Capital Allocation Strategies for REIT Success

During their recent episode, Taylor, Carlisle, and Bill Lenehan discussed Capital Allocation Strategies for REIT Success. Here’s an excerpt from the episode:

Tobias: The REIT sounds like it’s really geared towards good capital allocation rather than trying to identify any sort of individual trophy property or trying to have like a flagship big property that everybody can say, “Oh, that’s the Four Corners flagship. It’s emblematic for what they do. It’s really bread and butter. Capital allocation is the key.” So perhaps, you could just walk us through a little bit how you think about capital allocation very broadly and perhaps apply that to an individual building, theoretical or real.

Bill: Sure. So, our business basically rests on a couple of mental models, and I really feel strongly that it’s important to have these mental models. By mental model, it’s just sort of how you think about the world or maybe a tradition. And one of those mental models is looking at the stock price versus different valuation metrics and understanding that at certain times, it’s accretive to issue equity to buy buildings and other times, it isn’t. And if it was accretive 97% of the time, you’d say, “Well, I don’t need a mental model.” We will do it correctly most of the time and every once in a while, it won’t work, but you know 97 is pretty good, but it doesn’t work that way.

And so, our stock spun at mid-teens price. It went up to 33 during COVID, and in a week, it went down to 15. It’s back up. At different prices, you need to behave differently. And it’s very difficult to align a board around your activity. It’s very difficult to say to a board, “Well, last month, we bought 25 buildings. This month, we’re intentionally buying none, and it’s on purpose.” So, we came up with this mental model to say, if we’re in the green zone, i.e., a stock price that where we can buy accretively, we will buy. If we’re in the red zone, in theory, you should buy back stock. For a RIET, that’s a little bit harder than it sounds, but you certainly don’t want to be issuing equity.

And so, in many ways the best thing that we’ve done as a management team is when we spun at a low price and during COVID we were not in a position where we had to raise equity.

And we’ve talked about this, Jake. Everyone tries to be Henry Singleton and Warren Buffett and Charlie Munger. One of the things I’ve thought a lot about is I’m probably not smart enough to be Henry Singleton, but what can I do to be in that second decile of capital allocators? What’s the not best, but what can I take and take off the table being in the worst decile or second worst decile? And I think low leverage and having these mental models that provide some guardrails during times of extreme stress are really helpful. And so, when our stock went from 33 to 14 in a week during COVID, there wasn’t a question of what we were going to do. We were in the red zone. We’d already discussed as a board what we would do if that happened. And it was a lot smoother sailing than my experience during the financial crisis where there was a lot of discovery of what we should be doing as the time went on.

You can find out more about the VALUE: After Hours Podcast here – VALUE: After Hours Podcast. You can also listen to the podcast on your favorite podcast platforms here:

Apple Podcasts