Real Estate Investment Trusts (REIT) are tax free business entities that invest in real estate developments and multi-family housing. There are strict compliance requirements to maintain this tax status. In general, the investors must by paid at least 90% of the earnings every year.

Value Investment Fund Status Week 12 – Principles are Working.

Value Investment Fund

During the week ending January 15, 2021, the Value Investment Fund grew a whopping 1.3%. Whereas the DOW reported a slight downward change of .6%. Exceptional growth for the fund was boosted by the results tied to the REITs Pool. REITs grew 5.8% in one week. The principle of patience is beginning to show itself with this pool of investments. Altogether, this pool has expanded $10,226 in 12 weeks off of an investment of $60,000. However, this is an unrealized gain at this point in time. This coming week, all of the REITs will report their 4th quarter preliminary results. If results are positive, the REITs Pool will continue to grow. If results mirror the 3rd quarter, there will be slight drawback of three to four percent. If results are significantly lower than the 3rd quarter, the REIT’s Pool balance will most likely drop back to its basis. Thus, the principle of risk reduction protects the actual core principal with value investing. Based on intrinsic value and the current market conditions, it is unlikely that the REITs Pool of investments will go negative in comparison to the total amount invested to date. 

At the beginning of the week, the Value Investment Fund’s status stood at $117,894 (see Week 11 report). On Thursday, the Fund sold Comerica Bank and made a nice return of 18.38% in a mere 35 days as that particular stock soared that day to the market recovery price set in its buy/sell model. In total, Comerica Bank earned $3,929 off a $20,000 investment; this includes dividends earned in Mid-December. This was another successful full transaction. Total realized returns equal $12,855 including dividends in 86 days of a $100,000 starting balance. This is tracking for more than a 40% annual return. The Investment Fund is still adhering to the expected return of at least 34% during 2021.

Purchased 43.2994 Shares Essex Property Trust

Essex Property Trust, Inc.

Today, the Value Investment Fund purchased a second tranche of Essex Property Trust. After calculating the intrinsic value of Essex Property Trust at $256, the REITs Pool allocated $10,000 for a second purchase of Essex once the price dipped below $230 per share. Today, 01/11/21 at 12:38 PM, the stock price dropped to $229.95.

Value Investment Fund Status Week 11 – Good Week

Week 11

During the week ending January 8, 2021, the Value Investment Fund expanded 1.3%. Whereas the DOW reported a stronger uptick of 1.5%. Again, exceptional growth for the fund is held in check due to the continued poor performance of the REIT Pool. The concerns about the ability of folks to pay rent during this lockdown period is holding the pool in check. Many institutional investors in these stocks are waiting for the 4th quarter reports; the preliminary reports are due out in two weeks.

At the beginning of the week, the Investment Fund’s status stood at $116,231 (see End of December 2020 report). On Friday, Union Pacific was sold at $215.17 as that particular stock soared that day. In total, Union Pacific had a 23.66% return in only 72 days. This was another successful full transaction. This transaction added $4,620 to the realized returns total of $9,177.38 including dividends earned of $1,122.12 in 79 days. This is tracking for a 42% annual return. The Investment Fund is still adhering to the expected return of at least 34% during 2021.

Intrinsic Value of Essex Property Trust

Essex Property Trust, Inc.

Intrinsic value of stock is a company’s realistic value per share at any given moment. Intrinsic value is not book value; it is the most likely dollar amount a reasonable person would pay for the underlying net assets. In most cases, an investor would include some value for the near-term future earnings of the investment; but the core amount in determining the intrinsic value of a share of stock is tied to the net assets at fair market value.

The intrinsic value formula is different for every sector of the economy and for the respective industries within that sector. Equity based real estate investment trusts (REITs) consist of six different types. One of the types of REITs are apartment complex based operations. In effect, they are apartment rentals. With real estate, specifically those in the home rental industry which includes apartments, condos, townhomes and traditional individual homes, intrinsic value is strongly tied to the fair market value of the rental properties less the assigned associated debt (mortgage). In addition, some value is included for future near-term earnings and the other assets on the balance sheet. It is really no different than how your traditional home rental operation would value their investment.

With Essex Property Trust, this REIT has been around for almost 30 years. It owns 246 apartment complexes with 60,272 units. There are an additional 1,853 units under construction. To determine intrinsic value, one would simply appraise all 246 complexes, determine the full fair market value and then deduct the total debt to get net assets value. Add to this value, the other assets on the books, get a full net assets value at fair market value. In addition, you would simply add about three years of profits. With this cumulative sum, divide by the number of shares and determine an approximate intrinsic value per share.

This appears relatively simple. For Essex, assume each unit can be sold for $350,000; seems like a reasonable value per unit. Total fair market value would approximate $21.1 Billion. The other assets on the books are equal to around $900 Million, thus total assets at fair market value would approximate $22 Billion. Total debt and current liabilities on the books are approximately $7.2 Billion. Once the liabilities are satisfied upon the sale of the units, the net remaining amount available to all shareholders results in $14.8 Billion. There are 67.5 Million shares outstanding. Thus, each share has a net worth of about $219 tied to net assets value at fair market value.

Currently, the company’s net operating income is just a little over $8 per share. Using three years of net income, the investor would add about $24 to the net assets value outcome to get total intrinsic value. Three years of net income is used as this would be a reasonable and normal time period to dispose of all the complexes, i.e. it would be the time period to negotiate an arm’s length transaction (fair and normal). Thus, Essex Property Trust’s intrinsic value is approximately $243 per share. 

Of course, there is more to it than this simple approach. But the core idea is there; the intrinsic value should be in the neighborhood of $243 per share. As a value investor, you should anticipate that the intrinsic value isn’t going to deviate greatly from this simple quick calculation. In effect, a value investor would expect the actual outcome to end up within 20% of this quick calculation. Thus, the final intrinsic value should end up in between $195 per share (20% less) and $292 per share (20% more). From Lesson 7, there is no definitive intrinsic value calculation for any stock. Intrinsic value has a range; the key for value investors is to narrow this range as much as possible in order to determine a reasonable intrinsic value for any potential stock investment. Ideally, getting the range down to plus or minus 3% is the goal. In effect, the final intrinsic value calculation is somewhere between the two given outcomes and the value investor’s goal is to have a high level of confidence with the final outcome. 

What is important here is that if you end up with a really conservative outcome (tending towards $195/share), it is likely the market price will never dip this low (the last time was in November 2014) thus eliminating opportunities for the value investor. If the end result is too high (tending towards $292/share), you end up with more opportunities but the end result with the investment is less gains from the respective buy/sell turnovers and therefore the overall return for a value investor decreases. In effect, it defeats the purpose of value investing which is to buy low and sell high. Thus, it is extremely important to walk through the exercise of calculating a reasonable intrinsic value that results in reduced risk and adequate opportunities to make buy and sell transactions assuring an excellent return for the portfolio, i.e. the pool of similar investments.

Given this, how do you determine a REIT’s intrinsic value to plus or minus 3%?

Value Investing – Industry Standards (Lesson 13)

Have you ever wondered how the measurement of length called a ‘meter’ came to be? It is simply the distance light travels in a given time period. The key isn’t the actual definition, it is whom dictates this time period of travel. Some authority states that this is the definition of a meter (also written as ‘metre’). It is currently the International Committee for Weights and Measures based out of France. It is an 18 person task group promoting uniformity with units of measurement. This committee is the authority.

This same principle of authority exists in business. Every industry has their own authority or set of principles promulgated by an agreed upon group of individuals or a leader within that group. For value investors, understanding the authority for the respective industries is essential to measuring success for each member company within the pool of potential investments. Once a value investor recognizes what is the standard of production or performance, it becomes easy to compare their respective investments and then equate this into financial value. There is a hierarchy of authority for all industries. In almost all cases, the number one authority is a governmental institution or law. Other levels of authority at the next level include academia, associations, journals, books, white papers and committees. The third level of authority include experts and company level affiliations. The final level of authority is the leader in the respective industry.

Each of the following sections explore these different levels of authority. In each section, there is an introduction to the various resources the value investor may wish to use when investigating their respective industry. The key to this lesson is to understand that higher levels of authority are the standard setters. Value investing is about having facts to support a buy/sell position with each member of the pool of investments. The stronger the authoritative position of the standard setter, the more accurate the buy/sell trigger points can be calculated.

Value Investment Fund Status Week 8 – Patience

Patience is essential with value investing. It is difficult because it just can’t get here soon enough. However, the models will prevail and the returns on the investment will be lucrative. Be patient.

With the REIT Pool of investments, the model indicates that it will take about 10 months to reap an excellent reward; it has only been 2 months so far. Thus, patience is necessary even if the fund has some setbacks in the interim. Economic power will prevail and the REIT investments will do very well and well outperform the DOW, S&P and all other indices.

Value Investment Fund Status Week 7 – Tough Week

During the week ending December 12, 2020, the Value Investment Fund retracted 4.26%. Whereas the DOW only reported a decrease of .6%. The lack of action in Congress greatly affected the REIT Pool as its value decreased 6.25%. Inaction to support the economy overall affects confidence in the ability of tenants to pay their respective rents. Since the REIT Pool is strictly traditional apartment style real estate, this pool felt the brunt of this political mess.

Value Investment Fund Status Week 6 – 3.2X Dow Jones Industrial Average

Value Investment Fund Status Week 6 – 3.2X DOW Jones Industrial Average During the week ending December 5, 2020, the Value Investment Fund reports a 3.88% gain in one week. Whereas the DOW only reported a 1.2% gain. Thus, as happened multiple times this year to date for the fund and during Year One of …

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