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What’s “The Donald J. Trump Income Retirement Plan?”

How does Ian Wyatt think we can invest like the Donald?

By Travis Johnson, Stock Gumshoe, November 12, 2015

This is just silly. Politicians always find their names appropriated by newsletter ad campaigns, because it’s an easy way to catch your eye — you’re already (or maybe not you, but lots of folks) feeling passionate about Donald Trump, or Hillary Clinton, or President Obama or whoever… so if those names are blazoned across an ad, you’re more likely to open the ad and read a bit of it… and then, of course, the copywriter has done his job.

So what do you find when you start reading this one? Well, essentially it’s just a pitch that Donald Trump made most of his money from owning real estate, and therefore you should try to make money owning real estate, too.

Who knows, maybe if The Donald has got you in a lather about a Mexican wall, or about the red Starbucks cups or whatever else (and it doesn’t matter which side of any of these “hot topics” you drift toward, just that you react to them), maybe that will increase the odds that you’ll read the ad… but make no mistake, using a celebrity or politician’s name in an ad is just a way to get your attention for the extra couple seconds that a copywriter needs to spark a greed impulse in your brain. You see the Donald Trump name, it makes you pause for long enough to give the ad some attention, you think in the back of your head, “hey, Donald Trump is rich and owns lots of buildings” … boom, you’re on your way to being one of the 0.1% of people on the email list who subscribe to their newsletter, and their work is done.

Or actually, it’s not done — once you’ve shown them that you’re a person who’s willing to pay for information and subscribe to newsletters, the next step is to spend a couple years trying to upgrade you to the more profitable newsletters for their “select” readers.

But I digress. We were talking about how to make you rich like Donald Trump, right? The ad is from Ian Wyatt for his High Yield Wealth newsletter, and we’re going to find out which investments he’s teasing (if you’re looking for that infrastructure investment that Donald Trump is teased as owning by another newsletter, that’s a different spiel — we covered it here). It opens up thusly:

“Discover Trump’s little-known secret to collecting income for life!

“Select investors are collecting checks totaling $3,887…$5,592…and as much as $30,583”

He goes on to talk about how Trump is both controversial and how he has a gift for making money in real estate, as well as to name-drop some other celebrities who have some huge land holdings — including probably the least Trump-y land holdings on earth, the big ranches owned by Jeff Bezos and Ted Turner.

And to make the point that real estate is, in at least some measures, in a boom period around the world again now…

“Just this year, 23 real estate tycoons joined the Forbes Billionaires List – all thanks to their real estate holdings.

“It’s easy to see why these “mini-Trumps” are doing so well…

“Research firm MSCI says property prices gained nearly 10% globally this year – the best performing year since 2007.

“Real Estate Boom of 2016

“The global boom for real estate is just getting started.

“One sign is that the volume of property changing hands – office buildings, shopping malls, apartments and hotels – is up a whopping 36% from last year.

“And that’s just in America.”

Then we get to the “you don’t have to be left out” bit…

“With a strengthening economy and the Federal Reserve committed to ultra-low interest rates for as long as possible…

“Real estate is likely to continue its long-term upward trajectory.

“But let’s face it…few of us are ever going to be real estate developers or tycoons.

“Or own more than a couple of properties….

“The truth is, you can start sharing in this big money all year round.

“You can be a part of the real estate boom that’s making Donald Trump – and other tycoons – very rich….

“You don’t even need to own a single property.”

So how do you do this? Well, some of you are undoubtedly jumping ahead of the class on this one… but yes, he’s talking about being a partner in real estate ownership, not a direct owner and landlord. Here’s a bit more:

“So what is this extraordinary way of profiting from real estate…without owning a single property?

“I call it The Donald J. Trump Income Retirement Plan

“Trump himself outright owns very few properties.

“… instead of owning the properties himself, Trump simply becomes a ‘silent partner’…

“Allowing others to assume the headaches of managing properties and finding tenants.”

Surprising? No, I think we all know that The Donald is not posting ads on Craigslist to find tenants — like with most commercial property and new developments, the real estate he controls is often actually owned by individual corporations or partnerships in which he has a stake, and management companies (including ones that he owns) manage the properties. Trump’s political disclosure forms list hundreds of these partial stakes and limited partnerships.

And, as is so often the case, we get the long littany of windfall checks that other investors have received… without any indication of what the size of their initial investment was.

“Michael Licalsi has been doing this for years. Over the last year and a half, he’s received nearly two dozen checks totaling $5,592.

“Or Daniel Bradbury of San Diego. This year, he’s made $2,972.

“Or Robert G. Cutlip, 65, of Mclean, Virginia. A single monthly check paid him $2,712.

“Jeffrey B. Carter, 43, received multiple checks of $3,605.

“Then there’s Robert E. Pester, 58, of San Francisco. Earlier this year, he received a single check for $22,845.”

If you’re a person who typically invests two, five or ten thousand dollars into an individual equity position, probably pretty average among individual investors who subscribe to lower-cost newsletters, those numbers sound fantastic. If you more often have $100,000 positions (probably less typical for the investor who craves high yield stocks and buy $49 newsletters), that sounds pretty paltry. Once we’ve identified these “Donald J. Trump Income Retirement Plan” investments, I’ll do the math for you to see what kind of position sizes those examples indicate.

And yes, to be a wee bit snarky, we’ll hope that the “Donald J. Trump Income Retirement Plan” avoids the bankruptcy filings that have bedeviled several of The Donald’s highest-profile real estate investments in New York and Atlantic City.

So what are they? Well, you’ll probably be unsurprised to hear that this “Trump Income Retirement Plan” is all about investing in Real Estate Investment Trusts (REITS).

For those new to REITs, they’ve been around for 50 years or so (signed into law by President Eisenhower, as long as we’re doing some name dropping)…. they were intended to give individual investors a way to invest in diversified portfolios of real estate, and they’re pass-through entities that are able to avoid corporate taxes in exchange for passing their net income (and the tax liability that goes with it) to the shareholder owners of the REIT.

That’s why REIT dividends are typically fully taxable as income, they don’t get any benefit of “qualified” dividends when dividend taxes are lower (if the dividends are in excess of actual income and the company is actually paying out their accumulated depreciation or capital as “return of capital” distributions, that’s different — those reduce your tax basis instead of counting as current income).

So … what are the specific REITs teased? Here are your clues:

“Trump Income Opportunity #1:

“This real estate partnership owns 170 properties in four of the most tony commercial office markets in the U.S. Its properties include the General Motors building in New York and the John Hancock building in Boston.

“And its tenants include big names like Citigroup, Microsoft, Bank of America and the U.S. government. Even better, over the past 10 years the value of its properties has more than doubled to $19.4 billion. You can own a piece of it today for just $120.”

That one is Boston Properties (BXP), one of the largest REITs in the country and probably the biggest one, along with Vornado, that focuses on big urban developments and office buildings. Like most REITs, this one had a nice big run through last Winter and has been pretty weak since, with fears of rising interest rates hitting pretty hard. I think it’s generally pretty risky to bet on increasing property prices when you buy a REIT, far better to bet on REITs that you think can invest wisely (buying properties for less than it costs them to finance the acquisition) and manage the properties to have a growing income yield… but if you are going to bet on rising property prices, you might as well bet on high-profile real estate in big, wealthy cities. Boston Properties does indeed own (part of) the old Hancock Tower in Boston and the GM Building in New York (which itself is worth more than $3 billion), and they’re building a huge new development on the site of the old Boston Garden… but the yield is anemic.

The quarterly dividend for BXP would give you $2.60 per year at the current rate, which at $123 a share means you get a yield of 2.1%, less than a lot of (non tax advantaged) companies. The difference for BXP is that although this regular dividend is only about half of their Funds from Operations (FFO, a standard measure of cash flow for REITs that doesn’t count property sales or depreciation/amortization), they have also, for the past two years and occasionally before that, paid out large special dividends at the end of the year. You can’t count on those, but the last two years had payouts of $5.15 and $2.90, so it can be meaningful. They say that these extra payments are driven in part by asset sales, but that’s not clear in the numbers (asset sales were much higher in 2013 than 2014, but the special dividend much higher in 2014), so I don’t know how to guess at what the payment might be this year, if any. The projected earnings per share (not FFO, but actual earnings) for BXP are $3.92 for the year, per their last quarter, so I’d think they probably, all else being equal (which it might not be) will have to pay out at least $3.50 or so in total to avoid taxation, which indicates to me that there should be a special dividend of at least 90 cents. Given the strong performance operationally this year, which is better than they had projected a year ago, and the $1.60 or so in asset sales per share, it could certainly be higher.

So the yield will probably be more than 2%, but you wouldn’t want to be too much on that — this is a blue chip REIT that mostly owns office buildings in very profitable markets, so it’s doing fine… but do keep in mind that you probably wouldn’t want to buy a rental house for $100,000 if you only made $2,000 in income from that house each year. You might, but that would depend on your getting a good long-term mortgage at low rates so you had less capital tied up (commercial REITs can’t get 30 year fixed-rate mortgages, as you’ve probably guessed, so BXP has to roll over lots of 10-year bond every year… though they’re pretty careful to manage their interest rate exposure), or if you were convinced of the long-term ability of that property to increase in value at least at the rate of inflation.

That doesn’t mean REITS are bad investments (though they’re obviously under pressure because of fear of rising interest rats just now) — Just keep in mind that buying a big commercial REIT with a 2% yield means you’re making some assumptions: you know that 2% isn’t enough income to justify your capital investment, so you’re assuming either that the payout will rise fairly quickly, or that the value of the assets the REIT owns will rise substantially over time, faster than the debt burden, and you’ll benefit from that rise because it will lift the per-share price or bring higher income as they sell more richly valued properties. If BXP pays out less than a few dollars as a special dividend at the end of this year, I expect the price will come down pretty sharply… though chatter about the interest rate and the Federal Reserve, and the decision by the Fed to raise or not raise short-term rates next month, will probably be the primary drivers for all interest rate-sensitive investments, REITs included, for the near term.

And no, 2% isn’t going to turn you into The Donald anytime soon. Nor is 4 or 5%, of course.

How about another one?

“Trump Income Opportunity #2:

“With 77 properties across 21 states, this next partnership is heavily diversified, with tenants spread across everything from chemicals, machinery and banking to healthcare, telecommunications and manufacturing.

“And with a tiny 1.2% vacancy rate, its properties continue to be a steady, always-reliable cash machine for investors. Even better, you can own it today for under $15.”

This is almost certainly Gladstone Commercial (GOOD), a “high yield” REIT with a dividend yield of over 10%, but also a small and pretty heavily levered one. They have been a model of steady payouts, keeping the distribution constant at $1.50/year — but the dividend has not been raised since 2008, and the Funds From Operations (FFO) per share has only recently gotten high enough to actually cover that dividend. So maybe things are turning around now, I don’t know — haven’t looked at them all that closely. I’d suspect that they probably need to sell some shares if they’re intent on ever growing, but they probably wouldn’t want to sell equity at a 10% yield and they can keep this rolling along at the current pace for quite a while as long as their financing is relatively affordable — they do have very low vacancy rates and a fairly diversified portfolio (though the 77 properties bit is old now, Wyatt must be recycling his descriptions — I think they’ve got around 100 properties now).

Wyatt has touted GOOD for years, it has mostly been in the $16-18 range when he has mentioned it in the past, and, as a REIT with a higher perceived risk and fairly substantial leverage, it’s probably going to continue overreacting to interest rate chatter. Not for those with sensitive stomachs, but it does have a fat payout — and, with a large chunk of it often being classified as return of capital, it doesn’t generate as much taxable current income as you’d expect for a REIT (keeping in mind that this lack of taxable income is because it’s not very profitable as a company, which some people would consider to be a bad thing).

And one more…

“Trump Income Opportunity #3:

“This third real estate partnership is a beast, owning 131 properties in 30 markets throughout North America, Europe, Asia and Australia. Its clients include blue-chip behemoths like JPMorgan Chase, Visa, Verizon, AT&T and IBM.

“But the best thing about it are the โ€œrent checksโ€ it regularly pays to investors: Not only have they never been cut, they’re always growing bigger – even during the crash of ’08! Own it today for under $70.”

This may be the least Trump-y of them all — here the Thinkolator sez he’s almost certainly touting Digital Realty Trust (DLR), the granddaddy of the data center REITs. These are very different from standard commercial property owners, they own giant data centers and charge customers for space, power and connectivity within those centers. Digital Realty is by far the biggest and oldest of these, and it pays a high yield for the segment at 4.6% or so — the younger and smaller (and faster growing) data center REITs, including Coresite (COR), which I own, QTS (QTS) or CyrusOne (CONE), tend to have lower dividends and faster growth. Equinix (EQIX), the most recent REIT conversion in the space, is also huge but doesn’t have the same settled dividend history just yet and has the lowest regular dividend of the lot so far (most of the dividends this year have been REIT conversion payouts, so I’m not sure what the yield will be going forward).

Digital Realty was beaten down by some company specific issues in 2013, including accounting restatements, but since then it has come back pretty nicely alongside the other data center REITs — though it has been the worst performer in that small segment, with total returns (dividends included) of about 40% over the past three years, versus 80% for the average data center REIT and about 200% for Coresite. Really, it has traded more like a “regular” REIT, maybe just because it’s been the only really large cap data center REIT, and the only one with big institutional investment until recently, but it has had a strong record of dividend growth and the current yield is above average. It’s a favorite of a lot of dividend investors now, since the yield is substantially higher than competitors and the assumption is that those yields will normalize — and they are growing, including the acquisition of Telx just a month or two ago that they funded with debt and equity. The valuation has been looking more reasonable for DLR of late, and it’s probably worth a look for those who want current income, even though I personally have preferred the faster-growing and, I think, more attractively valued (but also more volatile) COR. (I’m not buying COR right now, to be clear, though it’s probably fairly valued — I last bought around $50, and last sold covered calls against that one at $60 because I expect we’re close to the top of the near-term valuation range).

So there you have it — your “Donald Trump Income Retirement Plan” from Ian Wyatt starts with a big low-yield, conservative office REIT, a small high-yield office REIT, and a data center REIT, which together probably have a blended dividend yield of about 5-6% (a bit more if Boston Properties pays a special dividend). They’ll likely all continue to be volatile in the face of shifting interest rate expectations, and those shifting expectations over the past several years have brought some interesting buying opportunities in the REIT space — so if you’re hankering for some yield, those are three more picks you might keep an eye on to see if real bargains arise. All three have had total returns that beat the S&P 500 over the past decade (GOOD by a little, BXP by 50%, DLR by a couple hundred percent)… but over the past decade we also saw consistently falling interest rates, so who knows what the future will bring.

Sound like your kind of investment? Interested in other REITs or income investments? Let us know with a comment below.

P.S. I almost forgot to check on those “payout” numbers — these three REITs have very different dividend payouts, as noted, but if we take the middle of the road one, Digital Realty, with its 4.6%ish yield, and the lower example of receiving a $2,972 in income this year to date (we’ll just assume that’s a full 12 months), that would mean that particular person had to own 875 shares of DLR to earn that much this year. To buy 875 shares of DLR today would cost you about $63,000. That’s a pretty reasonable average expectation for the income you might receive from a reasonably diversified REIT portfolio — the REIT index ETFs will yield about 4% right now.

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7 years ago

Does RE speculating beat our the income from owning insurancers, especially casualty insurers? Show me! ๐Ÿ™‚

Add a Topic
๐Ÿ‘ 15112
7 years ago

Travis–did I miss your Idea of the Month for October? Thanks for all you do. You are
an incredible person.

๐Ÿ‘ 46