REITs - Real Estate Investment Trusts - Info & Discussion
- Normxxx
- Normxxx
- radiodude
- Kirk
- Normxxx
- radiodude
- Normxxx
- Kirk
- Karin_
- Happy_2
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» Normxxx - REIT chase could end in trap
REIT chase could end in trap
Yields jump as prices fall, but rates cause worry
By Shawn Langlois, CBS.MarketWatch.com | 12:53 PM ET April 16, 2004
SAN FRANCISCO (CBS.MW) -- A hefty dividend payout in the current environment can be very enticing, but don't get sucked into a real estate investment trust on the basis of tasty yield alone.
When it comes to REITs and their rising dividend yields, the average investor would be well served to heed the old adage: If it looks too good to be true, it probably is.
"Over the last year, increases in REIT prices have been driven more by greater demand than improving fundamentals," said Dan McNeela, analyst at Morningstar. "You never know when that supply and demand is going to start working against you."
With fears of rising interest rates shrouding the sector, stocks in the group have certainly been "working against" REIT investors lately.
The Morgan Stanley REIT Index (RMS: news, chart, profile) took the biggest hit in its near 10-year history to begin the week, closing down 5 percent at 570.9. Early in the session, the gauge touched on 560, a level not seen in over five months. The index had recovered near 578 by midday Friday.
The resulting surge in these stocks' dividend yield might seem irresistible in the current low interest-rate environment.
Like bonds, price and dividend yield move in inverse directions for REITs. For instance, if a $10 stock paying a 5 percent dividend falls to $5 a share, the yield jumps to 10 percent.
At face value, the 10 percent dividend looks very appealing, but if the suspect health of the company triggered the stock drop, future dividends may be cut or eliminated.
Yields offered by many of the higher profile REITs have topped 10, 11 and even 12 percent in the past few weeks.
Don't get too drunk off these intoxicating dividend returns, though; high yields often translate to high risks.
"Yields this high are rarely sustainable and, at some of these levels, you want to make sure the company is producing enough cash flow to maintain that dividend yield over the long term," McNeela said.
REITs, by law, must distribute at least 90 percent of their taxable income to shareholders annually.
NovaStar, EOP in the spotlight
At first glance, NovaStar Financial (NFI), a $1 billion issue that yields a whopping 13 percent, sounds pretty good. But this return comes after shares plunged 31 percent Monday following a disconcerting story in the Wall Street Journal.
While the mortgage REIT has steadily delivered on its dividend for the past few years, that hasn't always been the case. In the late 1990s when the industry took its lumps amid the burgeoning tech bubble, NovaStar didn't declare a dividend for almost three years.
Regardless of this week's haircut, shares of NovaStar last traded at around $39.50 -- double its 52-week low of $19.15 set in April of last year.
Similar concerns hound the sector's largest player, Chicago-based Equity Office Properties (EOP). The stock established a new 52-week low this week, touching $25.40. The yield has stretched to almost 8 percent, but some believe that a dividend cut could be on the way. The stock was trading at $26.10 midday Friday.
Adding to the widespread uncertainty, more than a few Wall Street pundits have soured on the previously white-hot sector.
Wall Street warns
Many industry watchers have taken a cautionary tone in the past few weeks, including Prudential Equity Group analyst James Sullivan.
"We believe that a correction down to the low 500, high 400 range on the Morgan Stanley REIT Index should not be ruled out over the balance of this year," he wrote in a note to clients. "That would provide investors with a better risk-reward ratio than REITs provide currently."
Last week, UBS cut its ratings on several REITs, including Pan Pacific Retail (PNP), Simon Property (SPG), Rouse (RSE) and General Growth (GGP), all to "reduce" from "neutral".
UBS also sliced its ratings on Boston Properties (BXP) and Prentiss Properties (PP) to "neutral" from "buy".
"2004 will be a year where REIT stocks lag the overall market. The big sell-off doesn't mean the worst is over," said Tony Paolone, analyst at J.P. Morgan Securities.
Still, a selection of officers at some of the more prominent REIT companies remained upbeat throughout a conference call hosted by the National Association of Real Estate Investment Trusts on Tuesday.
"Things are generally quite good. The sell-off has been a huge overreaction. These are just some cyclical things we have to manage through," said Weingarten Realty Investors CEO Drew Alexander.
The decline could, indeed, turn out to be an "overreaction," but take care not to overreact to the lure of a fat dividend that appears only to get fatter as the stock price plunges.
Said Morningstar's McNeela: "If you move into these positions because of the high yield, you'll lose the bulk of the reason for investing there if those dividends get cut."
-- posted by Normxxx
» Normxxx - RADIODUDE
I'm not much of a market timer which is why I was going to hold RWR basically forever. (RadioDude:)
RadioDude: I just noted this comment in one of your past messages. Please, please buy a copy of John Mauldin's Bull's Eye Investing. It should be available by 1 May 2004 (see my thread, normxxx, or the book review thread).
If you stick with "buy and hold," you can expect to see no net change in your investments by the end of the decade if you are lucky. If you are not lucky, you can expect to do much worse.
Neither Kirk nor I are market timers in the sense that we try to follow trends, but neither of us are "buy and holders."
Kirk uses a Dynamic Asset Allocation model which takes profits (when there are any), thus reducing market risk at the top. You'll have to check with him as to how the system works with losses (i.e., at bottoms).
I use something called Dynamic Portfolio theory, which allows me to use objective criteria to determine when to increase/decrease an asset class. For my stock asset class, I use something called Seasonal Timing Strategy, which produces one sell and one buy each year, and keeps me out of the market when it is at its riskiest.
(See http://www.syharding.com/sts.html for details.)
[Used correctly, DPT is a risk controlling strategy. As market risk increases, you need to use strategies such as decreasing investment or hedging to decrease risk back to the risk level you have determined to maintain, and conversely.]
My REIT asset class is separate from stocks, but its risk is determined by such things as yields relative to bonds, average premium or discount to NAV, RE value cycle, etc. I have been poised to lighten up seriously for over the last 6 months. (REITs have been and still are sporting over a 10% - 20% premium over NAV-- unjustafiably so.) I just reduced my holdings by 50%, and may trim some more, depending on how interest rates go. For the record, I do not expect the Fed to raise rates any time soon-- almost probably not before the elections. But REITs may come down further anyway, since they are so overpriced. There is certainly not much upside for the forseeable future. And their yield is no longer worth the risk.
The content of this message is not to be construed as constituting market or investment advice. It is intended for educational purposes only.
-- posted by Normxxx
» radiodude - Re: RADIODUDE
In response to message posted by Normxxx:Hi Norm. Thanks for the note. My history as an investor has tossed me into the Malkiel "random walk" believer, which is why I am a buy and holder who only sells to rebalance the portfolio now and again. I also like the readings of Bogle, Bernstien and Swedroe --- each of which basically say to find the proper stock/bond ratio based on how much risk I want, then buy several of the indexes with as little correlation between them as possible for diversification. I hope to have some hope of being near the "efficient frontier." but I have reservations about being able to know in advance what components that frontier entails.
The book "The Four Pillars of Investing" pretty much outlines my plan.
My History: Several years ago, I got burned really badly by an Edward Jones broker who claimed that his firm had superior knowledge and research of individual stocks, the economy, as well as market direction. Well, in 2001, I bolted from EJones since I lost lots of $$$ and it became obvious they were a bunch of snake-oil salesmen. To make a long story short, I realized that if Ejones couldn't save my valuable 401K rollover with their entensive research which was supposed to be the best in the business according to WSJ, then nobody has a clue about the markets or individual stocks--- I therefore became a random walk believer.
For some people, it was a QQQ trade, but for me it was Ejones crap that caused me to bolt into the random walk theory which states that nobody can really predict anything about markets or individual stocks. To stay on topic for this thread, for me, REITS would also fall into the Random Walk.
Norm, thank you very much for the message, but I guess I can't move from my belief that whatever news is known about REITS must already be "priced into them." I know the "priced into them" theory doesn't hold for a bubble like the QQQ bubble, but is it really possible to know it was a bubble until it's over? My Ejones guys sure didn't protect me from the tech bubble -- they didn't know it was a bubble at the time, nor did I.
So, in summary, I guess we could be in a REIT bubble, but being a random walker, I don't believe anyone can predict such bubble until it's over. So, I go with tons of diversification and I limit exposure to any one area (sector) as much as possible, and rebalance now and again . By doing so, hopefully I am close to the efficient frontier (which is another quantification which obviously can't be known until it's over. )
I do thank you for the message, but it would be difficult for me to move away from the buy-n-hold (but rebalance now and again) strategy outlined in "Four Pillars" given my history of being burned by Ejones who always had me buying and selling stuff based on "research."
-- posted by radiodude
» Kirk - The Four Pillars of Investing
.In response to message posted by radiodude:
If anyone wants to buy the book and support Suite101.com (so we can keep forums like these up and running) here is a link that pays us a commission:
The Four Pillars of Investing : Lessons for Building a Winning Portfolio by William J. Bernstein
“A Triumph! It is my candidate for the best investment book of 2002.” John Bogle, founder of the Vanguard Group.
-- posted by Kirk
» Normxxx - Re: RadioDude
In response to message posted by radiodude:1. At least you are wise enough to want to stay in the market. The market is not random (or Long Term Capital Management would still be in business). Recent academic studies have borne this out. However, you are right, no one can tell where the market is heading next-- or for how long. If anyone claims to, run fast the other way.
2. Never listen to snake oil salesmen and stock market brokers. Stock market brokers are salesmen-- not analysts (and, even the Wall Street analysts are crooked these days). They only know enough to sound wise (if they knew the facts, they probably would be half as convincing).
3. However, long term market traders are quite successful, using money management techniques (of which you just quoted one, i.e., systematically rebalancing). But there are a lot more techniques than that and, depending on how much effort you are willing to put out, can be far more rewarding. Basically, the philosophy is easy (it's the execution that's hard): cut your losses quickly; and let your profits run.
Do rebalance at least annually, but no more than once a month.
4. Also, the market is based on probabilities. As in life, you try to optimize by choosing the techniques and directions with the highest probability of success, but occassionally you have a run of bad luck. If you have some notion of why things are happening, you will know how and when to take corrective action. Also, you never put all of your eggs in one basket, however tempting. Remember, all things being equal (which they almost never are), risk rises as the probability of reward goes up. Bonds may look least risky, until you figure the probability of interest rates going up (and bonds down) and an inflation rate which is close to or even greater than your bond coupon.
In the stock market, as in life, what you don't know can hurt you-- if not kill you!
5. At the moment, for example, I am accumulating money in money market funds-- meaning, I am losing money to inflation, even at the curent low(?) rate. But, like Warren Buffet, I see no good place to put my money where the reward exceeds the risk, so I'd far rather take a small loss than risk a far greater one. The essence of investing is patience. Never let new money burn a hole in your pocket. Wait for the opportunity, seize it, then wait again until everyone else recognizes it; then get out!
6. Do check out Bull's Eye Investing when it comes out. I don't think you will be disappointed whatever you decide, or you wouldn't be on this board.
The content of this message is not to be construed as constituting market or investment advice. It is intended for educational purposes only.
-- posted by Normxxx
» radiodude - Re: Re: RadioDude
In response to message posted by Normxxx:I too have some assets in the "cash" bin.
I wonder what you are getting for a return on your cash. (?)
ING direct, the on-line bank, is giving 2% for a MM type account -- this is the best I've seen.
Most brokers are sub 1% these days. If you can hold longer, a 5 year CD pays about 3.4%
Thanks ..
-- posted by radiodude
» Normxxx - Re: Re: Re: RadioDude
In response to message posted by radiodude:I use a variety of moderate risk vehicles, including "callable" preferred stock (1 - 3 years to call), which were originally issued at very high rates, in excess of 8%, currently around 3% - 4% yield-to-call, etc.
I don't think CDs, etc. are worth it. Don't quite know what to advise here for short term. A safe 2% seems about the best you can hope for, short term. Everyones's waiting for the shoe to drop.
<img width="520" src="http://www.gold-eagle.com/editorials_04/...">
http://www.gold-eagle.com/editorials_04/...
The content of this message is not to be construed as constituting market or investment advice. It is intended for educational purposes only.
-- posted by Normxxx
» Kirk - To Kick Around a Contrarian Idea
.Just for discussion purposes:
I am considering some commercial property REITs... as a possible income investment that should also appreciate...
People are dumping REITs for interest rates but R&D property REITs should do better with an improving economy... so the general sell-off could be something to consider an opportunity.
High end apartment REITs could do well soon also as folks move UP from the cheap ones into these as times get better... now they are "empty" due to high income folks moving out and buying homes... but eventually the lower rungs will move up again... if the economy continues to improve.
I don't see imigration ending so more people in the US will need to find homes so this constant supply should restore demand eventually... if you have the location.
An index fund is the easy way to take advantage... but I always like to mix inded investments with some dart tosses...
-- posted by Kirk
» Karin_ - These are the Rodney Dangerfield Stocks...
While mortgage rates have climbed to 6% again, lenders are shifting to more-affordable adjustable and hybrid loans, reducing the possibility that the housing market will crater. Most important, the largest builders continue to grab market share from local builders, a trend that should help the stocks over the long haul."If mortgage rates go above 7.5%, you start to worry, but rates are still relatively low," says Scott Black, president of Delphi Management Inc., a Boston money-management firm that owns some of the largest builders. "These are the Rodney Dangerfield stocks of the Big Board" because they get so little respect.
-- posted by Karin_
» Happy_2 - Re: To Kick Around a Contrarian Idea
In response to message posted by Kirk:With more and more tele commuting, I have my doubts about office/ R&D flex space.
I agree that as interest rates increase, less people will be able to afford to buy a home and more will need to rent. I am looking at an apartment building about 15 mins. from downtown Atlanta. The market seems to have bottomed out there and values are good.
If I didn't have to do a direct ownership deal to defer taxes on another property, I would buy Vanguards REIT index fund.
Forget Calif. apartments GRMs are way too high.
-- posted by Happy_2
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