REITs - Real Estate Investment Trusts - Info & Discussion
- Normxxx
- bob90245
- Normxxx
- Happy_2
- Kirk
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» Normxxx - For Experienced Investors Only!
For Experienced Investors Only!
The world’s biggest money manager, Bill Gross, says a housing bust followed by a weakening economy is “almost inevitable.”
After devouring a 71-page Federal Reserve study on housing booms and busts in 18 developed countries over the last 35 years, Bill Gross proclaimed: “Make no mistake about it, the froth in the U.S. housing market is about to lose its effervescence; the bubble is about to become less bubbly. If real housing prices decline in the U.S. in 2006 or 2007, a recession is nearly inevitable.” Bill isn’t wrong very often. (People don’t entrust you to manage a half-trillion dollars unless you’re like Bill— substantially right for decades.) Bill’s calling this “almost inevitable.”
I think that real estate stocks are a great leading indicator for the real estate market. These stocks trade more quickly and more easily than actual property, so we can see a falling market immediately. The recent and steep fall in real estate stocks is ominous. If you’ve got speculative real estate, or you’re overextended with second and third properties that you only own because you think they’ll be worth more someday, let me be blunt: You’re doing the wrong thing. Reduce your leverage (to 1:1, if possible). Cut back on your stocks, too. As for what to do with that cash, hold it for a few months (in very ST or ST instruments)— no joke. You should be able to earn a very safe 4%, and even more, as the Fed continues hiking interest rates.
As the LT (and maybe IT) prospects for both stocks and real estate are very bad now, a guaranteed, no-risk positive return is not the end of the world. (Just think, you would have Warren Buffet for company, among others.) Unlike your broker or your neighbor, it’s not my job to tell you that everything is okay, and that you’re doing the right thing. Quite the opposite; as you are likely to hear what the mob is thinking about 90% of the time.
Your broker has a vested interested in keeping your money with him so he can keep earning fees. On the other hand, having reached Critical Mass, I am primarily concerned about not losing it. And, one primary way, is to avoid extreme volatility (which is why I subscribe to Sy H's STS). But everyone note: the first law of financial success is not losing it, and the second is, cut your losses short!
Being smart about risk is not the same as gambling!
Back in late 2001, there was nothing wrong with Simon Property when I bought it.
It was just supercheap... The dividend yield was 8.0%— extremely attractive. And the stock was only priced at a Price-to-AFFO (Adjusted Funds from Operation) ratio of about 8x— that’s supercheap! I bought, and I made about 50% on my money (though I sold early— I could have made 100%!) Today in 2005, there’s nothing wrong with Simon Property once again... it’s just super-expensive... Simon’s dividend yield is now only 4%, and it’s Price-to-AFFO ratio is over 20x. As I said, super expensive. The story with Simon is basically the exact same story for the entire REIT market. They were a great deal in 2001. They were expensive early last year, and they’re super-expensive now...
As a group, REITs were paying dividends in excess of 7.5% in 2001. When you compare that to the ten-year Treasury bond paying 4.5%, REITs were a great deal. When you looked at the other competitive asset classes (stocks, bonds, and cash), nothing compared to real estate.
Now, instead of paying nearly 8% as they did in 2001, REITs as a group are only paying around 4.5%— the same as Treasury bonds. REITs used to be a competitive asset class, but they’re not anymore. Bonds pay over 4%. And cash pays nearly 4%. In short, the prices of REITs need to fall a lot more before they’re attractive once again.
Let’s take a look.
Are real estate stocks expensive? Yes! Real estate stocks are trading at about 20 times analysts estimates for cash flow for next year (to be specific, it’s actually adjusted funds from operations, not cash flow, as AFFO is the most useful income yardstick for REITs). For reference, anything above 12.5x is expensive. 20x is a record. And the previous valuation high before now was in 1997-1998... It was 14x. (After which, they crashed in 1999!)
Are interest rates in the way for real estate? Yes! Back in 2001, REITs were incredibly attractive versus the alternatives— you couldn't get close to a guaranteed 8% anywhere except in REITs. Those days are over. REITs now pay 4.5%— hardly better than sticking your money in the bank, yet with a lot more downside risk now.
Is the REIT market acting badly? Yes! REITs have been hammered in recent weeks. They’ve been down roughly 15% since the beginning of August. They’ve just signaled a change in trend. The trend is now down in REITs, so this is the safest time to make a counter-move.
A couple of more points to ponder:
Yield Gap. A relatively constant spread between the average REIT dividend yield and the 10-year Treasury has been maintained. Currently, REIT dividend yields are virtually the same as the 10-year Treasury yield. If the 10-year Treasury yield moves up, there is no cushion.
Yield Curve. With short-term interest rates expected to rise by 50 - 100 bps over the next 12 months and the long-end not moving much, the yield curve will invert. Over the past 15 years, when there have been instances of only a flattening yield curve (as currently), REITs have underperformed the S&P 500 by about 15 percent on an annualized basis.
Betting against real estate investors in general is a no-brainer. And betting against REITs, which will no doubt fall much farther than the average property price, and on which I can close my position out immediately when the time comes, is the best way. But how to invest so I can easily buy in my retirement account? It’s simple. I can buy the Short Real Estate Profund (SRPIX).
This fund’s goal is to return the inverse of the Dow Jones U.S. Real Estate Index (usual index symbol: DJUSRE). It’s a new fund, but it’s achieved its objective so far. My plan is to be in this trade about 2 years and then get out. (I may get out earlier if we pick off a quick 20%-40%.) The largest (inverse) holding in this fund is actually (a short on) Simon Property. As I said earlier, there’s nothing wrong with Simon. It’s just overpriced right now. It’ll correct, and I’ll put some cash in my pocket as it does. Now is finally the time to make the bet. Real estate stocks started reaching record levels of overvaluation in 2004. But it was much too risky to bet against the strong trend back then, as everyone still wanted to be in real estate. Now, finally, the trend has broken. REITs (as measured by the Dow Jones U.S. Real Estate Index) have given a sell signal.
So now I’ve got 1) expensive real estate, 2) that’s loved, and 3) in a downtrend. It’s exactly what I want to see. I'll buy the Short Real Estate Profund (SRPIX) with up to 4% of my investable assets. I’ll sell in two years, maybe sooner.
Two notes— First: The Profunds website (http://www.profunds.com) lists a minimum investment of $15,000— but that's only if you open an account with them (it is their account minimum). You can place a much smaller order through your own brokerage firm— maybe as small as $1,000. Second: If you can’t buy this fund for some reason (if you’re not a U.S. citizen, for example), there is a way to emulate this trade... I could sell short shares of iShares Dow Jones U.S. Real Estate Index Fund (symbol IYR). The performance should be almost exactly the same. Simon Property is the largest holding in this... It makes up 6% of this index fund. If you want to sell short the U.S. real estate market and the Profund is not right for you, this is the way.
This is also a great way just to hedge any RE holdings.
______________
The contents of this letter/report does not necessarily reflect the opinions or viewpoint of normxxx. They are provided for informational/educational purposes only.
The content of this message is not to be construed as constituting market or investment advice. It is intended for educational purposes only. Individuals should consult with their own advisors for specific investment advice.
-- posted by Normxxx
» bob90245 - Re: For Experienced Investors Only!
In response to For Experienced Investors Only! posted by Normxxx:I think that real estate stocks are a great leading indicator for the real estate market.
The two are an apples and oranges comparison. Unlike residential houses, REITs come in many more varieties: Apartments, Office, Shopping and Industrial to name a few. And lumping them all together may not be the best approach. I can probably argue that apartment REITs may even strengthen.
Consider that as home prices and interest rates rise, fewer renters will be able to buy a home. And as over-extended homeowners can no longer afford rising interest payments on their ARMs, they may be forced to sell their home and become renters again. Combine those two trends, and you have an increasing number of renters which will be beneficial for apartment REITs.
-- posted by bob90245
» Normxxx - Re: Re: For Experienced Investors Only!
In response to Re: For Experienced Investors Only! posted by bob90245:And as over-extended homeowners can no longer afford rising interest payments on their ARMs, they may be forced to sell their home and become renters again. Combine those two trends, and you have an increasing number of renters which will be beneficial for apartment REITs.
That very well may be true in the long run (but remember what Keynes said about that), but in the short run, dropping property values and rising interest rates will compress multiples. Figure out what will happen to one of those REITs if they go from around 20X now to a more 'reasonable' 10X, as they did in 1999.
-- posted by Normxxx
» Happy_2 - Re: Re: Re: For Experienced Investors Only!
In response to Re: Re: For Experienced Investors Only! posted by Normxxx:I found your post interesting. But, one cross-current to your idea Norm is that if interest rates are rising it can only be because inflation is increasing. And, if inflation is increasing rents of all kinds, offices, apartments, hotels etc, will also go up. For REIT's that are not too highly leveraged, higher rents spell higher earnings.
There are so many other things going on. For example in many areas, up-scale apartments are being converted to condos. These condos can be sold profitably, over their equivalent value as apartments, even at higher interest rates.
This trend is leading to increases in demand for the remaining apartments.
Rents in San Francisco, which have been down 40% in the past 5 years, have no where to go but up.
Prices in NY for hotels and apartments are starting to sky rocket after years of stagnation.
In regards to office REIT's, I would say you may be right. With energy prices where they are more and more people are going to tele-commute. Even a 10% reduction in commuters, would have a huge effect on metro rents.
I have many friends in the Federal government who not only don't do anything at work, hell they don't even have to go to work anymore. But, that is another story.
-- posted by Happy_2
» Kirk - REITs vs Stocks 1972-2006
.Chart of the Day
Over the long-term REITs (real estate investment trusts) have actually outperformed stocks. Investors appear to have caught on to this fact and have bid up REITs to new all-time highs. While today's chart illustrates that REITs are well within a long-term uptrend, REITs are fast approaching resistance (red line). Stay tuned...
<img src=http://www.chartoftheday.com/20060127.gif>
Since beating the market is hard for most to do, I recommend a "Core and Explore" approach to investing. Core means place 80 to 99% of your money into a CORE, buy-and-hold, no load, mutual fund portfolio and then EXPLORE with the remainder. To build your core portfolio, I suggest a diversified basket of index funds such as one of the two Vanguard index fund portfolios I recommend in "Kirk's Newsletter ." For the remainder, I recommend Kirk's Newsletter Explore Portfolio . Through Jan 1, 2006, these two core portfolios, composed of seven different Vanguard Index funds, have beaten the S&P500 over the past five and seven years by over 20% using no market timing and only rebalancing once a year. These index fund portfolios include US equities, international equities and an REIT index fund.
As of 12/31/05 the Total Return for "Kirk's Newsletter Explore Portfolio" since 12/31/98 is Up 197% while the S&P500 only up 12%!!! & NASDAQ only up 1%!!! (my explore portfolio beta is about 1.5.)
-- posted by Kirk
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