#164 - My Short Stint As A REIT Research Analyst & What I Learned

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Mar 5, 201811m
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#164 - My Short Stint As A REIT Research Analyst & What I Learned
Mar 5 '1811m
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Hey everyone, Kirk here again from Option Alpha and welcome back to the daily call. Today, we are going to be going down memory lane here a little bit for me and I want to talk about my short stint as a research analyst, a REIT research analyst and what I learned in that capacity, in that role. And so, I don’t know if there’s any major takeaways. I didn’t write down here my top three things that I learned. But I just want to talk through this because I think it might help shed some light on not only that industry, at least from my perspective and my opinion, but also just how I fell into the capacity that I’m in right now. After I worked in New York, I worked for Deutsche Bank in New York in mergers and acquisitions, also had a rotation on the trading desk, so that’s where I got I guess you could say my official start in the business, is actually in New York. I moved back down to DC where my family and my wife now (previously was girlfriend at the time and fiancé) was living and had a short stint as a research analyst for BB&T Capital Markets. It was a local regional bank. It’s not a huge multinational bank by any means, but it’s a very big bank in the area and across the eastern seaboard.

And so, when I was working in REITs, I wanted to do something a little bit different. When I was in New York, I was on one side of what’s called the Chinese wall where I was on the private side or the non-public side, so I had technically, insider information. You can’t trade-off of it, you can’t do anything and I wanted to see what the other side looks like. That’s basically why I wanted to go down the research side and become an analyst. And I thought, “Okay, great. I like the market, I like stocks, I love real estate. I’ve always had an interest in real estate. And so, I want to see what the research side looked like. I wanted to see what the professional research side looks like with regard to real estate.” And so, I figured REITs were a really good fit for that. And so, I got placed into a group. Initially, there were four of us and then it whittled down to just three of us that was in this group and we covered all kinds of REITs. REITs again are real estate investment trust. And so, we covered multi-family and hotel and hospitality. We covered specialty REITs, so like ski resorts and water parks and amusement parks which is actually kind of cool that you didn’t know that most of those are actually owned by REITs or a lot of them are owned by REITs. And then we cover things like triple net REITs which I found a real love for and interest in which those are real estate investment trust that basically buy up assets and then lease them back to the lease source like Walgreens or CVS or shopping centers. It’s actually kind of crazy how that whole business worked. You would never really know it. But it’s very, very interesting.

I did learn this and I guess the reason I’m telling you guys all this back story is because I did learn a lot about just like how that side of the business work. I think in sitting down with… All the time, we would sit down with the CFO or the COO or the CEO and talk about the business and talk about the future and how they looked at asset allocation and how they looked at use of debt and leverage. What I think I found in this environment was a real understanding of how leverage works in regard to people and then profit. What I mean by that is that most of these REITs are actually run by fairly small teams. The cool thing about REITs, especially triple net REITs which are ones that just basically buy land and lease it back to the leaser or like a Walgreens or CVS, is that those companies have thousands and thousands and thousands of properties and what they end up doing is they end up running all of this basically remote and they run everything with a very small team, sometimes eight or 10 people. It's really not that big of a team. And the reason that they can do this is because they’ve set themselves up with systems and leverage and basically, the capacity to play in their space, in their own little sandbox and be masters of that universe. I honestly don’t know what other way to say it other than that.

They have a very simple business model. It’s actually not complex at all. What I’ve tried to take away from that is everything I do with Option Alpha and everything I do personally with trading and investing, is just to really have a simple business model. Most of the REITs are basically a spread business. Not all of them, but most of them are spread business. They have the capacity to borrow millions of dollars at 3% or 4%. They re-lease that money back out too using real estate. They re-lease that property that they purchase back out to a tenant at 6% or 7% and they make that spread difference. And so, it's truly an edge business. It’s no different than options trading in the sense that there's a definable edge, but you don't realize that edge until you’ve actually gone through the process. You have to borrow the money, you have to lease it out and then you’ve got to hold the property for four or five to 10 years before you actually really start realizing some massive gains.

I learned that side of the business that’s really just important that’d be leveraged in the right areas I guess. We’re not talking debt leverage. We’re talking about use of time and funds and allocations and capital. And then also just to realize that the spread business takes a little bit of time, but generates a lot of income. A lot of these REITs are just so fascinating because they generate so, so much income and they have such a good track record of paying out their dividends. Something they’re required to by keeping the REIT status. But they still pay out dividends. They have really low leverage rates, really high payout rates, just a fascinating business. And so, I try to take everything that I learn in that capacity and try to apply it to what I do now with real estate, with what me and my wife do with our real estate properties that we hold, also with what I do with Option Alpha and how I trade. I try to think about options trading because it is very much a spread business. There’s a definable edge, there’s a definable margin that you can capture as an option seller and it just takes time and repetition before you get into it, before you can really realize that and really solidify that edge. I think that’s probably one of the biggest takeaways I had.

The other thing I learned in that business and not necessarily on the good side per se. I loved the people in the business. I loved talking with the CEOs and CFOs of these companies and really picking their brain about how they saw the markets and capital allocation, the whole deal. What I didn’t really like about the business is where the research analyst like me would fall into place in the grand scheme of things at a company. It’s not any knock on my company that I was at. I think it was just the whole industry thing. Where we fell into place is that like our goal in the company or basically, our mission in the company was to write research and to publish that research, buy, sell, recommendations for a company, but then we were supposed to be used, like our research was supposed to be used as a frontline of… Not defense, but as a front line of engagement for clients in the banking community. The next level down or the next level out from us would be somebody who was like a sales guy for the company and would call prospective clients and say, “Hey. Did you see this research report that our analyst wrote about XYZ company?” If the research report was you should sell that stock, well, there’s not any reason to call that client. Our salespeople would not really ever have a reason to call somebody if we had a sell recommendation.

I’m not saying that they ever told me or forced me by any stretch to deliberately make a buy recommendation on a company, but there was this underlying tone I felt throughout everything that we did, that we should basically produce research that would then generate commissions and generate banking revenue for clients, so bring clients in. If it was a hold recommendation, why was it a hold and could there be upside potential in the future? Yes, it might be a hold now, but maybe there's upside potential in the future. If it was a buy recommendation like talk about how great the buy was, like how great the buy recommendation was and how much upside there is and where is the stock really going… I think it was just this underlying tone that I just honestly hate it. It drove me crazy. I loved everything about the business except actually publishing the research because in research and any investment research, there are so many factors that go out into the future that you just can’t possibly know. There’s growth rates, there’s expense rates, there’s taxes, discount rates, like where are interest rates going to be in the future or where are taxes going to be in the future. You just can’t predict all of that stuff so accurately enough to then publish a piece of research that says like, “Yes. This is the buy or sell recommendation.”

Now, I know that this still goes on and I’m not saying that I don’t agree with people and I don't think that they’re smart people when they publish their guess. But frankly, it's just a guess and in literally instance, two instances like two minutes of a trading day, that could be totally changed with a new law that’s passed or new interest rates that are subjective to the market, new market pricing, like the whole market could just drop 5%. And so, you find yourself really in just this huge cat and mouse game all the time of having to redo research and republish and reanalyze on a forward 10 or 15 year business. It’s just totally unrealistic to think that you can predict that far out into the future and then make like really actionable, reliable signals off of that. That’s the business I really didn’t like at all. Honesty, it’s just one of the main reasons that drugged me out of the business, was that side that just seemed unrealistic. I guess it’s really what it comes down to. Again, I’m not knocking people who do that. I think that there’s really wicked smart people who are in that industry, but it just wasn't for me. It wasn't a good fit for where I wanted to be and what I wanted to ultimately do.

During that whole time though, I was able to… Since I was on the public side and I didn’t have private information or inside Information, I was able to then start trading options and start continuing to do what I had learned how to do in New York or refining what I was doing and started to trade options and day-trade a little bit. I started to I guess try to day-trade a little bit at the time and realize that wasn’t a good idea very quickly and then started to really hone in on this option strategy that I’ve been using basically for the last couple of years. Anyways, it was a blessing in disguise for sure. It was a great industry to be in, at least for the short time that I was in it back in the early 2000s. Yeah, so we’re here. Hopefully that helps out. I know it was a little bit longer of an episode today, but I wanted to share my thoughts on what I did there and what I learned. Obviously, if you’ve been in that industry, I’d love to hear from you or if you thought this was helpful, let me know. Hopefully this helps out. As always, until next time, happy trading!

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