at the yield, the history, the payout ratio, which can be up to a hundred percent and the consistency of the dividend. What I mean by consistency is if they've paid out $0.40 and they paid out $0.40 for like 12 quarters, that's consistent. If they paid out $0.40, but then they cut it to $0.38 and they cut it to $0.36 in like a three year period, and it goes back up to $0.40, that's not consistent.
That means they paid $0.40 like two times and they were bouncing all over the damn place. Then I'll look at the earnings. I want to verify the earnings cover the dividend.
And finally, we'll dig into the financials. We want to see the revenues growing, the debt shrinking, and the overall health of the company. ABR.
I'm glad you picked this one because this one, again, questions that narrative because we're going back to Schwab. ABR's 10K is much more easy to read than O's. Now I will say sometimes, real quick before we click on the thing, scroll down a little bit.
Sometimes you can find the 10K in the news section of your stocks. Schwab's display case. Yeah.
But in this case, I couldn't find it. So scroll back up to the same place where it was before. Oh, it's so nice.
They have a little website clicky thing for you over here. Investor relations. In ABR.
Okay. The first thing you see here is these are the different things that they have in their portfolio. They have Fannie Mae, Freddie Mac loans, private label loans, FHA loans, FSR loans.
So they have a decent amount of diversification, but you'll see that they are kind of top heavy with Fannie Mae. Let's scroll down a little bit. Here you'll see that, okay.
The year ended, they had 61% of their dividends in SFR loans or 61% of their loans in that. They had 31% in multifamily loans. So that's pretty decent.
It's not great. It's less diversified than it was in 2023. 2023 is 54 and 42.
I mean, that's not always bad because that economic climate shift. So you see that ABR holds about 54. If you go through that, you'll see that 54% of their portfolio is in multifamily mortgages and 45% is in single family homes.
The other 1% is in land. We saw that the loans were spread between Fannie Mae at 67%, Freddie Mac at 18% and a couple of others. Then you get the geographic.
We'll go back. Geography. How come I can't say that word? Geographic? Geographic.
The geography. You'll get the geography breakdown. How come I can't say that word? Basically, they have loans in 10 states, which is decent because they're spread out across the country.
I wish it was more, but it's not. So when we're looking at – I misspoke. To find the geographic spread out, actually, if you just go into Arbor's website, they have a list of all their origination offices, which we looked on their website.
At Atlanta, Boston, blah, blah, blah, blah, blah, blah. These are all different places where people can get loans through ABR for their homes. So there you have it.
It's spread out across the United States. Anyway. In the second point, in 2024, Arbor issued 10,030 new shares, which is a steep decline from the 193,661 issued in 2023.
But in 2024, ABR also repurchased 11,408 shares, meaning no new shares were technically issued. I'm betting that 10,000 shares were drip shares since I can find no news in anything on the Arbor website about new shares being issued. I was going to say, why does this matter? Well, that matters there.
They issued 193,000 shares in 2023. Yeah, that's a lot. That means they issued because they're trying to raise capital.
That's why they issued new shares. Which usually dilutes the pool, right? And brings the price down. So I actually think that's a good thing that they didn't issue more shares.
That's actually on the page. If you go to the page, we can pull up the shares. Oh, boy.
So that's where you see right there where they issued a new common stock. My 10,000 was actually from a different source. So anyway, they didn't issue any new shares other than the drip shares.
If we go look at their quarter four earnings, we can see their total liabilities were 10,339,011,000. And the shareholder equity was 3.1 billion in shareholder equity. That gives us a debt to equity ratio of 2.28, which is well below the 4.0 ratio.
Where you find the total liabilities, go back to the page. There's total liabilities, 10.339. And then there's the total shareholder equity of 3.15. So you basically just divide that one by that one. See, if you look in 2023, they did something because in 2023, they had a total liabilities of 12 billion divided by 3 billion.
So it was 3.8. So they brought their debt to equity ratio from 3.8 down to 2.8 within a year. So that's good. Very nice.
Like I said, the 4.0 is like the... What is that? Mendoza line for baseball fans? Mendoza line? It's like the Mendoza. The hot to crazy line? 4.0, like anything above 4.0, you have to like seriously consider like, what am I doing with my life? Anything below 4.0 is good to go. Okay.
Go back to Schwab. We're going back to PE. You should know where that's at.
Okay. There's the earnings per share is $1.06. $1.06 actually, I mean, this is something that I don't really look at. I just look at this subconsciously.
$1.06 and here's their earn... So they made $1.06 and they paid out $1.20 in dividends for the last year. But these are the numbers that are more important. Like if you look over here, you see $0.47. Their dividend is $0.40. So $0.47 covers the dividend.
$0.45 covers the dividend. $0.43 covers the dividend. $0.40 covers the dividend.
Anyway, that's not something that you need to look at, but that's just something that you'll like automatically gravitate towards once you do more research and things. You see their current price earnings is $11.05 and their forward priced earnings is $11.05. Remember when we said that $15.3 is the average PE for mortgage rates. So like that $11.05 is well below the $15.3. So that's good.
Okay. I'm sorry. It's $0.43. The current dividend for ABR is $0.43 quarterly and it's $1.72 annually for a yield of 14.29%. Over the last 10 years, the dividend has increased from $0.15 a share to $0.43 a share, which means it grew at 187% or 18.7% year over year.
ABR currently has a payout ratio of 146 and a different dividend coverage ratio of 69. Remember I said you want the payout ratio to be around 100 and you want the dividend coverage rate to be above 100. So again, that's a red flag.
Generally, a lower payout ratio and a higher dividend coverage rate are preferred. So we just mentioned that red flag. ABR also has a very high payout ratio.
And when you factor in the payout ratio, it was 100.47 for a five-year average and 80.16 for a 10-year average. That's a huge red flag. So that 146 over five years was 100%.
So that means it's up 46% over its five-year average and it's up almost damn near double over its 10-year average. That's a huge red flag. That means they're actually probably due for a dividend cut.
Which I think you've said, right? Yeah. Seven of the past eight quarters, ABR had an EPS that covered their 43% dividend. The most recent EPS of 40 did not cover the dividend.
So that is something to monitor going forward. Again, another red flag. Yeah.
I was just going to say, another one. And again, looking at that main financial page and swap, we see the total debt has decreased 18% over three years, which is nice. Revenue has increased 79% during the same time frame, which is super nice.
Looking through all the financials, everything we just brought up, I see a dividend cut coming down the road for ABR or ABR is going to issue new shares. Either way, their cash is dwindling and it will need to be replenished, whether it's through a dividend cut or issuing new shares. If the interest rates are cut a few times, that will go a long way and generate more cash.
ABR issues loans at a higher rate than they pay for borrowing money. So if they can borrow money at a lower rate and refinance current debt while still having an 8% to 10% rate they lend out at, their financials will improve drastically. So ABR, to me, is not overvalued based on its PE and some of the things, but it is at a pretty, I'm 75% certain they're going to cut their dividend.
So my question here would be, when they, they had a major stock correction. We'll go to year to date. Well, it shouldn't be year to date.
Down 15% year to date. You do the one year. No, when it did the actual, when it dropped off that cliff last year.
When was that? Oh, so it had a major correction and then it spikes back up and now it's had another major plummet. Looking on here. My question was, did they cut the dividend when it had this massive drop off the cliff thing, this first one back in July of last year? No.
So they didn't cut it and now it's down even further. So when you, when a stock drops significantly in stock price, they're still obligated to pay that per share thing that they've locked into unless they cut the dividend. It's like all this volatility here is interest rate based.
Yeah. You'll see, like if you go out to the five year, it was doing nice. And then interest rates started getting fucked around within 20, 2023.
So it went down. And it's been very volatile since then because it was like, oh, interest rates got cut. So it went up.
Oh, interest rates were held. So it went down or stayed sideways. If you looked at the sentiment, everybody thought they were going to cut them or raise them or this or that.
And it was like back and forth. So the sentiments definitely market swing. Mortgage REITs are very susceptible to interest rates, obviously, because they're borrowing money and they're lending money out.
So they have to have that interest rate spread. So it makes sense if the price of this thing has come down a significant amount that the dividend is a burden on their revenue and net profit margin and all that stuff. So it would make sense, I think, from what Tim was saying.
And another huge red flag for something I didn't even bring up, but just looking at that number, that's crazy. What are we looking at here? That one right there. The short interest, the percent of shares outstanding, 31.34. So they have 31% short interest.
That means people are betting on them to lose value. Wow. OK.
And if they do a cut, that's exactly what will happen. So people are betting on them to lose value. So like if you're not in ABR, I would wait till the dividend cut and the short interest gets rectified.
But it's a really good company. And the reason that we're not getting out of it is because we bought into it so long ago. Years ago where we're like our cost basis is like $6.
Like what's the current price thing? It's like $12 something. Our cost basis is like $6. Dang.
It's like $6. Yeah. So if you would have been up here at this like 15 mark, you would have lost a lot.
It's one of my favorite stocks we hold, but I wouldn't recommend it right now based on the valuations that we just went through. And that's where the magic comes. You can still hold stuff in your portfolio if you get in at the right price.
And there's that safety margin. Generally, because this is tedious, I do this like probably once a year. And then I monitor the news.
What I'll do is I'll go through. If I find things during my research, that's a read I have to look at. I'll do this research.
I'll save it all on a list and I'll do it like once a year. And then I just have a watch list of reads. And I'm like, OK, well, that one should be around here in price.
So you can kind of ascertain what the price should be based on the valuation. O is trading at like $57. But based on its valuation of the metrics, it should be like in the $38 to $42 range.
So if O dropped down to like $40, I'd probably think about picking that up. ABR, based on what they got going on, I would think that a good price for ABR would probably be $10, maybe $9.50 to $10 range. So if ABR fell to $9.50 or $10, I'd probably start an initiated position, pick it up.
And I have a watch list of reads that I monitor like that. Because once I do the financials, I only have to check in like at the end of the year to verify that the current year was better than the previous year. So it's like it's a lot of upfront time spent.
But like once you get more acclimated to it, you do it quicker. And then you have a watch list where you kind of know where things are supposed to be. So it's really easy at that point.
And then as you get familiar with all these different metrics, you actually start to notice when something's a red flag. And that's why Tim can do this so quick. I think he's gotten to the point where most of the data has been so internalized that he can just look at something and get a feel for it.
That's why he was like, yeah, O's got tons of red flags. Or no, O just isn't sitting right with me. And that happened with PTMN.
He just knew something was off. And it's so funny. I know it's going to piss a lot of people off because they love O. But like, dude, the numbers don't lie.
But again, would you rather lose that money? If you're in it for the long haul, it really shouldn't matter if it has a pullback. But if you need the money soon, like you lose that huge chunk of your principal, are you going to freak out about that and sell low? I don't know. It just depends.
But if they got in super, super low on O, it doesn't even matter for them. It doesn't. But people need to understand that to evaluate REITs, there's more than one or two metrics.
There's a lot. All those steps is probably 300% more than I do in an average stock. Average stock, you literally can just go into Schwab and all that stuff.
We were looking at the price to earnings, the peg, revenue, and all that. It's all on one page. You don't have to go into the earnings reports.
Is that because they're higher risk? Because usually the higher yields? Well, it's because they have different... Price to earnings is super good for common stocks of most companies, but REITs you can't use. It's just because they're a different animal? Yeah. Is that all it is? Okay.
So they're just a different animal. They have different metrics that you have to use. And if you don't want to deal with all that, you don't even have to buy into REITs.
Or you just get a fund. That would be the way. If you don't want to be into REITs, I would just look at closing the funds that hold REITs.
Because there's a few of them out there that literally all they do is... Any examples off the top of your head that you know? No, I don't. Okay. Because we don't do it that way.
I don't do it that way. But if that's what you want to do, you just can find a closing the fund or an ETF that literally just has all REITs. And then they do all the work for you.
And you just pay like half a percent in fees. Or you could just get on our emails. You could.
But that's like... Because Kevin talks about what he gets in and goes... I know it's a super boring topic, but it's something that I guess is needed. Because even people that think they're right don't know what they're talking about. So there's a lot of factors.
But it is still subjective to the individuals. Risk tolerance. Well, it's risk reward.
So if I was looking at Arbor right now, it's a 14% yield. I don't think it's going to go down more than 28%. So that would just be two years of dividends to recover your loss.
So that risk to me makes sense. If I was not... If I was new and had never invested before, I wouldn't invest in it. But me, if I had more money, I'd probably be buying Arbor the entire way down.
But we actually have a pretty high percentage in our portfolio already. So I can't buy anymore. All right.
So that answers that question. If you guys want any other stocks evaluated, let us know. Or if you have questions.
Because I know this is some confusing shit. So if you have questions... Facts. And if you... Again, Tim does it all the time.
People throw him stocks. We just had one from our F&A Van Life followers the other day. It was... What was it? Buckle? Buckle.
So he asked about Buckle. Tim did an evaluation for it. He told him what he thought.
Showed him what he was looking at. And he leaves it up to you guys to make the choice. Because it's your portfolio at the end of the day.
You have to be the one making the decisions to pull the trigger or not. Yeah, I do try to get back pretty quickly. If there's a question about like an ETF or stock, I try to get back within a couple days.
Here's what I think. So if you have those, drop them in the comments. I mean, there's tons of ways to reach out.
And we'll get back to you. Because you definitely need training wheels in the beginning of this. Until you feel comfortable.
But once you go through the motions, you'll be fine. And then... So that's... Next week, we're going to do a podcast on market pullback, corrections, and recessions. Yes.
Because the recession is looming. It is now the point where the CFOs of companies have gotten on the bandwagon. Customer sentiment has already been at that place where recession is pretty much inevitable at this point.
They're not inevitable. But like CFOs are like 75% sure there's going to be a recession. They're preparing for it.
In the next like 18 months. But if consumer sentiment stays the way it is, like they're the ones that drive the down... So if you want to watch the media and say, oh, whatever news I watch is saying the recession is not going to happen, I'm more... I'd rather prepare for it. I've listened to people that actually are in the companies that handle the company monies and CFOs.
If they think that their company is going to have a recession, then... Yeah. Just saying that's something to look into and like... Prepare for the worst, hope for the best. What to do.
There's psychological stuff, blah, blah, blah, blah. We've been through a lot of this before. But I think it's a good follow-up that we should do.
Things are going to get worse before they get better. And if you're sitting on the fence, recessions are the best time to invest because you compound so many more shares and you can buy so many more shares. So when things correct, like you just... Like millionaires are made in recessions and bears.
That's really all it is. Same with crypto millionaires. Yeah.
They got Bitcoin at like $6,000 and now they're sitting at like $80,000 because they were willing to buy Bitcoin during a crypto winter. Yep, facts. All right, guys.
So we will see you next week. Hopefully that helps. Thanks for tuning in!! And keep making them divies.