Benjamin Graham and REITs

Evaluating Real Estate Investment Trusts (REITs) using the 17-point Value Investing framework of Benjamin Graham, Warren Buffett's mentor.

Graham's Framework

Graham's 17-point stock selection framework is a system of checks and balances designed to analyze any equity based investment (regardless of industry).

So stocks from sectors with lower Earnings are required to have more Assets, and vice versa. Stocks of poorer quality - or of questionable history - are required to provide a greater "Margin of Safety" by way of Assets and Earnings.

Evaluating REITs

Real Estate Investment Trusts (REITs) are inherently equity based instruments, with all the same risks that come with buying stocks. So they should be evaluated by Graham's 17-point framework just the same as any other stock.

Since REITs generally lack Current Asset and Current Liability figures for evaluation, they would have to be evaluated using Graham's criteria for Public-Utilities and Financial Enterprises; and not Graham's criteria for Industrials.

Results

REITs don't generally score too well on the Graham framework and that's probably to be expected because business equity has historically been a better performing investment vehicle than real estate (or anything else, for that matter).

The biggest draw of REITs appears to be the combination of high dividends and price volatility. REITs are therefore seen as a great avenue for small scale speculation in real estate.

Graham has always been very clear that speculation is never a feasible long-term strategy.

Watch Video