Lessons From Pac-Man
- The most compelling thing about playing Pac-Man is the concept of turbo-charging.
- As a REIT analyst, it’s critical to understand the benefits of fragmentation and consolidation.
- The concept of managing risk is nothing new, and of course, these are the lessons learned from years of experience that is the reason that “O” is a blue-chip REIT.
When I was a kid, I loved playing Pac-Man. In fact, I was somewhat addicted to the arcade game in which the player navigates Pac-Man through a maze containing various dots, known as Pac-Dots, and four multi-colored ghosts: Blinky, Pinky, Inky, and Clyde.
The most compelling thing about playing Pac-Man is the concept of turbo-charging, that is, near the corners of the maze there are four larger, flashing dots known as Power Pellets that provide Pac-Man with the temporary ability to eat the ghosts and earn bonus points.
Of course, the challenge to the game are the four ghosts that roam the maze, trying to kill Pac-Man. If any of the ghosts hit Pac-Man, he loses a life; when all lives have been lost, the game is over.
The goal of the game is to accumulate points by eating all the Pac-Dots in the maze, completing that ‘stage’ of the game and starting the next stage and maze of Pac-dots. The high score for Pac-Man cannot exceed 999,990 points; players may exceed that score, but the game keeps the last 6 digits.
There are 256 levels in total and I’ll admit, I never came close to that, but I am almost certain that I spent over $1,000 (over the years) trying to become the dominant Pac-Man gamer of all-time.
OK, now onto serious business…
One of the reasons that I decided to include Pac-Man in my article today is to make a point, and one of the best ways to illustrate that is by explaining the power of consolidation.
As a REIT analyst, it’s critical to understand the benefits of fragmentation and consolidation. I have found that over the years many investors seem to get confused by the concept and more importantly the benefits to building a competitive scale advantage.
More specifically, within the $4 Trillion REIT universe, we have witnessed a growing evolution of companies that have built powerful scale advantages by utilizing low cost of capital, acquisitions, development, and dispositions.
Management techniques have been structured such that real estate landlords can now become much more efficient by focusing on their customers, allowing them to utilize their resources on operations versus managing the real estate. Given the wave of capital that has entered the REIT space, many corporations are recognizing that owning real estate is not as profitable (for the company) as growing the business.
One of the original pioneers of the sale/leaseback business was W.P. Carey (WPC). Early on, this Net Lease REIT realized that it could create a vehicle to acquire free-standing buildings from corporations in exchange for a long-term lease. By trading the real estate for cash, these companies began to realize that the most efficient way to control real estate was by leasing them back over time.
Over the years, many Net Lease landlords have utilized the sale-leaseback model by turning themselves into investment banks of sort. In addition to WPC, numerous REITs have become sale/leaseback aggregators, such as Realty Income (O), National Retail Properties (NNN), VEREIT, Inc. (VER), EPR Properties (EPR), and Spirit Realty (SRC).
It is estimated that the universe of free-standing corporate buildings that could be monetized through a sale/leaseback structure is in excess of $4 Trillion. If you think about it, there are literally hundreds of potential deals in every county across the United States.
Just look out the window on your drive home from work. You may see Walgreens’ Starbucks, FedEx, Coca-Cola, Target, etc… The list is really almost infinite and the companies that are expected to benefit the most from the wave of sale/leaseback transactions are the Net Lease REITs.