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

Top 181. Oct 15, 2001 10:12 AM

» JenL_2 - Real Appeal

This from 10/15 Barron's:

Real Appeal

A fund's success with mortar and bricks, trailer parks and drug labs

By David Franecki

Mutual-fund investors have spent the past two years looking for shelter from double-digit annual losses. In the aftermath of September 11, the search has become more frantic.

Investors' common response has been to sprint to the sidelines and dump cash into money-market funds and bond funds.

But there's an often-overlooked fund category that has actually held up well in this tough market: real-estate funds.

As of the end of September, real-estate funds had grown 7.4% on average during the last 12 months and gained 8.3% a year during the last three years, according to Lipper. That compares with a 27.2% loss for the average U.S. diversified fund in the last year and just a 5% annual gain for the three-year period.

One of the better, but lesser-known, real-estate funds is Undiscovered Managers REIT Fund (URTLX).

As the name would imply, the $73 million real-estate investment trust (REIT) fund is run not by a household name, but by Bay Isle Financial, a boutique asset-manager in San Francisco co-founded in 1986 by William Schaff and Gary Pollock.

The firm looks for institutional money managers with good track records and then hires them to run its various funds. (The other fund Bay Isle manages, as fund sub-adviser, is the Berger Information Technology Fund.)

Bay Isle launched Undiscovered Managers in 1998 -- after which followed two tough years in the real-estate market. Still, the duo that manages the fund -- Schaff and colleague Ralph Block -- invested conservatively, so they outgunned most of their competitors. By 2000, the pair got more aggressive, finding the values too compelling to pass up.

Due to that deft work, Undiscovered Managers REIT has amassed an impressive track record. As of October 9, the fund has gained 12.38% during the past 12 months, ranking it in the top 15% of real-estate funds, according to Lipper. During the last three years, the fund has returned 14.39% a year, ranking it in the top 5% of its peers.

Schaff, a Korean adopted as a child by a Jewish family near Pittsburgh, started his career in corporate finance at oil giant Chevron. When that firm bought Gulf, he was responsible for determining the breakup value of the company. The experience got Schaff more interested in investing, and he soon jumped to a small money-management firm in San Francisco. After about 18 months there, he felt ready to run his own shop.

Now 43, Schaff was only 28 at the time of Bay Isle's start-up. He was also the sole investment professional, while company co-founder Gary Pollock handled the business end of the operation.

The early years as his own boss were lean ones, Schaff admits: "For the first three years, I think our secretary was our highest-paid employee," he recalls with a chuckle.

The firm started out with one $10 million client, but now runs more than $1 billion in assets. And in those first days, Bay Isle was already managing diversified portfolios in the value style.

In 1993, Schaff met Ralph Block, his cohort in running Undiscovered Managers REIT and the firm's resident real-estate expert; Schaff specializes in valuing the companies.

Block, now 58, was a lawyer for 27 years before going into money management full time. Early in his law career, he dabbled in investing several times -- and got burned several times. For instance, in 1968 he bought stocks on margin and lost all of the $2,000 he and his wife had. But in 1975, he started following and investing in real-estate stocks. In the 'Seventies, very few REITs existed, but Block liked their high yields and cash-flow stability.

Now he is one of the most tenured REIT investors around: Block has written a real-estate investing newsletter for years, and has authored two books on the subject.

But being mostly "undiscovered" has worked to the fund's advantage, say its portfolio managers. Its relatively small size allows it to take positions in smaller companies, and affords it nimbleness in getting in and out of stocks -- nimbleness that isn't possible for bigger funds. Schaff and Block also say their focus on diversification has helped.

Undiscovered Managers tracks the Morgan Stanley REIT Index and rarely puts 10%, more or less, in a sector other than the REIT index. Real-estate funds in general have held up well in this tough market due to their high yields and their lack of correlation to the general market.

A small number of investors, including those in diversified mutual funds, have shifted some of their money out of other sectors and into real-estate stocks. And since REITs have such small market capitalizations compared with other stocks, a small injection of cash into the sector can go a long way, Schaff points out.

REITs have benefited, too, from the high visibility and predictability of their earnings, Block notes. The stocks were once thought of as boring or plodding because they tend to grow more slowly than so many others; "now, plodding is good," Block says.

Ralph Block (standing) and William Schaff started their Undiscovered Managers REIT fund in a tricky market, but clever plays -- in fields like health-care real estate -- have paid off.
Within the real-estate sector, Block's and Schaff's favorite picks are health-care REITs, self-storage and manufactured-home communities (a/k/a trailer parks). They like them because they are less sensitive to economic growth than other sectors.

The pair is now staying as far away from hotel stocks as possible in light of the travel decline following September 11. After the attacks, "the first day we could start selling our hotel REITs, we sold them," Block says.

In addition to an anticipated decline in occupancy, hotel stocks are extremely vulnerable now because they have high fixed costs and debt.

The fund employs a valuation model, designed by Schaff, which looks at three elements when pricing real-estate stocks:

First is a discounted cash-flow model, similar to what many fund managers use to determine the true value of a stock. Next is a real-estate valuation model, which looks at the value of the real-estate property itself, compared with the value of the actual REIT security. Third is a measure of a stock's price compared with adjusted funds from operations (AFFO) -- a measure of cash flow commonly used to measure a REIT's growth instead of earnings.

Undiscovered Managers REIT Fund holds about 30 stocks at once, a smaller number than most funds.

One of the duo's favorite stocks is Alexandria Real Estate Equities, the only REIT specializing in office space for laboratories and biotechnology companies. Alexandria is somewhat of a play on the boom in new drug development; two of its largest clients are drug giants Pfizer and Merck.

Block calls Alexandria Real Estate Equities "a virtually recession-resistant property." The company owns five million square feet of properties, mostly in key California cities, eastern Massachusetts and North Carolina -- markets where much of the health-care development takes place.

Block estimates that Alexandria will be able to grow its free cash flow at least 10% a year for the next two years. The stock isn't cheap, selling at 11 times 2002 AFFO, compared with 10 times for the average office stock. However, Schaff and Block like its growth and low risk.

Another favorite stock is Manufactured Home Communities, which operates 149 trailer parks in 23 states. Started by Sam Zell in the early 1980s, the company concentrates on high-end trailer communities with larger units and a greater variety of amenities -- for example, central driveways, patios, garages, fireplaces, even putting greens. The company boasts 93%-95% occupancy, operating cash-flow growth of 4% a year, and rent increases 1%-2% above the consumer price index.

There is limited threat to future development in most of Manufactured Home's communities, thanks to zoning laws. Its units have 10%-15% annual turnover, compared with 50%-65% in many conventional apartment communities.

There are three REITs in the trailer-park business, and Block considers Manufactured Home the most consistent of the group. Large numbers of its tenants are senior citizens -- which helps account for low turnover and low default rates.

Block expects Manufactured Home to grow its AFFO 8.5%-9% a year for the next several years, and its yield is a healthy 6.5%. That sort of double play -- AFFO growth plus yield -- has Schaff and Block bullish about real-estate stocks, going forward.

Says Block, "I have more confidence in what REITs will do than the broader market. Unless the multiples compress, we're looking at returns in the neighborhood of 12%-14%. The stocks are also slightly cheaper than they've traditionally been, when compared with the value of their underlying properties."

But as positive as fundamentals look, even Block admits that he is going to have to bow to investor sentiment -- which can be fickle. If the new investors that have propped up the sector in recent years leave, it will hurt the whole sector. After all, concludes Block: "Investor psychology is the key."

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<img src="http://chart.bigcharts.com/bc3/intchart/..." width=579 height=335>
URTLX, FRESX, RMS, S&P500 1 YR Chart

of course the chart doesn't show dividends reinvested.....Jen

-- posted by JenL_2

Top 182. Oct 21, 2001 6:50 PM

» JenL_2 - REITs - Still a Safe Haven?

This from 10/22 Barron's:

A House of Twigs?

By Barry Vinocur

Real-estate investment trusts have offered investors a haven for much of the past two years. After a lengthy stay in the stock market's doghouse, the Morgan Stanley REIT index broke its lease in 2000, posting a 26.8% total return. This year, too, the sector's benchmark index has outpaced most broad market measures, rising nearly 7% despite some early stumbles. But when Standard & Poor's recently reversed its long-standing ban on the stocks' inclusion in its equity indexes, REITs rightly felt that they'd finally arrived. S&P added Equity Office Properties to its flagship S&P 500 index following the close of trading October 9, while five other REITs were welcomed into the S&P MidCap 400 or the S&P SmallCap 600.

Yet this long-sought seal of approval may be laced with irony, as S&P's warm embrace proves no antidote to investors' cold shoulder. Since midsummer, real-estate fundamentals have been weakening, as Barron's noted in "Realty Check" (July 9). And concerns about REITs, in particular, have only multiplied since the September 11 terrorist attacks. Goldman Sachs cut earnings estimates for six REITs Friday morning.

In a recent report on real-estate company earnings, the REIT research team at Merrill wrote that 2001 likely would be the weakest year for growth since the early 1990s. "Since real estate is a lagging economic indicator, we are not surprised our FFO [funds from operations] per-share growth rate continues to decline," analyst Steve Sakwa and his colleagues wrote. (Funds from operations, a standard industry measure, are roughly equivalent to earnings.)

"We now expect the REIT sector to post FFO per-share growth of 6.6% this year, which is 120 basis points [1.2 percentage points] below our projected growth rate calculated in early July," Sakwa's report said.

Although REITs are facing their slowest earnings growth in roughly a decade, analysts insist that earnings will climb in both 2001 and 2002. But with REIT shares trading near historic multiples of cash flow -- the stocks now sport an average price-to-cash-flow ratio of around 10 -- Sakwa and his team do not expect any multiple expansion in the next 12 months. "It is quite possible the sector could experience some multiple contraction during 2002," Merrill's report states.

Indeed, shares of apartment REITs already are showing signs of such contraction. For every multifamily REIT such as Houston-based Camden Property Trust, which has confirmed its earnings guidance for this year, there are others that have preannounced shortfalls for 2001, 2002 or both. These include Summit Properties, Mid-America Apartment Communities, Gables Residential, Apartment Investment & Management and Equity Residential Properties Trust.

Morgan Stanley's REIT research team is cautious about multifamily REITs, noting that their so-called defensive characteristics have been anything but that. The stocks were bid up sharply in the past year on the theory that "everyone has to live somewhere," but many have been among the worst performers in the past few weeks in terms of both earnings and shares. Wrote Greg Whyte, the firm's senior REIT analyst, "With our meetings at NAREIT [the National Association of Real Estate Investment Trusts] providing further confirmation of declining foot-traffic levels and occupancies, as well as increasing delinquencies [in rental payments], even the most positive of management teams now seem convinced the weak operating environment will persist well into 2002, and we agree."

Lodging REITs, however, have been hit hardest. The sector's fundamentals were softening before September 11, and have spiraled downward since. At the recent NAREIT convention in Chicago, a number of lodging-REIT CEOs tried to put the best face on what is already the industry's worst downturn since the Gulf War. But investors aren't buying it. "Occupancies have improved since the days immediately following the terrorist attacks, but it's way too soon to be talking about a turnaround," one money manager said. "Our best guess is that it could be two to three years, or longer, before the lodging industry rebounds to levels seen before this year's dramatic slowdown."

One of the biggest issues facing lodging REITs is their ability to continue paying hefty dividends. The stocks, on average, yield about 13.65%. Although a number of lodging REITs have signaled they might be forced to cut or suspend their payouts, none has done so to date. In a recent research note, Jim Sullivan, head of Prudential Securities' REIT research team, noted that he and his colleagues believe some companies are likely to skip their fourth-quarter dividends in order to conserve cash and protect their balance sheets.

Mike Kirby, co-founder and principal of Green Street Advisors, a real-estate research boutique in Newport Beach, California, says REIT dividends generally are "safe," with the notable exception of the lodging sector. Kirby and his colleagues argue that lodging-REIT dividends have to be cut, in light of dramatic declines in occupancy levels, room rates and the sector's earnings, and that delaying the inevitable only creates additional downward pressure on the stocks. "The argument that dividend cuts are already in the stock prices is incorrect," he says. "Lodging prices have fallen because of sharply deteriorating fundamentals. But when the cuts come the stocks will drop further."

Kirby and others argue that most REIT dividends generally are rock solid. Payout ratios, at an average 73.1%, are at their lowest levels since the dawn of the modern REIT era in the early 1990s. Sure, there will be some dividend cuts, not limited to the lodging sector. Crescent Real Estate Equities last week slashed its payout by more than 30%, to $1.50 a share.

But Crescent is the exception, Kirby stresses, noting that just a few REITs are overpaying investors. These funds' payout ratios exceed their adjusted funds from operations (AFFO), or recurring cash flows after deducting normalized capitalized expenditures and backing out "straightlined" rents. (Generally accepted accounting principles require landlords to average a tenant's rent over the life of a lease. Since rents tend to escalate over a lease's lifetime, straightlining leads companies to book higher-than-actual rent in a lease's early years, and lower-than-actual rent in the lease's later years.)

If returns on equity generally decline, perhaps to 8% from a historic 10%-11%, REITs may become more popular with individual investors, notwithstanding the sector's current woes. After all, the ability to book returns of 6%-7% from dividends alone is an increasing rarity in the current market.

A case in point is Chicago-based Equity Office Properties, the largest publicly traded office real-estate company and aforementioned S&P newcomer. Although the company recently lowered its earnings guidance for next year to $3.40-$3.50 a share from $3.57-$3.62, it will still deliver earnings growth in 2002 of more than 8%.

Equity Office recently hiked its dividend more than 11%; last week, the stock was yielding roughly 6.7%. The company owns a high-quality portfolio of office assets nationwide, and its management team, led by Tim Callahan, is considered among the best in the business.

"Will Equity Office raise its dividend by 11% next year? Probably not," Kirby says. But he doesn't rule out a smaller increase. Moreover, Equity Office's dividend is well-covered by the underlying properties' recurring cash flow. Based on next year's estimated AFFO, he adds, the company's payout ratio is a conservative 68.2%.

Put another way, there's approximately $1.47 of cash flow backing every dollar in dividends. Even in an otherwise deteriorating market, that's the sort of ratio likely to calm investors.

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

.....Jen

-- posted by JenL_2

http://biz.yahoo.com/bw/011023/230337_1....

Top 183. Oct 23, 2001 12:35 PM

» mdorsey - Yes I am long NLY.

Annaly Increases Per Share Earnings by 115% and Book Value by 37% From the Prior Year
NEW YORK--(BUSINESS WIRE)--Oct. 23, 2001--Annaly Mortgage Management, Inc. (NYSE: NLY - news; the ``Company'') today reported earnings for the quarter ended September 30, 2001 of $26,345,168 or $0.58 per average share outstanding, as compared to $3,806,097, or $0.27 per average share outstanding for the quarter ended September 30, 2000, which equates to a 115% increase in earnings per share.

Net income per share for the quarter ended September 30, 2001 increased by 21% over the prior quarter net income of $0.48 per average share outstanding

-- posted by mdorsey

Top 184. Nov 18, 2001 6:59 AM

» Kirk - REITs vs Total Bond vs S&P500

This is an interesting 3 year chart:
<img src=http://pvcharts.quicken.com/bin/icenter.... width=470 height=250>

Interesting how the REIT fund has about followed the bond funds and is providing a slightly higher rate of return. For me, it probably isn't worth the risk (higher volatility) since I like bonds to smooth out portfolio returns and to give some negative correlation to stocks.

VSIGX is Vanguard's REIT fund
VFIIX is Vanguard GNMA fund
VBTIX is Vanguard Total Bond

As to regressing to the mean, I wonder what is the longest period in history where Bonds have outperformed the S&P500?

5 years and they are about even now….
<img src=http://pvcharts.quicken.com/bin/icenter.... width=470 height=250>

-- posted by Kirk

http://www.freddiemac.com/pmms/

Top 185. Dec 2, 2001 7:51 AM

» Kirk - Weekly Mortgage Market Survey

Good Data from Freddiemac

HIGHEST MORTGAGE RATES SINCE JULY, ACCORDING TO FREDDIE MAC
http://www.freddiemac.com/pmms/rate1129....

Fixed-Rate Mortgage Rates Leap More Than One Quarter Of A Point In One Week

McLean, VA – In Freddie Mac's Primary Mortgage Market Survey, the 30-year fixed-rate mortgage (FRM) averaged 7.02 percent, with an average 0.7 point, for the week ending November 30, 2001, up from 6.75 percent last week. A year ago, the 30-year FRM average was 7.65 percent. The last time the 30-year FRM was higher was the week ending July 27, 2001, when it averaged 7.03 percent.

The average for the 15-year FRM this week is 6.53 percent, with an average 0.7 point, up from last week when the 15-year FRM averaged 6.24 percent. A year ago, the 15-year FRM averaged 7.35 percent. The last time the 15-year FRM was higher was the week ending August 10, 2001, when it averaged 6.54 percent.

One-year Treasury-indexed adjustable-rate mortgages (ARMs) averaged 5.22 percent this week, with an average 0.8 point, up from last week's average of 5.18 percent. This time last year, the one-year ARM averaged 7.24 percent.

(Average commitment rates should be reported along with average fees and points to reflect the total cost of obtaining the mortgage.)

"Although we had confirmation this week that the US economy has been in a recession since March of this year, mortgage rates jumped. This is because sentiment that the recession will not be as long or as deep as usual is putting upward pressure on mortgage rates," said Robert Van Order, Freddie Mac chief economist. "One offset to the gloomy economy, however, is the housing industry, which remains quite active and healthy. As a matter of fact, new and existing home sales in October rebounded unexpectedly from the previous month.

"And with Freddie Mac's new loan limits taking effect in January, about 250,000 more families will be able to benefit from lower mortgage rates available in the conforming market, providing further stimuli to the economy."

-- posted by Kirk

Top 186. Dec 9, 2001 8:36 PM

» JenL_2 - Timber Company REITs?

Part of an article from 12/10 Barron's posted on the "US Stock Market" thread:

No Pulp Fiction

Rayonier's shares look cheap, especially if the company can realize its timber values

By Sandra Ward

Rayonier (RYN) is about as solid a company you can find. Its business is wood: making pulp and specialty fibers out of wood, and especially growing wood. Top management, led by Chief Executive W. Lee Nutter, commands respect not only for its experience -- he's been at Rayonier for 34 years and his two key lieutenants have been with the company for a combined half century -- but for its ability to innovate and provide decent returns, even when times get tough.

(clip)

The REIT Way to Cut Corporate Taxes

Despite a wall of skepticism surrounding the issue, one of Wall Street's best-known tax authorities, Robert Willens of Lehman Brothers, can barely contain his enthusiasm for decisions related to the merger of Plum Creek and Timber Co., and the precedent they might set for for a new wave of corporate restructuring.

"I feel they are critically important rulings that open the door for a lot of corporate financing activity," he exhorts, referring to decisions by the Internal Revenue Service in connection with Georgia-Pacific's spin-off of Timber Co. and Timber Co.'s subsequent conversion to a real-estate investment trust and merger with Plum Creek, also a REIT. "For anybody with a lot of real estate, this is the thing to do."

While the IRS didn't completely sanction the tax-free status of the transaction, because it didn't accept the deal was done for an authentic business purpose and viewed the motivation for Timber Co.'s conversion to a REIT as merely one of tax avoidance, it did however revise a former ruling under which it now accepts REITs as active businesses for purposes of a spinoff. In good news specifically for timber companies that may be contemplating a similar move to that of the Timber Co., the IRS also ruled the cutting of timber isn't a disposition of assets and so isn't subject to a built-in gains tax.

Willens argues that not only would companies with extensive timber operations, such as Rayonier, Weyerhaeuser (WY) and International Paper (IP), benefit from converting their land holdings into a REIT format , but retailers such as Sears, Roebuck, Wal-Mart Stores, J.C. Penney and even McDonald's would unlock a tremendous storehouse of value for their shareholders. "They'd be converting tax payments to Uncle Sam into dividends for shareholders," he says. By leasing properties it used to own from a newly established REIT, the corporation could deduct the lease payment from its taxes and the REIT pays out the income it receives from the lease directly to its shareholders without the IRS taking its cut. (The REIT shareholders still would be liable for taxes.)

Moreover, corporations would see their financial profiles enhanced by converting real-estate holdings to a REIT structure. In an extensive report on the subject written this past summer, Willens notes: "The separation, from a corporation's operating business, of its real estate, will dramatically improve the corporation's financial profile: The corporation's asset base will be drastically reduced and, as a result, certain key financial ratios, such as return on equity and return on assets, will be correspondingly enhanced. This, in turn, should enable the parent to trade at a higher multiple of earnings (its P/E ratio should benefit) and, as a result, an equity offering, for the purpose of expanding the business, would be facilitated. In addition, because real estate is generally debt-financed, and such real estate will now, along with the accompanying indebtedness, be lodged in a separate entity, the operating company's 'leverage ratios' will improve and, therefore, new borrowings it seeks to undertake, again for the purpose of financing expansion, should be more readily available."

It's along these lines that Willens believes other companies can make a persuasive case to the IRS that there are sound business motives for pursuing a REIT format, a case that Plum Creek failed to make. He points to the agency's own regulations in which it lists any number of business purposes that should generally result in a favorable ruling. Among those purposes are facilitating an equity offering or a borrowing.

The biggest challenge corporations will face in pursuing this strategy, he believes, is in satisfying the requirement that a converting company must purge itself of all retained earnings accumulated in its non-REIT years by paying a special dividend. But that is not as daunting as it appears, and there are numerous ways to defray the distribution, Willens insists.

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

.....Jen

-- posted by JenL_2

http://www.msnbc.com/news/697065.asp

Top 187. Jan 31, 2002 3:32 PM

» mdorsey - Bad news

Rise in office building vacancies
in U.S. was steepest ever in 2001

Apartment, retail sectors also declined faster than expected

By Dean Starkman
THE WALL STREET JOURNAL

Jan. 31 — U.S. office buildings last year experienced the sharpest jump in vacancies ever recorded, according to two new surveys, while the apartment and retail sectors also deteriorated faster than even pessimists predicted.

-- posted by mdorsey

http://biz.yahoo.com/rf/020204/n04127181...

Top 188. Feb 4, 2002 6:05 PM

» mdorsey - More bad news?

Keystone Properties misses estimates, warns on 2002
WEST CONSHOHOCKEN, Pa., Feb 4 (Reuters) - Keystone Property Trust (NYSE:KTR - news) on Monday posted an 9 percent rise in fourth-quarter funds from operations as lower debt costs offset weaker revenue, but said it expects 2002 results to trail analysts' forecasts.

West Conshohocken, Pennsylvania-based Keystone reported fourth-quarter funds from operations, a commonly used gauge of real estate companies' performance, of $13.4 million, or 43 cents per share. That compared with $12.3 million, or 48 cents per share, in the year-earlier period. Revenue fell to $24.9 million from $32.3 million.

-- posted by mdorsey

Top 189. Feb 10, 2002 5:50 PM

» JenL_2 - REIT

copied from "Ask Rande":

Author: bubee
Date: February 10, 2002 4:59 PM
Subject: REIT

Can anyone recommend a REIT that they have and are pleased with? I got 1/21/02 copy of Forbes because they ranked 20 but I did not recognize any fund name, i.e. Vanguard, Fidelity, etc. RVT (9.35%), BXP(6.11%) and VNO (6.23%) I looked up Vanguard REIT Index Fund Investor Shares and a yr was 12.35. For fixed part of portfolio - is now a good time for REIT or would this be getting in after the best has been? Thanks.

-- posted by JenL_2