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

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Top 151. Aug 24, 2001 7:00 AM

» KLR - Do the REIT thing

Do the REIT thing
Yield hunter James Stratton scores with realty funds

By Craig Tolliver, CBS.MarketWatch.com
Last Update: 4:03 PM ET Aug. 23, 2001

PHILADELPHIA (CBS.MW) -- Real estate funds are on a tear this year, reaping gains when every other sector fund category is nestled in the red.

As of Wednesday, real estate funds are up nearly 12 percent since the beginning of the year, according to mutual fund analyst Morningstar Inc. Only the small value diversified equity group, up 13 percent, and precious metals funds, considered an international play, up 14 percent, outpace the segment this year.

The $113 million Stratton Monthly Dividend REIT Fund (STMDX: news, chart, profile) has leaped ahead of its peers, sporting a 26 percent year-to-date gain. Over the last three years, the fund boasts average returns over 11 percent.

Generally speaking, real estate funds operate in a direct inverse to the Standard & Poor's 500 index, and Stratton is no exception, so it shouldn't be too surprising that these funds have picked up -- especially in a falling interest rate environment.

What has distinguished Stratton from the other players in the group is its attention to high yield. In fact, fund manager James W. Stratton argues that his fund shouldn't be viewed as part of another stock allocation to an investor's portfolio, but that it's more appropriate as a "bond substitute."...

-- posted by KLR

Top 152. Aug 24, 2001 1:11 PM

» mitelo - Re: Do the REIT thing or Do the RATE thing

In response to message posted by KLR:

It is interesting that he said the REIT's "operate" in "a direct inverse" to the S $ P 500 Index. I guess he means they "move" in opposite directions. That is pondersome in view of his comment that a REIT fund is appropriately allocated as a bond substitute. Usually we think of a good bond market as a required precusor for a good stock market, and a very weak bond market as very bad for stocks. REIT's are vulnerable to much more than interest rates but by the same token can advance because of factors other than interest rates, ie. the dividends can be raised if the business is doing well.

REIT dividends are much more vulnerable than bonds. That is why many pay more than highly rated bonds. Similarly, some wonder why GNMA funds have returned less than Total Bond Index funds. The GNMA paper is all AAA, while the total bond index at Vanguard holds 18 % Baa paper. "You get what you pay for".

-- posted by mitelo

Top 153. Aug 25, 2001 6:31 AM

» RhyneN - REITs and the S&P500

The August 25th edition of Barrons discusses the possible addition of some REITs to the S&P500 index. Some years ago, those who determine the index decided that REITs were not operating businesses and chose to exclude them from the S&P500 index.

Because of several tax law changes that allow REITs to be more like operating business, the question is being re-reviewed and a decision is expected in September or October.

A decision to include REITs would cause significant buying of those REITs selected to be included. The article indicates that REITs would likely occupy 70 basis points of the index.

The three largest REITs measured by market cap are EOP, in office buildings, EQR, in apartments, and SPG, in retail malls. Based on July 18th values, they made up 9.575%, 5.685%, and 3.827%, respectively, of the Morgan Stanley REIT Index.

This helps explain the recent strength of these three stocks.

Other REITs with large market caps are PLD, an industrial REIT, BXP, an office REIT, and PSA, in self-storage.These three made up 2.965%, 2.712%, and 2.696% of the RMS at July 18.

-- posted by RhyneN

Top 154. Aug 25, 2001 7:12 AM

» RhyneN - Bob90245 - Less volitile REIT mutual fund

In response to message posted by bob90245:

Bob, the Vanguard REIT index, VGSIX, simply followed the REITs in 98 and 99 as investors abandoned REITs and chased technology. This created a great buying opportunity in REITS in October, November, and December of 1999.

Why don't you do a search at www.morningstar.com
They have a good Fund Selector Tool that non-premium-members can use. Choose Fund Selector. Then, under Fund Group, choose domestic Stock. Then under Morningstar category, choose Real Estate. Then under the other areas, tailor the search to your specifications.

Morningstar will show 74 no-load real estate mutual funds and a number of load funds unless your other choices reduce the number.

If you find a couple of funds you like, let us know. I am a premium Morningstar member, and I can look at the funds with you, if you like. As a premium member, I can get more detail about the funds.

-- posted by RhyneN

Top 155. Aug 25, 2001 7:23 AM

» Kirk - Re: REITs and the S&P500

In response to message posted by RhyneN:

Hopefully Jen can post the REIT article. Sounds interesting.

I watched Wall Street Week with Louis Rukeyser last night and the guest was talking about how now is the time to sell defensive issues as they have had their run and money will flow to areas of the market that are less defensive as the economy bottoms and turns. He defined defensive issues as those with low P/E but good dividends (usually due to a mature industry or little growth). He did not mention REITs specifically, but they sure came to mind for me.

At this point in the stock market cycle, where equities are way down, interest rates are low and REITs and Bonds have had a good run, I would advise against moving equity monies into bonds or REITs (unless you are about to retire and want a more conservative asset allocation). Now that "they" are talking again of adding REITs to the S&P500, I'd look at it as a contrarian sign much as the untimely removal of RiteAID from the S&P500 and replacement with JDSU just before RiteAid doubled and JDSU went from $140 to $7.
http://stockcharts.com/def/servlet/SC.we...

When the market turns, people won't be as risk averse as they are now and so REITs will lose some of their appeal. Now if you are talking about moving some of your bond portfolio over to REITs, then that is an interesting idea worth discussion. REITs should pay a bit more than total bond or GNMA but the credit quality is not as high and the operating expenses (don't the individual REITs, even in an index, have fairly high management fees or at least property managers to pay?) are a consideration.

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-- posted by Kirk

Is It Time to Put REITs in the S&P?

Top 156. Aug 25, 2001 7:41 AM

» JenL_2 - Re: REITs and the S&P500

In response to message posted by RhyneN:

Rhyne - Here's the article in 8/27 Barron's:

If any join index, their shares should benefit

By Shirley A. Lazo

Real-estate investment trusts have provided shelter from market turmoil since stocks peaked in March 2000. Accordingly, any number of investors would like to see some dividend-rich REITs in Standard & Poor's U.S. indexes. As it happens, S&P has had the matter "under consideration" for several months. Real-estate industry representatives met with the firm's index-selection committee in late April. Says David Blitzer, head of the four-person committee: "Our hope is to have the process concluded and have gone public with something in late September-early October."

If the notion gets a green light, it would be the first time since the 1970s that the S&P 500, which lost 9.1% in 2000 and 7.6% more through this July, has included REITs. Back then, S&P decided that tax and structural aspects of REITs made them different from other corporations.

REITs, however, triumphed last June when the Internal Revenue Service ruled that they are operating companies, thereby reversing a 1973 decision that REITs weren't engaged in the "active conduct" of a business.

In any case, investment advisers caution that, given REITs' big gains, one should pick and choose carefully. In 2000, they posted average total returns of 15.9%, while this year the figure is roughly 12%.

In a recent SalomonSmithBarney study, trading strategists Steven Kreichman and Nicholas Gulden assess how inclusion of REITs could affect the S&P indexes. They say "a decision by S&P could likely come with the addition of the first REIT, followed by an explanation for the rationale in order to avoid a widespread run-up in the REIT group. Using the Russell 3000 as a proxy for the U.S. equity market, our analysis suggests the REIT industry group would have a weight of approximately 70 basis points in the S&P 500... [That] would not measurably affect the yield or volatility of the S&P 500 index. However, assuming the index committee decides to include REITs and does so gradually [through attrition, such as merger and acquisitions and deletions due to lack of representation], the relatively low liquidity of the top REIT names could cause significant short-term price dislocation." In other words, sharp price gains, as index-fund managers scramble to put the stocks in their portfolios.

The SalomonSmithBarney pair, employing the methodology used by the S&P index committee, have identified 22 companies that would be likely candidates for S&P 500 membership. Their three top picks are Equity Office Properties and Equity Residential Properties, both operated by billionaire financier Sam Zell, and Simon Property Group. "It is important to note that the committee may choose not to include REITs in the S&P U.S. indices," the strategists point out. "However, [these] three companies meet all current guidelines for inclusion, are the three largest by market capitalization and are representative of the three largest REIT industry groups."

The other top candidates on SalomonSmithBarney's list: ProLogis Trust, Boston Properties, Public Storage, Apartment Investment & Management, Vornado Realty Trust, Duke Realty, Avalon Bay Communities, Archstone Communities, Host Marriott, Kimco Realty, Crescent Real Estate Equities, AMB Property, Liberty Property Trust, Health Care Property Investors, Plum Creek Timber, General Growth Properties, Rouse, Carr-America Realty and Arden Realty.

S&P observes that, despite generally rising share prices, REIT yields remain attractive, compared with those on other income-oriented investments. "The typical equity REIT has recently yielded 7%, while the S&P utility index returned about 3% and 10-year Treasury notes yield roughly 5%." Net income is the chief measure of operating performance for most industries, but for REITs it's funds from operations (FFO). The latter is defined as net income plus depreciation and amortization, excluding gains or losses from property sales and after adjustments for joint ventures and unconsolidated partnerships.

Notwithstanding the slowing economy, S&P expects the salubrious climate for REITs to continue because "the fundamentals of most real-estate sectors remain fairly healthy... Rents should continue to increase at a strong clip, as leases that were written years ago expire and are renewed at higher rates. FFO growth, moreover, should remain strong."

There's a legislative fillip, too -- the REIT Modernization Act, which became law in December 1999 and took effect this year. "Broadly speaking, the RMA allows REITs to conduct business with greater efficiency," like providing services to tenants. That should give REITs "a new stream of income and enable them to garner customer loyalty," says S&P. "In addition, the new law reduced to 90% from 95% the minimum amount of taxable income that a REIT must distribute to shareholders. This reduction will enable REITs to retain more of their after-tax earnings to pay down debt and acquire new properties, among other things."

Subscribe to WSJ & Barron's Online @ http://www.wsj.com

.....Jen

-- posted by JenL_2

http://leviticus.boards.fool.com/Message...

Top 157. Aug 27, 2001 6:08 AM

» RhyneN - REITs - buy, sell, or hold

Here is an interesting post from the Motley Fool early retirement board.

-- posted by RhyneN

Top 158. Aug 27, 2001 11:10 AM

» CaptRon - Kirk

In response to message posted by Kirk:

FWIW, Dow Reit index looks to be rolling over, supporting your premise, FWIW:
http://stockcharts.com/def/servlet/SC.we...

-- posted by CaptRon

http://www.realtystockreview.com

Top 159. Aug 28, 2001 3:42 PM

» RhyneN - Have REITs topped?

The Morgan Stanley REIT Index closed today down 0.35, at 418.09. The all time high was last week at 421.91.

I received an e-mail from Realty Stock Review telling of a report from the REIT analysts at CSFB, which stated:

"The CSFB analysts concluded that REIT valuations at this point are either right on top of –or slightly in excess of –private market levels. “All in all, we conclude that thanks to the 18-month run-up in REIT prices, the group is no longer cheap.”

Raiman and his fellow CSFB analysts stopped well short, however, of suggesting that the stocks will head south from here—though they did add a note of caution. “In light of significant fund flow activity (and problems in the broader market), we suspect that current valuation levels will not impede a further rise in share prices. We do caution investors, though, that any incremental decline in industry’s growth rate could put the brakes on the REIT group’s rally.”

The CSFB REIT Team identified the office/industrial group as the sector that “far and away looks the cheapest from a valuation perspective.” Trading at just 9.7x EBITDA, they added, “this sector is at the lowest multiple despite producing one of the fastest growth rates.” Why the disconnect? “Clearly, investors are nervous about the office-industrial group’s exposure to development, with 8.9% of enterprise value committed to new construction. Should the economy firm and absorb new supply additions, valuations within the office-industrial sector would prove opportune,” Raiman and his colleagues concluded."

-- posted by RhyneN