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

http://bradhill.com/tips/stock/reits.htm

Top 17. Sep 2, 1999 6:46 AM

» JenL_3 - REITs - (CCG, EQR, SPK)

This is Tip World's Stock Tip of the Day:

REITs (CCG, EQR, SPK)

We're enjoying a long bull market not only in stocks, but in real estate as well. Stocks and property meet in Real Estate Investment Trusts (REITs), which are basically holding companies for specialized types of properties. REITs operate by somewhat different rules than corporate stocks. Created by the U.S. Congress in 1960, these trusts avoid corporate taxation by distributing most of their taxable income to shareholders in the form of dividends. These days, thanks to continued good real estate fundamentals and because the share prices are somewhat deflated (thanks to fears of overbuilding in 1998), dividend yields are quite high. Accordingly, REITs in general are an interesting bet for both capital appreciation and income.

Three REITs were recently spotlighted by Standard & Poor's as good prospects: Chelsea GCA Realty (CCG), Equity Residential Properties Trust (EQR), and Spieker Properties (SPK). CCG specializes in ownership of manufacturers outlet shopping centers. Equity Residential Properties Trust, as the name implies, focuses on apartment properties, currently holding hundreds of buildings in 34 states. Spieker Properties (SPK) owns about 20 million square feet of office space on the West Coast.

To see a comparative chart of these three REITs, visit the following site:

Brad Hill http://www.bradhill.com is the author of 10 books about the Internet and personal technology. He currently teaches Investing on the Web, an online course for ZDU; writes the Investor 2000 column for Raging Bull; and is the producer of Closing Bell, a daily market report.

The information contained in this tip is based on rules and regulations existing at the time of initial publication. These rules and regulations are subject to change. Neither TipWorld nor the author of this tip is engaged in rendering legal, accounting, or other professional services. The reader should always consult with a professional adviser to ascertain current rules and regulations and the application of this tip to personal circumstances.

Paul - Interesting that this article mentions two Reits, EQR and SPK, that did not make your list. Do you have any opinion on these Reits?.....Jen

-- posted by JenL_3

Top 18. Sep 3, 1999 4:16 PM

» JenL_3 - Boom in Real-Estate Mrkt Fails to Boost REITS

This from 9/3 WSJ:

Boom in Real-Estate Market Fails to Boost REIT Stocks

By BARBARA MARTINEZ

The real-estate market continues to soar. Rents for all property types -- from office buildings to apartments -- are still rising at a healthy clip. Demand for space appears comfortably ahead of supply in most major markets.

So shares of real-estate investment trusts, the public entities that own a chunk of the nation's real estate, are flying, right?

Wrong.

The shares are now down 4.6% since the beginning of the year, compared with a 7.3% gain in the Standard & Poor's 500-stock index. Recently, the much-watched Morgan Stanley REIT Index fell below the psychologically important 300 level.

"There isn't much joy in REIT-ville these days," says David Sherman, analyst at Salomon Smith Barney. "The mood among REIT investors remains morose, or maybe comatose." The title of one of his recent REIT reports: ZZZZZ.

There was a glimmer of hope in April, when shares of REITs shot up (after having their worst performance in more than 20 years in 1998 with a share-price decline of 22%). Even famed value investor Warren Buffett started to buy up some REITs. From the beginning of April to nearly the end of May, REIT stocks climbed 14%. Since the peak in May, however, REIT stocks are down 8.2% on a total-return basis, which includes their hefty dividends.

Most analysts cite the threat of rising interest rates, distractions from glitzier stocks and the REIT industry's own undoing.

Interest-rate fears affect REITs with variable-rate debt, which would be squeezed if rates keep pushing upward. And investors are distracted by highflying technology stocks over REITs that offer only 8% to 10% growth rates.

"Whatever is going on has to do with the psychology of stock investors, not fundamental company performance," says Eric Hemel, analyst at Merrill Lynch. "Investors are not falling in love with these companies." REITs are expected to continue to turn in healthy earnings, though the level of earnings growth is "gradually tapering down," he says.

There is another possible culprit, and REITs themselves may be partly to blame. From May 1 through July 31, over $800 million in REIT equity offerings were priced, while dedicated REIT mutual funds received only $46.7 million in inflows, says Salomon's Mr. Sherman. "Not only did this offering activity soak up all the incremental demand in the REIT market and start stocks going down, it also scared potential additional investors away."

Many investors see a role for REITs in a balanced portfolio, if only as a defensive play. "It's not the most exciting part of our portfolio, but it was never intended to be," says Charles Freeman, lead manager of the Vanguard Windsor Fund. REITs are about 4.3% of his portfolio and his REITs are up 3.5% year to date, not including dividends. Add on a 7% average yield, and that gives Mr. Freeman a 10.5% return so far, and that's "market-like performance.".....

....Now that growth investors have mostly left the sector -- after enjoying total returns of 35% in 1996 and 20% in 1997 -- many believe that the pension funds and value investors are more natural and long-term owners of REIT shares.....

....Jen

-- posted by JenL_3

Top 19. Sep 4, 1999 9:34 AM

» Oaktoad - Real estate is a long term investment

Anyone looking for quick money in this area probably should not be buying. Yes there are surges, but real estate by nature tends to be a buy and hold concept.

Those who have owned houses for a long time can see this. The market in the Bay Area has its ups and downs, but I don't know anyone that bought 20 years ago regretting the decision.. if they could hold until today.

Some who bought in the early 90's were losing until the last year or so, now they are doing fine.

Many REITs are yielding 9-10% and these are not the dregs of the industry (those yield north of 12%). YOu can do dididend reinvestment for some of these. If you are getting to be where bonds become part of the equation then I think REITs are a good alternative as the yield is much higher and there is some inflation protection, which even if it is only 2-3% per year can give a long term boost to the total return.

-- posted by Oaktoad

Top 20. Sep 4, 1999 10:40 AM

» KirkL - Good Points Paul

Good Points Paul
I wonder if REIT's might be a good replacement for what used to be the 5% Gold in a portfolio for an inflation hedge?

Perhaps a 60:40 portfolio might be changed to 58:37:5 with

58% stocks
37% Bonds
and
5% REITs?

-- posted by KirkL

Top 21. Sep 6, 1999 3:54 PM

» Oaktoad - Gold???

I never was big on holding a commodity as an investment.

REITs vary as they do have true inflation protection. No inflation protection in gold over the last 20 years.

Real estate gives some income, whether it is the rent that you don't have to pay or the rent that one collects.

As I get older I am less inclined to own property that I have to manage. REITs allow me to get diversification as well as professional mgmt. The income is nice and frankly, I use the REITs as a replacement for bonds, why hold 40% bonds if they are GNMA as our buddy BB suggests. 6.5% current yield and he brags on 7% over the last few years total return. REITs do much better. I don't know why BB and others don't follow REITs much. I know that BB has had callers ask about them and his general answer is "I don't follow them"

For the truly lazy, there is a Vanguard REIT fund that provides a good yield, typical low Vanguard fees, good mgmt, etc.

REITs are perhaps a bit boring compared to the high flyers out there, but still for those approaching retirement (if there is such a thing based on the Barron's article in this weeks issue).

9-10% yields may look very good over the next 5 years, esp. if inflation continues at a moderate pace of 2-3%.

-- posted by Oaktoad

Top 22. Sep 7, 1999 9:09 AM

» KirkL - Deflation and REITs

Paul
I like what you say, but I worry about REITs that invest in commercial property like shopping malls. I wonder if the internet squeezing profit margins will lower the return one can get out of a shopping mall and thus lower the value of commercial realestate such as that? It seems you either have to pick a REIT in a good sector (market time) or buy a REIT index fund and take the averages and thus get stuck with the lemons if the internet leads to deflation in shopping and strip malls.

I'm still looking for a compelling reason to add some to my portfolio so I appreciate the discussion.

-- posted by KirkL

Top 23. Sep 7, 1999 5:03 PM

» Oaktoad - internet and the malls

I don't think that the internet poses as much a threat to malls as people think. Shopping is very much a social experience and I don't think that will change that much.

I think the retailers that use catalogs will get hurt more. I also think that malls will have to be a bit more creative to keep people coming to visit them. The other long term issue is population. Well situated malls will have tremendous power. There may not be any new big malls in the Bay Area for example. The existing ones will have more people to draw from and that could increase their earnings substantially.

Strip malls are perhaps more of a problem, but a retailer that has a web presence will still need a retail site that people can visit as often they will want to see the product and pick it up. If they don't need a retail site they still will need
warehouse space so mini-whse type places should be good investments.

People will still buy lots of stuff and need places to store it (if they continue to be anal, which they no doubt will) so Public storage and shurgard should be good long term bets. Small companies often use them for inventory storage or whatever. People store their boats/rec vehicles there.

Apartments are a good long term bet. People will have to have places to live regardless of the internet. One with good growth potential (lower yield) is Archstone. They have a nice new facility going up in Dublin.

Hotels are some of the more speculative type of REITs, but still, if the economy does well people will travel and they can't stay in their computer.

Commercial office developments will continue to do well as long as the economy continues to do well. Look at all the building in the Bay Area. One guy built a fortune by owning/developing around Sand Hill Road, etc...

I personally don't have the mutual fund. Pick a sector that you feel comfortable with and do a bit of research. There are multiple companies in almost all areas.

Golf and prison REITs seem a bit out there for me, but I have a golfing friend that thinks golf ones are the wave of the future.

With luck we will stop putting so many people in jail so that the prison ones may lose their appeal. The pessimists might want to put money on them.

Have fun.

-- posted by Oaktoad

Top 24. Oct 7, 1999 6:11 AM

» GoodGuy - Looking for FFO

Hi,

After reading extensively thru Oaktoad's earlier discussions I have done some research to understand REITs.

One question is where to find FFO info. When I go thru the information I find EPS which I understand is not the right valuation tool for REITs.

Do I look at cash flow numbers or the net income numbers to come up with FFO. Also what about FFO estimates for future.

Can Paul or anyone throw more light ?

- GG

-- posted by GoodGuy

Top 25. Oct 7, 1999 7:39 PM

» Oaktoad - FFO is shown as earnings by analysts

When you do research on REITs you will find that where they show earnings for this year and next that it is really the FFO they are forecasting.

Pretty easy to check and gives you the info that you need to figure out what percent of FFO they are paying as dividends. Generally the lower the percent the safer the REITs dividend if that is the reason that you are buying..

For more adventurous investors in this area look at PRT and CEI for high dividends that if everything works the way it is supposed to will result in large capital gains over the next year or so... not the 40% per year that you will get every year in internet stocks (yes I am being facetious) but still could be a nice return.

-- posted by Oaktoad