REITs - Real Estate Investment Trusts - Info & Discussion
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» 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:
Is It Time to Put REITs in the S&P?
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."
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.....Jen
-- posted by JenL_2
» 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
» 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
» JenL_2 - REIT Earnings Debate
Jeepers talk about REITs maybe being over-hyped - 8/29 WSJ is a REIT 3-banger...Debate Over Earnings Puts Wall Street Analysts at Odds
By RAY A. SMITH
In real estate, everyone agrees that location is everything. But when it comes to real-estate earnings, it seems no one can agree on anything.
For the past 10 years, the real-estate investment trust industry has focused on an earnings recipe called funds from operations, or FFO, rather than net income. Public real-estate firms say FFO -- which generates higher earnings than net -- is the best way to evaluate operating performance.
Then last month, three major Wall Street firms -- Merrill Lynch & Co., Morgan Stanley and Citigroup Inc.'s Salomon Smith Barney -- broke ranks with fellow analysts and the real-estate industry and said they would start forecasting earnings for real-estate investment trusts, or REITs, based on per-share net income that conforms with generally accepted accounting principles.
Now, a splinter group of analysts, miffed that they were excluded by the big three firms, has been secretly meeting to come up with its own definition of earnings for the sector. The problem is that the splinter group is itself split, with various members proposing different earnings formulas.
"This only adds to confusion in a marketplace that is already confused over how
REITs report earnings," says analyst Jonathan Litt of Salomon Smith Barney, one of the three firms that broke ranks with the industry.
The debate over real-estate companies' earnings shines a light on the contentious issue of so-called pro forma results. Proponents of pro forma measures argue that certain sectors, like real estate or insurance or technology, need a different formula than net income to give investors a clearer financial picture.
Critics argue that pro forma earnings allow companies to play down items that would reduce reported earnings. Companies and industry analysts, in turn, often use pro forma earnings to justify higher stock valuations.
<img src="/files/mysites/jen2/reitearnings.gif" width=449 height=295>
First, a quick primer on FFO. Real-estate industry executives say net income can give a deceptive picture of performance for a real-estate firm. That is because, under generally accepted accounting principles, a real-estate firm must depreciate the value of its properties each quarter, taking a hit to its earnings. By contrast, the actual value of the properties usually rises from year to year in most markets.
In 1991, the National Association of Real Estate Investment Trusts, the main trade group for the REIT industry, created a supplemental standard called funds from operations. It allowed REITs to add back real-estate depreciation. In addition, REITs, which derive their main earnings from rents on the buildings they own, were able to ignore gains on sales of properties. FFO became the standard performance measure as the REIT industry ballooned to a current total equity market capitalization of $148.4 billion from $8.7 billion at the end of 1990.
Why the controversy? Over time, REITs became more aggressive in what they excluded from or included in FFO. Some began excluding technology-investment losses or foreign-currency losses; others included gains from sales of property that had been depreciated. Indeed, many analysts soon began publishing "adjusted" funds from operations to add back expenses that they felt had been improperly excluded.
The REIT industry's debate over FFO came to a head earlier this summer when the Merrill Lynch, Morgan Stanley and Salomon Smith Barney analysts got together and decided to start sending estimates for per-share net income to Thomson Financial/First Call, which tracks analysts' earnings estimates. Until then, the three firms, along with nearly every other Wall Street analyst, had been providing estimates based on FFO.
The group's decision to summarily de-emphasize FFO didn't sit well with some analysts, especially Lawrence Raiman at Credit Suisse Group's Credit Suisse First Boston. He and a few other analysts decided to round up analysts from other firms to participate in an "open-forum" dialogue. "We all thought the industry would be better served by having a broad constituency agree [on a definition], vs. having a few people going out," Mr. Raiman says.
Mr. Raiman called and e-mailed about 20 analysts, inviting them to participate in a conference call that was held less than a week after the other group's July announcement. The call was kept hush-hush. Representatives from the industry trade group and real-estate companies weren't on the guest list. Of course, neither were analysts from the group of three. Participants agreed not to share anything discussed during the call with anyone, including their clients and companies.
"That was to make sure that it wouldn't be publicized in a way that says there's one camp vs. another," Mr. Raiman says.
According to some people familiar with the call, the group didn't make a lot of headway. The participants decided to hold another call about a week later, but this time fewer analysts participated.
David Kostin of Goldman Sachs Group Inc. was among those who chose not to call in a second time. "We do not need a dictum from a group of analysts when the [GAAP] definition of earnings per share is so clear," says Mr. Kostin, who had dropped out of discussions with the major three firms before falling out with the dissident group. He described the first conference call as "disjointed" and says he has no plans to attend any follow-up meetings. Mr. Kostin's firm uses operating earnings per share, which excludes gains or losses from sales. The definition that Merrill, Morgan Stanley and Salomon Smith Barney adhere to includes gains and losses on sales.
How much difference can FFO make in a company's results? Consider the second-quarter results of Equity Office Properties Trust, the nation's largest office owner. For the latest second quarter, Chicago-based Equity Office reported FFO of 78 cents a share, but it reported earnings per share of just 40 cents. The difference: Equity Office added back in depreciation and amortization of 38 cents a share when it calculated FFO.
Some REITs are placing more emphasis on net income. AMB Property Corp., a big San Francisco owner of industrial properties, has led its earnings announcements with earnings-per-share figures since the third quarter of 1999 and is believed to be the first REIT to do so. Since then, a few more REITs have directed attention to net. "We like earnings per share because the rules are very clear and those rules are policed by the accounting profession," says Hamid R. Moghadam, chief executive of AMB.
The flap over FFO comes as the index committee at McGraw-Hill Cos. that oversees the Standard & Poor's 500-stock index is considering allowing REITs into its stock index. Inclusion in the index could broaden the base for REITs, which have failed to whip up widespread interest among investors. "Earnings per share is what is tracked most widely by the investor universe," says Joseph Gyourko, director of the Zell/Lurie Real Estate Center at the Wharton School of the University of Pennsylvania. "One would think if REITs want to access that universe for capital, it's a good idea to use earnings per share."
In the end, REIT analysts may agree to use an earnings-per-share figure, with each making his own adjustments to calculate financial results -- the same exercise they do with funds from operations. "We may end up agreeing on a standard but leave the specifics to be determined on an ad hoc basis," Mr. Raiman of Credit Suisse says.
Buffett's Sale of Stock Puts Focus on REIT
By JONATHAN WEIL
Warren Buffett, the billionaire investor who says the best time to sell a stock is never, has sold his stake in First Industrial Realty Trust. So should investors follow him out of the stock his wallet made famous?
For most of the past two years, First Industrial, a Chicago real-estate investment trust, has basked in being the stock recommended by Mr. Buffett as part of a December 1999 charity event. The name of the REIT was tucked inside the 20-year-old wallet auctioned by Mr. Buffett, raising $210,000 for Girls Inc. of Omaha, Neb. But First Industrial's days as a Buffett holding are over. "He owns no shares of the stock," a spokeswoman for Mr. Buffett says.
The spokeswoman declines to say when or why Mr. Buffett sold the stake, which he held personally. But the disclosure comes just as First Industrial is receiving scrutiny over the way it calculates the profit measure most widely followed by Wall Street analysts. Michael Brennan, First Industrial's chief executive, Tuesday declined to comment on Mr. Buffett's departure. "I don't comment on specific activity of specific shareholders," says Mr. Brennan, who also adamantly defends the company's financial-reporting practices.
As reported last year, Mr. Buffett bought 1.8 million shares of First Industrial at about $24 each, a 4% stake, for a total of $43 million. As of 4 p.m. in New York Stock Exchange composite trading Tuesday, First Industrial shares closed at $33.23, up eight cents.
Mr. Buffett recommended First Industrial when the tech-stock rally was near its peak. When share prices dropped, many investors fled the sector's red ink -- and reliance on "pro forma" accounting practices to make their results look better -- by rushing into supposedly safe stocks like REITs, which had real assets, steady dividends and healthy-looking profits. What investors may not have realized, however, is that the REIT industry's widely cited earnings benchmark -- "funds from operations," or FFO -- is just as fuzzy as the dot-coms' pro forma metrics.
"For investors that have moved into real-estate stocks for safety, it may not be as safe as it seems," says Lee Schalop, a REIT analyst at Banc of America Securities, who rates First Industrial a "market-performer" and says he isn't recommending it. "Of the 32 companies we cover, First Industrial is the most aggressive" in calculating FFO.
The National Association of Real Estate Investment Trusts defines FFO as net income plus depreciation and amortization expenses. The association excludes, among other things, gains or losses on sales of any properties that previously have been depreciated. The reason depreciation is added back is that real estate generally gains value over time. Gains and losses on sales of depreciated properties are excluded because their owners have declared, by depreciating them, that they are holding them for investment purposes rather than as inventory for resale.
Most REITs follow the guidelines set by the association, to which First Industrial belongs. But the guidelines aren't binding, leading to inconsistent pro forma accounting practices throughout the industry.
Unlike the trade group, First Industrial defines FFO to include net gains from sales of previously depreciated properties. The company doesn't disclose that in its quarterly-earnings news releases -- which have given more prominence to FFO than the REIT's lower net income. But the company does reveal how it computes FFO in separate "supplemental information" booklets for investors and analysts. Michael Havala, First Industrial's chief financial officer, says the company's disclosure practices have been evolving and are "as good as, if not the best in, the industry."
<img src="/files/mysites/jen2/reitbuffet.gif" width=220 height=300 align="left"> First Industrial first reported gains from depreciated-property sales in the first quarter of 2000, and the company began including them in FFO under a line item called "Integrated Industrial Solutions customer sales gain/fees." (First Industrial says gains represent almost the entire line item.) The company recorded $1.2 million in such gains in the first quarter of 2000, or just 3% of its $40.4 million of FFO, according to its supplemental information.
For the six months ended June 30, gains on depreciated-property sales totaled $11.7 million, or 13% of the company's $92.6 million of FFO. Based on the company's guidance, Banc of America's Mr. Schalop notes that analysts project First Industrial will report 2001 FFO of about $190 million, or $4.06 a share. Of that amount, Mr. Schalop estimates 59 cents a share, or nearly 15%, will come from the line item for depreciated-property sales. First Industrial's top executives also benefit from high FFO because FFO is a "primary component" of their bonus and incentive awards, according to the company's proxy.
Messrs. Brennan and Havala say they are aware the company's FFO definition doesn't follow the trade group's guidelines and that gains on sales of investment properties are considered nonoperating items under both generally accepted accounting principles and the association's FFO definition. They say First Industrial includes such gains because it considers them, in effect, recurring inflows of cash. As for the reason the gains on property sales have increased so much this year, they say corporate customers are taking advantage of low interest rates to buy their own buildings rather than lease them.
"Those activities are integral to the company's operations," Mr. Brennan says. For instance, First Industrial frequently contracts to develop custom-built facilities for customers who lease for the first few years and buy later. In those cases, he says, First Industrial is acting more as a developer than a passive investor, even if it is depreciating the property until it is sold.
Another area of investor scrutiny is the way the company has allocated purchase prices within newly acquired real-estate portfolios. For the second quarter of 2000, for instance, its biggest acquisition was a portfolio of 18 properties around Dallas for $44.3 million, or $34 a square foot, which it bought for investment purposes. About nine months later, it sold three of the properties for $12.1 million, or $38.39 a square foot. That produced an unusually large gain. The sale included the two properties in the portfolio with the lowest purchase-price allocations, at $20.17 and $21.55, respectively. That raises questions about whether those outsize FFO gains are sustainable; the average purchase price assigned to the 15 remaining properties is more than $36 a square foot.
The company says they are sustainable. Mr. Havala, the finance chief, says he had hoped to sell the three properties quickly when the company bought them. Mr. Havala says First Industrial didn't have those Dallas-area properties independently appraised, but that the purchase-price allocations were appropriate. He explains that company executives wouldn't intentionally boost FFO at the expense of higher taxes and, thus, reduced cash flow.
Rise in Common-Stock Offerings Shows Sector Still Looks Safe
By RAY A. SMITH
Equity offerings have slowed in most industries due to the weakened stock market. But not in the REIT world.
The increase in common-stock offerings by real-estate investment trusts shows that investors believe the industry is a haven in a down economy, says Jacques Brand, global head of real-estate investment banking with Deutsche Banc Alex. Brown in New York.
REITs, excluding those specializing in mortgages, conducted 15 secondary offerings of common stock so far this year as of last Wednesday, raising about $1 billion, compared with seven a year earlier, which raised $389 million, according to the National Association of Real Estate Investment Trusts. There haven't been any initial public offerings of REITs since 1999.
Meanwhile, the overall year-to-date number of common-stock offerings in the U.S., including initial and secondary offerings, was 351, with proceeds of $84.47 billion. That's down from 588 offerings, with proceeds of $127.72 billion, a year earlier, according to Thomson Financial, a Newark, N.J., data provider.
REITs hardly sold equity back in 1998 and 1999, as the sector suffered a bear market. But their stocks rallied in early 2000 as technology-related stocks fell out of favor. And they've continued to do well, allowing REIT executives to feel comfortable dipping into the equity pool.
"We anticipate a number of offerings after Labor Day," says Mark R. Patterson, global head of real estate and lodging at Salomon Smith Barney in New York. It's "not a torrent of deals like we saw in the past, but for companies that have good uses of the capital, [it's] prudent issuance after a period when there's really been very little."
REIT stocks are up in part because REITs are looking attractive to Wall Street, compared with other sectors. Investors have seen an average return of 15% so far this year as of last Wednesday, according to Morgan Stanley's REIT index. Total return from the Standard & Poor's 500-stock index, meanwhile, has fallen 11%.
Moreover, REITs, which are required to pay out 90% of their taxable income in the form of dividends, have attractive yields: an average of 7% at the end of July. The average yield for utility stocks was about half that.
<img src="/files/mysites/jen2/reit3.gif" width=187 height=229 align="left"> Analysts at Green Street Advisors of Newport Beach, Calif., have long maintained that a REIT's ability to issue shares should depend on where the company's stock is trading relative to the underlying value of its assets. As of last Wednesday, REITs on average were trading at a 5% premium to net-asset value, according to Green Street. A year earlier, REITs on average were trading at a 9% discount.
Trading at a premium "is a major condition for having the right environment for share offerings," says Green Street analyst John Lutzius.
Some REITs, like Weingarten Realty Investors, a Houston-based owner and developer of shopping centers, have already conducted more than one offering this year. And the company hasn't ruled out conducting more by the end of the year.
Others are doing so for the first time in years. Capital Automotive REIT's recent offering of about 3.4 million shares was its first since its IPO in 1998. The McLean, Va., company specializes in real-estate properties for car dealerships.
So just what do the companies intend to do with all their money? SL Green Realty Corp., which acquires older buildings in prime locations in midtown Manhattan, upgrades them, and markets them with the amenities of modern office buildings, says it raised equity to position itself for more acquisition opportunities.
Subscribe to WSJ Online @ http://www.wsj.com
......Jen
-- posted by JenL_2
» JenL_2 - New IRS ruling on REITs
This little clip is from the 8/29 WSJ Tax Report:ARE REITS ON THE RISE for land-owning companies?
Maybe so, thanks to the IRS's recent Revenue Ruling 2001-29. Robert Willens, a managing director at Lehman Brothers, says the ruling should open the door for companies with substantial real-estate holdings to spin off those properties tax-efficiently into real-estate investment trusts. Historically, the IRS determined that REITs, because of their structure, couldn't engage in an active trade or business -- a prerequisite for a tax-free spinoff.
That view changed with the recent ruling, in which the IRS now agrees that REITs could be engaged in an active trade or business. Mr. Willens says the ruling "is a very attractive restructuring opportunity for companies; we've had an awful lot of interest." Others aren't so optimistic, saying that added requirements for a spinoff aren't easily met when a REIT is involved.
Subscribe to WSJ Online @ http://www.wsj.com
......Jen
-- posted by JenL_2
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