Solo 401K and passive REIT income

I am searching around to investing funds from my Solo 401K in to crownfunded or diversified REIT that generates passive income to avoid the issue with 1099-DIV/B/K-1 which could be a tax issue. Any thoughts on what I should look at?

If it solo 401k, none of dividends, k-1 is taxed on your SSN now.

Whatever you do, i would suggest stay away from crowd funding for easy liquidity purpose.

Keep your investments in well known companies or index funds or public listed REITs where you can easily sell it.

so NYSE/ICE listed REIT’s would be where I should put the cash…

There are plenty of REITs, varies in business. Choose the best. I am giving you few post from my old notes.

ELI5: Can I use a REITs AFFO to essentially determine a cash on cash return of the share price?

Please correct me if I’m wrong.

So the AFFO (total of 4 fiscal quarters) if I’m understanding this correctly, when evaluating a REIT, is the ACTUAL net cash income annually. Since it factors back in depreciation which isnt a realized expense and then subtracts capital expenses to maintain the portfolio, the result is what the actual net income in cash hitting the bank account truly is - projected anyways?

So can I essentially take the annual AFFO divided by the total outstanding shares to get an AFFO per share and then use that, assuming I like the sector and comfortable with a REITs leverage to determjne a cash on cash return? Similar to what Buffets value investing based on net income of a company is.
I just feel like I’m not grasping this as well as I could/should and I need a better understanding to have confidence in picking REITs at particular prices.

I own tangible rental property, so when I invest (for example) in a single family home for instance and put $10,000 of my cash toward a $100,000 property (leveraging the rest) and it earns say $1,000 in net profits of actual cash (not factoring in depreciation), thsg is a 10% cash on cash of my investment of $10000 of my cash equity in the property. So when I think of shareholders, that is a stake of cash equity…so Im trying to apply that same idea to analyzing a REIT and my purchase of their stock.

Short answer is yes. The AFFO “should” be your best picture of a REIT’s cash flow available to shareholders. Keep in mind that it is a non-gaap calculation so I would want to be fairly certian that the adjustments being made truly help the calculation be more reflective of cash from operations instead of using it to fudge the numbers.

I know its not a REIT, but look at some of VRX’s “Adjusted Cash Flow” numbers over the years. Supposedly 2 years ago they were making $5B in cash flow “one time acquistion costs” were removed. Turns out they appear to have been lumping lots of stuff in one time costs. To this day the company has never made more than $2.5B in CFO ever. Once the acquisitions dried up suddenly it became apparent that they were not making nearly as much as they had led investors to believe. Of course there were other factors for VRX’s slide, but that was a big one.

These two impecably timed short calls explain it in more detail:
https://valueinvestorsclub.com/idea/VALEANT_PHARMACEUTICALS_INTL/137057#description
https://valueinvestorsclub.com/idea/VALEANT_PHARMACEUTICALS_INTL/137814
I could see how a very acquisitive REIT could do a very similar thing with AFFO. So my advice would be to make sure you are picking companies with strong corporate stewardship

Valeant is a spectacular platform story that rolls up specialty pharmaceuticals applying “The Outsider” philosophy with the aid of a tax-efficient coporate structure. Rollups like that has virtually unanalyzable accounting statements and forces you to decide whether you trust the management’s non-GAAP pro forma EPS numbers. Wall Street has chosen to operate on faith for this story.

“Trust but verify” is always a wise rule. Trust the non-GAAP EPS number but check whether its reported FCF from its cashflow statement eventually converge to it. In the spring of 2013, Valeant was guiding 2013 non-GAAP EPS of almost $6 when its reported FCF (GAAP cashflows from operations minus capex) was at about $2.3/share. No sweat. It should eventually converge once things normalize. The company is a classic rollup story and so there has always been heaps of one-time restructuring charges. Then Valeant announced the transformational acquisition of Bausch & Lomb and raised guidance of 2013 non-GAAP EPS to over $6 for the first time. This acquisition vindicated the company’s playbook. As long as they keep doing accretive acquisitions like that with cheap debt and tax-efficient structure, sky is the limit to what EPS can be. For sure reported GAAP FCF should be on a steady march toward that meager $6 sooner or later. Valeant claimed to have double-digit organic growth and that the string of tucked-in acquisition added to FCF. So by the time they gave up on the Allergan acquisition, they were already guiding a recurring non-GAAP EPS of over $10 for 2014 (in the 3Q14). The only problem was that Valeant was still struggling to report a GAAP FCF of $6/share then. The company’s trailing reported FCF continued to languish at $5 in the first half of 2015, showing no signs of converging with the $6 that they claimed they were already earning 2 years ago, never mind the $10 run-rate that they would have you believe. There was no sizeable acquisition since Bausch & Lomb closed in August 2013 to explain away the glaring gap. The Salix acquisition comes to the rescue. Because Salix is inherently a messy acquisition with channel inventory and accounting issues (even though it is less than you think), it serves to further suspend people’s skepticism over the Company’s GAAP numbers. The CFO Howard Schiller decided to leave just as the Salix deal closed in April 2015, surely for some legitimate personal reasons. The company is currently guiding over $12 pro forma EPS for 2015 and the Street expects $15 in 2016. The stock has thus rocketed from $80 to $250 during the last 2 years, propelled by a steadily rising non-GAAP EPS guidance.

But a careful review of the GAAP FCF trend would conclude that Valeant does not have much more than $6/share of earnings power before Salix. A casual review would lead you to the same conclusion all the same. This revelation would not have been possible if Valeant had not pursued Allergan and failed, leaving a window of almost 6 quarters of deal-free financial statements.

Many who are familiar with the power of roll-up stories know that faith-based stories like this can go on for as long as people are willing to believe in them because faith precipitates accretive acquisitions which can then fundamentally validate the faith in itself. But there are reasons for Valeant to be near the end of its acquisition spree, at least for a while. Back in 2013 Valeant was the only game in town. Nonetheless, in the intervening 2 years many inversions such as Actavis (now Allergan), Endo, Teva, Mallinckrodt, Mylan, etc have taken place. Deals below the size of Salix are very crowded now while Actavis and Teva are firmly in Valeant’s league for mega deals. The multiples at which M&A are done these days mean that any future acquisitions can only be accretive if a large amount of cheap debt is involved. But the Salix acquisition has exhausted Valeant’s borrowing capacity at least for another year.

If no major acquisition happens, by the end of 2Q16, we would get to see how far the Salix acquisition could lift the company’s trailing FCF/share to from its current level of $5. By then CEO Mike Pearson would probably have convinced everyone that the company earned $12 in 2015 and be guiding $15/share for 2016. If the company’s cashflow statement can report a trailing FCF of $10/share then maybe the stock deserves to trade at $250, or maybe even $300, i.e. 20x 2016 PF EPS. But in the unlikely event that the company struggles to report GAAP FCF of over $6, which they claimed they already earned in 2013, then the story is broken and we are looking at $100 stock if not lower. This scenario is unlikely only because the accounting mismatch is just too mind-blowingly ineffable and also because really smart people love this platform stock. Nonetheless, I like the risk reward in shorting this universally-loved (at least by sell side) stock.

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise do not hold a material investment in the issuer’s securities.
Catalyst

After Salix, the company is tapped out in its debt capacity and so sizeable deals should take a breather, opening a window for investors to verify its lofty non-GAAP EPS guidances. The market meanwhile might continue to ignore the gap due to the Salix noise, but not for too many quarters.

The balance of risk is pretty favorable for a trade that I estimate to have a roughly 12-month horizon to play out.

STWD is a mortgage REIT. It is well managed but I would view it as primarily a well-managed source of income, not at all as something that’s going to be a home run by any means.

VNQ is an ETF, not an individual name.

I think many of the high quality REITs (VNO, BXP as two examples) are overvalued. Realty Income (O) is a fine option, but more appealing in the mid-50’s where it was the other day. Do I like Boston Properties? Yes, but not at $126. Maybe more at $95-105. Vornado (VNO)? No at $95, maybe at $80-82.

Equity Lifestyle (ELS) would be something I’d be very interested in, but not at $73. More like upper $50’s/maybe low $60’s. Equity Residential (EQR) is getting closer to where it would be appealing (upper $50’s/maybe low $60’s.

I don’t want to own mall REITs at all. At times I’ve pondered Tanger Outlets (SKT) but I just really am not positive on malls at all and I’m really, really not positive on the mid/lower-end/strip mall operators.

The data center REITs that I like so much (CONE, COR, EQIX, DLR, QTS) are - in my opinion - fully valued or somewhat overvalued. Do I think they are still very appealing long-term growth/income plays? Yes. Would I be buying a little more here? No. Did I trim a little bit? Yes. Sell any of them completely? No.

Cell Tower REITs (AMT, CCI) are not as appealing a play as the data center REITs, but they’re okay, with CCI being US-centric and AMT being global.

Industrial REITs are appealing with the continue rise of e-commerce being a benefit for warehouse space. Prologis (PLD), Stag (STAG) and others are a play on this.

Healthcare (VTR, HCN and others) REITs are appealing long-term.

Farmland REITs (FPI, LAND) have not gotten much of a response. American Farmland (AFCO) IPO’d last year and it’s already seeking strategic alternatives because it continually has traded under book.

There’s some more unique REITs - Lamar Advertising (LAMR) for one. Entertainment Properties (EPR), which offers a monthly dividend. EPR is heavily movie theaters, and I’m not particularly bullish on movie going long-term. If you are, by all means.

Hotel REITs I don’t care for because they just get completely fucking obliterated at the slightest hint of a slowdown. Pebblebrook (PEB) is the one I like in this sector, but I just am not going to get into these because when things are good they do pretty decently, when things slightly slow down they get annihilated. Many of them cut their dividend in 2008. This is not a perfect comparison, but I just feel with hotel REITs that it’s two steps forward, two steps back.

I really appreciate your insight. I will do some foot work with the information you provided.

Thanks.

The above are my notes from reddit. I am not the owner of the contents. Do not ask me any question on the contents.