These kinds of ads always include some huge numbers that sound really, really impressive… here’s a little bit of the intro from the latest ad for Briton Ryle’s The Wealth Advisory:
“*Jim T. collected $23,500 last month from ‘backdooring’ Google’s Account
*Ron J. ‘backdoored’ $15,804 from Facebook’s Account
*Aaron K. pocketed $6,817 last month from ‘backdooring’ Wal-Mart’s Account
***This has nothing to do with options, bonds, or offshore bank accounts…”
So what are they talking about? Some way to make income from these big companies, apparently. Here’s a bit more from the ad:
“… while you’ve been buying actual shares in America’s biggest companies like Facebook, Wal-Mart, Target, and Amazon…
“A group of savvy folks have been ‘backdooring’ these massive, cash-rich companies… pulling millions of dollars out of their corporate accounts…
“And funneling them directly into their own personal accounts each month.
“All without buying a single share of these companies’ stocks.”
Sounds impressive, right?
So what’s the story? You’re not buying these stocks, and you’re not buying options or bonds… so where the heck does that income come from?
More from Ryle:
“It literally takes less than five minutes to execute the ‘backdoor’ transaction. And once you do, you’ll be set up to receive this growing stream of cash for as long as you please.”
Sounds both mysterious and easy, right? Just the sort of thing you’d happily pay $49 for (that’s the current “on sale” price for The Wealth Advisory)?
Well, you go ahead and subscribe if you want — but first, let’s figure out what this “backdoor” thing is so you can get a little perspective first. You don’t want to go into this actually believing that there’s a massive pile of cash headed your way — that will just lead to disappointment and, perhaps, risky behavior. Understand the concept, think for yourself a bit, then you can go subscribe if you feel like it — or invest in the ideas, if you’re so moved.
“The Wal-Mart ‘Backdoor’ Turns Every $1 into $18
“Wal-Mart rakes in an incredible $485 billion in annual revenues….
“Shares of Wal-Mart are pretty expensive now, too. A $10,000 investment in Wal-Mart stock would have turned into $18,000 profits over the last decade.
“But if you ‘backdoored’ Wal-Mart by making this secret transaction, you could have turned every $10,000 into $180,000 profits over the same time span….
“And here’s the best part… that figure doesn’t even include the monthly ‘backdoor’ distributions you could have been receiving.”
Hmmm… that sounds pretty similar to some past pitches this same newsletter has made, but the numbers don’t add up very precisely. Do we get any other clues?
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There are some specific people who’ve gotten these “backdoor payments”, we’re told:
“48-year-old Ray Kerr from Arizona got “backdoor” payments of $4,969 a month last year.
“Jerry Stevens from Ontario, Canada received a payout of $1,638 just last month.
“66-year-old Frank Pettit has been collecting “backdoor” payouts for years… and these days he’s getting $18,220 a month.”
And apparently these payments have never been canceled or cut, here’s one final clue from the ad:
“The size of these monthly distributions you could’ve funneled into your account have never gone down in value.
“And they’ve never shrunk. Not even during the 2008/2009 financial crisis.”
Well, as I said, the numbers don’t add up precisely — but they do match exactly what this same newsletter was using to hint at a recommendation to buy SmartREIT shares back in 2015 and SmartREIT’s predecessor, Calloway REIT, as far back as 2012.
And I do mean “match” — down to the precise $1 to $18 returns (though that is a very stale number, it refers to the gains since the 2001 launch of the REIT, so it encompasses much more than a decade — the source of that quote is this 2011 Globe and Mail article about $1 in 2002 turning into $18 in 2011 as Calloway and SmartCentres built up Walmart’s Canadian store presence).
The basic idea, if you haven’t yet connected the dots, is that being a landlord to Walmart is sort of like getting “backdoor income” from Walmart. Kinda.
And SmartREIT is indeed pretty closely tied to Walmart, at least in Canada. The actual name of the company, if you’re looking up the stock, is Smart Real Estate Investment Trust (SRU-UN in Toronto, CWYUF OTC in the US), and it’s also not terribly huge, at least compared to Walmart — it has a market cap of about C$5 billion. Like many other Canadian REITs, they do pay their dividend monthly (quarterly is more standard in the US, though it doesn’t really make much difference), and they’ve been steadily growing that dividend over the years.
I haven’t looked in detail at SmartREIT’s balance sheet or operations, but the story is fairly appealing — they are expanding quite a bit in the areas where it makes the most sense, near hot urban centers with urban-styel mixed use developments, or in areas where they can “intensify” by adding to existing developments (mostly, though not exclusively, Walmart-anchored open-concept shopping centers). The dividend offers a yield of a little over 5% at the current price (C$32, US$24), and appears to be sustainable based on the data in their latest investor presentation (they’re paying out only about 80% of their adjusted funds from operations, down from well over 90% several years ago) and their continuing growth prospects — including the new mini city that they’re planning to build at the Vaughan Metropolitan Centre, last stop on the Toronto subway in the northern suburbs.
They will face similar challenges to other REITs, presumably, including reliance on continuing real estate development and home prices, which some folks still think are in bubble territory in Canada’s key population centers, as well as the general risk of being very reliant on Walmart as their key tenant (though Walmart seems committed to Canada and has long leases, and has benefitted from Target’s exit from Canada in recent years). And, like most REITs, they’ll be judged by investors primarily as an income investment, so if Canadian investors decide they require a 7% yield instead of a 5% yield, the stock price will fall. But it’s a strong company with very good joint venture partners and a management team and owner who’ve pretty quickly built up a big brand name development company and shopping center empire and rewarded shareholders pretty nicely along the way.
If that Jerry Stevens that they use in the example is your target, though, be prepared to pony up a lot of cash to earn that kind of income — they hint that he’s getting “backdoor payments” of $1,638 a month. We’ll assume that’s Canadian, to be charitable, but that’s still a lot of shares of SmartREIT to earn that kind of income — the dividend is currently at 14.17 cents per month, so to earn $1,638 a month you’d have to buy 11,560 shares. At C$32.30, that investment will cost you just a little less than $375,000.
Doesn’t mean SmartREIT won’t work out well — perhaps it will, they seem well-positioned and well-managed, and a growing 5% dividend is nothing to sneeze at. Bu it also isn’t necessarily a stronger bet than its biggest tenant, despite Walmart’s giant size and many challenges over the years. I was curious about whether Walmart or SmartREIT/Calloway would have been the better bet during any of the past times that The Wealth Advisory has pitched this, so here are your charts…
This, according to Ycharts, is the comparative total return, including dividends, for SmartREIT/Calloway, Walmart, and Riocan (a larger and more diversified Canadian REIT, though also the one that took the biggest hit when Target left Canada), starting when we first saw this pitched as a “Wal-lord” investment in the Spring of 2012:
So… there are reason to choose a REIT over the stock of one of it’s major tenants, of course, and I own quite a few REITs myself. But those charts tell you, at least, that there’s no magic calendar at The Wealth Advisory that tells them the best times to buy these stocks — and that the “backdoor” isn’t always better than the front.
Hopefully that takes away some of the urgent “must buy now” feeling that these ads are designed to create in your brain, dear reader… but wait! They also teased some other “backdoor” ideas, can we ID those for you?
Will it spoil the surprise if I tell you they’re probably all REITs?
Well, let’s check anyway. Here’s the “Amazon Backdoor”…
“The Amazon ‘Backdoor’ Pays Out $50,846 Profits in a year
“Did you buy anything from Amazon this past year?
“If you did, you’re not alone. One in five Americans did.
“But instead of just going out and buying shares of Amazon, which are incredibly expensive, you could have spent far less cash up front and walked away with 50 times your money.
“I know some folks who did just that over the past calendar year…
“Ryan Williams walked away with $51,108
“Inez Jackson claimed $50,846
“Robert Westmoreland pulled in $55,211
“That’s three different payouts of at least $50,000, and it’s all thanks to the secret ‘backdoor’ transaction available to the ordinary investor.”
Well, that’s not enough to go on for any specifics… but presumably they’re teasing either a data center REIT here or a logistics REIT.
Data center REITs include Coresite (COR), which I own and which Briton Ryle has pitched many times as a “digital royalty” stock, Digital Realty Trust (DLR), which just announced plans to acquire Dupont Fabros (DFT) to become the largest data center REIT, surpassing Equinix (EQIX), and smaller players CyrusOne (CONE) and QTS Realty (QTS). I’m starting to get interested in DLR thanks to this latest acquisition, which gives them a little more growth (and possibly dividend growth), but it’s hard to beat COR in this group when it comes to past performance.
And the industrial/logistics REITs that are most closely tied to ecommerce fulfillment centers (including Amazon warehouses, among many other clients) are DCT Industrial Trust (DCT), Duke Realty (DRE), and Prologis (PLD). All of those have been on a tear over the past five years, with a 70% total return for Prologis, the granddaddy of the group, and 100%+ for the others. The data center REITs have been even more spectacular, with several of them more than tripling in value, and both groups have handily beaten both the broad market and the average REIT… which should probably inspire you to answer that question that’s no doubt on the tip of your tongue… if they’ve been doing so great, aren’t they expensive now?
Well, yeah. In most cases they are pretty expensive, and they have low dividend yields relative to many other REITs and to their own historical yields, with most of them having a trailing dividend yield of between 2-3% right now. But they have all raised their dividends by at least a little bit over the past year, with Prologis having the largest recent dividend raise among the fulfillment center REITs and Coresite at the top of the data center REITs. It’s a reasonable hunting ground for ideas, but I wouldn’t go “all in” at current prices.
“The Walgreens ‘Backdoor’ Turns Every $1 into $45
“As the American population continues to get older (after all, 10,000 baby boomers are retiring every single day), retail drugstores are going to continue to thrive and expand.
“The perfect example is Walgreens. It is one of the largest pharmacy chains in America. It has a solid 25-year history of paying dividends.
“But if you knew how to ‘backdoor’ Walgreens, you could have been getting paid every single month… for the last 23 years!
“Amazingly, these ‘backdoor’ payouts have gone up in value every single year for the past 23 years….
“Every single $1 you put in this “backdoor” would have turned into $45.07.
“Meanwhile, every single $1 that you invested into actual shares of Walgreens would have only turned into $17 over that time span….
“You simply tap into Walgreens’ corporate account using this “backdoor” transaction.
“And you’re set up to receive these distributions every month… for as long as you choose.”
That’s almost certainly Realty Income (O), which branded itself “The Monthly Dividend Company” decades ago and has built a retail investor-focused juggernaut of standalone triple net leased properties — mostly shopping center pads and similar properties that are used by pharmacies, fast food restaurants and the like.
And yes, Walgreens is their largest customer — though the portfolio is pretty well diversified. That “triple net” means they really are just an absentee property owner, the tenant is responsible for paying for maintenance, insurance and taxes in addition to their lease payments and whatever else might be associated with the building (utilities, cleaning, etc.).
Realty Income has gotten down to attractive levels recently — I’ve written about it many times as it has been teased over the years, but never owned shares and often found it expensive… but I started looking at it personally just a few weeks ago and taking it seriously as a possible investment. I still don’t own shares, but this is what I noted to the Irregulars in a Friday File about a month ago:
“Incidentally, if you find low-end retail and ‘not as likely to be smushed by Amazon’ retail at all compelling as a sector, the net lease REITs are also getting to be interesting values again — Retail Opportunity Investments Corp (ROIC), which is in my portfolio and which specializes in shopping centers anchored by grocery stores, is a relatively stable one and has come down some, but the more volatile large players Realty Income (O) and National Retail Properties (NNN), which have extraordinary records of dividend growth but also tend to rise and fall much more aggressively than ROIC, are getting appealing here as they fall… NNN is cheaper, but also has a somewhat less appealing portfolio to my mind (including 2.2% of the portfolio leased to Gander Mountain stores, since Gander Mountain filed for bankruptcy this year), and O is larger, with slightly lower cost of capital and a lot of investor love thanks to their monthly dividend increase policy, and they have big exposure to the dollar stores (about 8% of rent comes from Dollar General, Dollar Tree and Family Dollar). I don’t own NNN or O, but would consider either as decent core dividend growth REITs to look into here, with their yields getting close to 5%.”
I also looked into REITs in general for the Irregulars back on May 26, checking into past performance during times of rising interest rates to re-set my understanding of that dynamic — my favorite readers can see that here if they’re interested.
So… there you have it, the “backdoor” is those 2-5% dividend yields you can earn from REITs that lease space to our favorite companies. REITs can be a wonderful thing for diversifying a portfolio with some solid real estate, particularly if you buy your shares at low prices and let the dividends get reinvested and compound into much larger positions and higher dividends for very long periods of time, but there’s nothing secret or sneaky or “backdoor” about them, they do all tend to move as a group whenever there’s a big swing in interest rate sentiment, and they don’t necessarily do better than the companies they lease space to.
Enough? I thought so too. If you’ve a favorite “backdoor” to share or like or loath one of those noted above, well, feel free to shout it out with a comment below — or if you’ve ever tried a subscription to The Wealth Advisory, please click here to share your rating of it with your fellow investors. Thanks for reading!