REITs - Real Estate Investment Trusts - Info &amp; Discussion

Fidelity Real Estate Fund Takes More Defensive Approach

Top 131. Aug 19, 2001 9:34 AM

» JenL_2 - Fidelity Real Estate Fund : FRESX

This from 8/17 WSJ:

By FRANK BYRT

Fidelity Investment's Real Estate Investment Fund (FRESX) manager said he hopes to boost portfolio returns in the second half of the year by focusing on large-capitalization stocks holding office and real estate properties.

Steven Buller sees better returns possible even though the approach is more defensive than the one the fund took at the start of the year.

Buller said his fund late last year held a lot of higher yielding small-cap real estate investment trust, or REIT, stocks, which paid off into the second quarter of this year. But with the economy continuing to soften, he's getting defensive - hence an emphasis on the more predictable big-cap stocks since early summer.

Buller, portfolio manager of the $1.1 billion Real Estate Investment Fund since October 1998, has guided his fund to a return of 11.1% this year through Thursday. The fund's benchmark, the Wilshire Real Estate Securities Index, had a return of 12.75% for the same period, while the Standard & Poor's 500 Index was down 10.5% through Thursday.

Buller wouldn't talk about specific stocks in the fund's portfolio, but said he's made a few changes since March 31, the last time the fund's holdings were publicly posted.

The fund is now slightly overweight in the residential sector, with holdings in companies that own apartment buildings, he said.

He said such stocks are defensive because housing is a necessity and demand holds up, even in a weak economy.

Although fundamentals in the office REIT sector are only "okay," Buller said he has given a heavier weighting to the sector recently. Lease rates flattened or declined in several major city markets recently, but most of that has occurred in markets that saw the highest rent increases in the past few years "and are just giving up the froth now," he said.

Office vacancies have jumped as much as 10% year-over-year in several major markets, but he said that also is not indicative of a serious problem at this point in the economic cycle.

It is more important to realize that in most instances office space is subleased on a five- to 10-year basis, and "that means that someone is still on the hook to pay for it in a certain amount of time" if sudden vacancies occur, offering another form of protection in an economic downturn, he said.

High On Industrial Sector, Not Hotels
Buller is also slightly overweight in the industrial real estate sector, with holdings in companies that own distribution facilities or flex-manufacturing buildings. "The reason (for that) is that the lead time to build is among the slowest and they adapt quickly to supply/demand changes," Buller said.

Retail REIT stocks are about market weight in his portfolio, said Buller. And within that area, he has an emphasis on owners of malls and strip malls. "Malls, even with the slowing sales environment we've seen, (also) have a defensive element in them due to lease protection," he said.

Buller is most leery of the hotel sector because it offers the shortest lease protection: a one-night one. "I think it's going to get ugly, before it gets better."

Hotel occupancy rates drop immediately in a slowing economy and offer the least downside protection because troubled companies quickly cut back on their traveling budgets, he said.

For example, a recent report showed revenue per room was down 25% to 30% year-over-year for hotels in Silicon Valley, he said.

As of March 31, the fund's top holdings included: Equity Office Properties Trust (EOP), Apartment Investment and Management Co. (AIV), and Crescent Real Estate Equities Co. (CEI).

REIT performance could get a boost totally unrelated to the economy this year if a Standard & Poor's index composition committee decides to admit REIT stocks to the Standard & Poor's 500 Index for the first time, Buller said. Eight stocks would qualify to be included in the index, based solely on market capitalization.

Jay Hyde, a spokesman for the industry trade group the National Association of Real Estate Investment Trusts (NAREIT), said his organization has been told that REITs are under consideration for addition to the S&P 500. "But we have no way of knowing when the committee may act or how it may act," he said.

REIT shares could get a boost since an inclusion in the index would mean that many investment funds that have the Standard & Poor's 500 Index as a benchmark would have to buy those stocks in order to match its performance.

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<img SRC="http://chart.bigcharts.com/bc3/intchart/..." width=579 height=335>
FRESX, RMS, S&P500 3 YR Chart

again - these charts don't show dividends reinvested.......Jen

-- posted by JenL_2

Top 132. Aug 19, 2001 4:40 PM

» bob90245 - Preferred approach?

I am new to REITs. Is there a preferred approach to investing in REITs? By way of comparison, one preferred approach to investing in common stocks is with the Total Stock Market Index using VTI or SPY for the S&P 500 Index. Does as similar approach exist for REITs?

Bob

-- posted by bob90245

Top 133. Aug 20, 2001 5:31 AM

» RhyneN - Re: Preferred approach?

In response to message posted by bob90245:

Until recently, the best approach to try to track the REIT industry was probably the Vanguard REIT Index mutual fund. It has a 0.33% expense ratio. It currently holds shares in 112 REITs. Symbol VGSIX It may still be the best to track the total industry because of the large number of companies held.

In 2000, an ishare based on the Dow Jones Real Estate Index started. It has a 0.60% expense ratio, and holds shares in 72 companies. Symbol IYR

Early in 2001, an ishare based on the Cohen and Steers Realty Majors Fund was started. It has a 0.35% expense ratio, and holds shares in 31 companies. Symbol ICF

I tried to find some results, and used 6 month results since ICF started late in January 2001. It looks like the 6 month total return thru July 31, 2001 is IYR 7.12%; ICF 5.72%; VGSIX 7.8%. I got the ishare information from http://www.ishares.com/fund_info/
and the VGSIX from Morningstar.

-- posted by RhyneN

Top 134. Aug 20, 2001 7:35 AM

» JenL_2 - Re: Preferred approach?

In response to message posted by RhyneN:

Rhyne - Thanks for the info about the REIT ETFs. Here's what we get from Quicken.com for $1K invested...

<img src="http://pvcharts.quicken.com/bin/icenter...." width=470 height=250>
ICF, IYR, VGSIX 1 YR Chart

here's another one from BigCharts.com...

<img src="http://chart.bigcharts.com/bc3/intchart/..." width=579 width=335>
ICF, IYR, VGSIX, RMS, S&P500 6 MO Chart

I don't think these charts show dividends reinvested.......Jen

-- posted by JenL_2

http://www.quicken.com/investments/perfo...

Top 135. Aug 20, 2001 7:37 AM

» Kirk - REITs compared to Total Bond Index

REITs compared to Total Bond Index
Here is your list of REITs RhyneN plotted vs Vanguard Total Bond showing how $10K invested does in each (should account for dividends AND capital appreciation)

YTD
<img src=http://pvcharts.quicken.com/bin/icenter.... width=470 height=250>

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-- posted by Kirk

Top 136. Aug 20, 2001 10:15 AM

» RhyneN - Re: REITs compared to Total Bond Index

In response to message posted by Kirk:

Kirk, the bottom chart, the five years from 8/19/96 to 8/19/01, shows the Vanguard REIT Index mutual fund (VGSIX) and the S&P 500 Index almost coming together on 8/19/01 at about $17,500.

Is it possible to get this information in dollars, rather than a chart? Charts are wonderful to see the approximate movement, but I have found the lines are not plotted too accurately sometimes.

-- posted by RhyneN

Top 137. Aug 20, 2001 10:29 AM

» Kirk - Re: Re: REITs compared to Total Bond Index

In response to message posted by RhyneN:

Use this site for actual dates
http://chart.yahoo.com/t?s=VGSIX&g=d

-- posted by Kirk

Top 138. Aug 20, 2001 12:19 PM

» RhyneN - Re: Re: Re: REITs compared to Total Bond Index

In response to message posted by Kirk:

The five year annualized return on VGSIX, Vanguard REIT Index mutual fund, which I was using as a proxy for REIT total return, is 11.06% for the past five years. S&P 500 annualized total return for past five years is 13.45%.

-- posted by RhyneN

Top 139. Aug 20, 2001 7:17 PM

» bob90245 - Re: Re: Preferred approach?

In response to message posted by RhyneN:

Thanks for all the great info!

O.K. Here’s another question. The reason I had stated the “preferred” approach was because of the writings by Burton Malkiel and Charles Ellis. They conclude that the index approach will outperform the average of managed funds. Is there evidence that a REIT index fund will outperform the average REIT mutual fund? Is the expense ratio for the average REIT mutual fund appreciably higher than the index? The basic point of the authors is that the lower expenses of index funds make beating the index very difficult by the average managed mutual fund. Can the same be true in the case of REITs?

-- posted by bob90245