REITs - Real Estate Investment Trusts - Info & Discussion
- Oaktoad
- KirkL
- RhyneN
- JenL_3
- Oaktoad
- KirkL
- RhyneN
- JenL_2
- PlanetXL
- JenL_2
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» Oaktoad - damn good feedback
I didn't have time to do much additional and was planning to add some, but looks like someone did it first and probably better.A couple of comments.
the nareit.com site is really quite nice. I wish that it didn't cost $900 to join, but there is a lot of free info there.
REIT funds can give you some guidance on what stocks to include. For example the site mentioned above where Ralph Block wrote has the current holdings in his fund. I don't know how current this is, but it can't be too old and gives you an idea of where to start.
I counted (quickly) and found that most funds seem to have 30-40 REITs in the holding and if you can afford to buy that many I don't see how that can hurt. Blocks fund charges 1.4% for a mgmt fee. That can add up so if you are starting small maybe that would be OK, but if you have $50K to put into this then "why".
Also, I trade thru Schwab (usually) but if you want to buy smaller amounts Ameritrade almost makes the commission diappear. I have about $70K in 13 REITs. PRT was bought not as an income play, so perhaps I really only have 12. I am looking to add to this with the dividends received from the REITs I own. A DRIP would work really well with these if you don't need the income.
HOlding them in a tax deferred/exempt (I think these are ideal for a Roth) makes sense. I hold the PRT in a taxable account as I hope to get Cap Gain treatment as well as a very high after tax dividend.
Good to see more action here. I had almost given up on this here where all the techies seem to hang out. REITs are an excellent way to diversify and perhaps Block is right and this is a buying opportunity.
-- posted by Oaktoad
» KirkL - Living in CA
I am leary of REITs as I've seen buildings empty for long periods of time... and one of my early poor investments was in an appartment building that was looking great until some druggies moved into the neighborhood and I broke even after taxes and several yrs of dead money...Thus... a good site with some good information like I am reading here can educate many of us.
Keep it up.... I may join you in investing in REITs someday.
Thanks for all the great info! For now, I'll just lurk.
-- posted by KirkL
» Oaktoad - Kirk, when you start buying REITs then I know
we have arrived ;-)Seriously, I think that you are too young to really be looking at income stocks.
I agree that there are times that the "see thru" buildings dominated, but the tax law changes have made this less likely to happen. Also, as mgmt gets better on real estate, less emotion and more thought goes into the process.
Re: drug problems, if that is a concern, then don't buy apt. REITs. As I have some rentals and went thru about a one year period with druggies in a house that I own, I can identify with your concern. If you properly screen your tenants this is not a big concern. I don't know if you have tried to rent an apt or house in the last few years, but there are databases that are pretty damn good plus credit checks, etc.
I have only had the one problem and that was because I was living out of the country and trusted a relative to "take care of it" .. a lesson for all of us here.
For those that are BB followers and have hit critical mass (moi) having more income makes it easier. BB suggests GNMAs and I own them as well, but the extra yield on the REITs more than outweighs the risks IMNSHO.
I don't know what the demographics are for suite101, but would guess the average participant is "younger" so not as interested in income investing, but for anyone 55 or older who follows asset allocation I think this is one place to be.
A recent article suggested that 20% should be in REITs, I have been at 15% plus 20% in GNMAs and the rest in Mr. Market. As I move towards 50/50 then I will up my REIT ante to at least the 20%.... but will wait for 12,000 before I sell ;-)
or BB says the BEAR is here.
-- posted by Oaktoad
» KirkL - Thanks Paul
Thanks PaulI will enjoy reading and learning here for when I do want to invest for income as you suggest.
The drug problem. It was a building in a good neighborhood that saw the neighborhood go downhill even as the building was upgraded. Just a risk associated with individual properties that can be mitigated like stocks with a good REIT fund. I also believe Prez Reagan had alot to do with it as his tax bill eliminated much of the favorable treatment of limited partnerships.
-- posted by KirkL
» RhyneN - REIT convertible preferreds
I bought several convertible preferreds that are trading at steep discounts to the call value. There is a trade-off in that the dividend is more secure than the common dividend. If the common should be reduced, the preferred won't. (of course, the preferred dividend could be passed but would have to be made up before any common dividend could be paid.)You give up some of the appreciation potential that you have by owning the common directly.An example is USV-prA. This 7.72% preferred is callable at $25 and will receive $25 in liquidation. It is convertible into .9384 of a share of common (equivalent to a $26.64 price for common when the preferred is selling at $25). The current price on the preferred is $16, so the yield is 12.06%. The common is yielding 10.92%.
An investor who is primarily interested in the income stream might like this. It has a good chance for appreciation when the REIT market turns and as USV grows in value.
A couple of others are CEI-prA, which I bought some time ago when CEI was having some refinancing problems, and GLB-prA. These two don't have as much chance to appreciate with the common since the conversion ratios are at prices higher than the $26.64 on USV.
-- posted by RhyneN
» JenL_2 - REITs
These posts copied from the "Kirk's Market Thoughts" thread:Author: PeteM
Date: November 28, 1999 10:14 AM
Subject: The local paper also had an article about insider trading
The local paper also had an article about insider trading and mentioned about REITs that some of the REIT funds were trading at values of about 15% below the actual Real Estate that they owned!
Pete McCandlish
Author: Kirk (Kirk Lindstrom)
Date: November 29, 1999 8:49 AM
Subject: REITS
Pete
I have next to zero knowledge on REITS. Some sectors scare me and others look good. I DO like their returns and real estate is often a good inflation hedge, especially if inflation comes from an overheating economy where we have more money chasing less goods. I just can't make a large case for that scenario. What do you like about REITs or do you have any good info on them?
I think we have a REIT thread here and an expert (or well versed person) that posts there... Perhaps pose your question there?
Kirk Lindstrom - Editor: Investing and Personal Finance
-- posted by JenL_2
» PlanetXL - Our continuous effort to find real estate on the Internet.
We found a site called http://www.frozenflames.com that has a search engine that focuses on a huge variety of real estate information and contacts and is definitely worth checking out! My husband and I have had great success there.-- posted by PlanetXL
» JenL_2 - How Safe are REITs' Dividends?
This article on REITs from 1/10 Barron's was recommended by Rande:How Safe Are REITs' Dividends?
By Barry Vinocur
Rate Jump Puts Many Realty Borrowers on Hold
It's been a rough couple of years for investors in real-estate investment trusts. After soaring in the mid-1990s -- in 1996 they outperformed the broader market by a wide margin -- REITs are mired in a bear market. Last year the Morgan Stanley REIT Index posted a negative 4.6% total return, making it the second year in a row that REITs finished in the red. In nearly three decades, REITs have had only a handful of down years, and only once since the early 1970s have they posted back-to-back down years. That was 1974-75.
Though a handful of analysts and investors are predicting a major rebound this year, most share the view expressed last week by Jonathan Litt, who heads the REIT research effort at PaineWebber. In a conference call for the firm's clients, Litt said that his group expects REITs to post roughly a 10% total return this year. He pointed out that as of the end of last year his firm's composite REIT index had a yield of 10.5%. Which means, he added, that his group expects stock prices to remain basically flat.
"Funds-from-operations [the REIT equivalent of earnings] multiples should fall by about 8%," Litt said. He added that discounts to net asset value, or the underlying value of the companies' real estate, should increase, from approximately 18% to roughly 25%.
Though some investors and analysts are hoping for a "tech wreck," most concede privately that even if tech stocks crash, it might not mean a rebound in REIT prices.
Says an analyst with a firm that invests in property-related stocks for institutions and individual investors: "We're in the later stages of one of the most incredible real-estate runs in a generation. Investors have to understand that real estate is real estate. Despite the impression that was created in the mid-1990s, REITs aren't dot.comers. Sure, every decade or two there will be a year when REITs deliver a 30%-plus total return. But that's not the norm. The norm should be returns in the range of 12%-15%." Which isn't to suggest that there aren't a good number of investors who believe REITs are undervalued. For instance, John Neff, the value investor who oversaw the phenomenally successful Windsor Fund until his retirement in 1995, had this to say about REITs in his recently published book, John Neff on Investing: "This area has been bruised, maligned, overlooked and misunderstood." And none other than the quintessential value investor, Warren Buffett, has in the past year taken stakes in several REITs, including Tanger Factory Outlet Centers, Town & Country Trust and, presumably, First Industrial (the stock tip he enclosed in a wallet he recently donated to a charity auction).
If Litt and his fellow PaineWebber analysts are correct, the best strategy may be to focus on companies with the best balance sheets and the most talented management teams. Companies operating in markets with high barriers to entry. And finally, companies with the juiciest dividend yield.
Placing too much emphasis on yield can be a risky proposition, however. More often than not, stratospheric yields are a signal of problems; if the dividend looks too good to be true, it probably is.
Just ask investors in Prison Realty Trust. Before the company announced its recent restructuring, which included a proposal to shed its REIT status and to stop paying a dividend, the company sported a yield of nearly 30%. Though most investors expected a dividend cut, few expected the company to eliminate its dividend altogether.
Rare birds such as Prison Realty Trust aside, REIT dividend yields are indeed compelling. According to a recent research report by Eric Hemel, who heads REIT research at Merrill Lynch, the average yield for the 127 companies in the Morgan Stanley REIT Index at the end of last year was 8.2%. In sharp contrast to that, the yield on the 10-year Treasury at the end of last year was 6.7%, and that on triple-A corporate bonds was 7.1%. Add to that the fact that a portion of most of a REIT's dividend is treated as a return of capital (because it's attributed to depreciation), and the after-tax yield becomes even more attractive.
Running one's finger down the yield column in the stock tables may help identify REITs with the highest dividend yields, but it doesn't show the sustainability of that dividend yield. One way to get a handle on that is to focus on dividend-coverage ratios.
At the end of 1998, Hemel and his colleagues reported that the DCR for the companies in their coverage universe averaged 136%. In other words, there was $1.36 in cash available for distribution for every dollar of current dividends.
The newsletter Realty Stock Review recently analyzed the DCR for the 115 companies in its coverage universe. For its analysis, it used its consensus 2000 adjusted funds-from-operations estimates, which should be roughly equivalent to the Merrill analysts' cash available for distribution.
As the Merrill analysts noted in their 1998 study, "The higher a company's DCR the more sustainable its current dividend." The average DCR for the companies in Realty Stock Review's coverage universe was 133.3%. The range of DCR by sector is large, however -- from 174.4% for the self-storage REITs to 111.5% for the sector the newsletter calls 'Opportunity/Diversified," which includes MediTrust, Crescent Real Estate Equities and Vornado Realty Trust. As Hemel and his colleagues underscored in their study, when looking at DCRs investors must factor leverage into the equation. "Given that the average REIT is approximately one-third leveraged implies that the pre-leveraged cash-flow figure (that is, the net operating income) would need to decline by 15%-20% for the average dividend-coverage ratio to reach 100%," the Merrill analysts noted. They viewed the likelihood of such a decline in the coming 12 months as unlikely, and their assessment proved correct.
On average, REITs are somewhat more highly leveraged today than they were at the end of 1998. Further, REITs with significant amounts of debt to be refinanced during the next 12 months in all likelihood will face higher interest rates. But the likelihood of an across-the-board decrease in net operating income sufficient to jeopardize dividends is extremely unlikely.
As the Merrill analysts underscored a year ago, investors need to keep an especially close eye on lodging companies. Since hotel guests sign the shortest leases in the real-estate business -- they check in and out daily-and since hotels run on a high degree of operating leverage, lodging companies' net operating incomes are at greater risk than, say, the NOI of regional malls.
As is usually true in investing, relying too heavily on any one measure has its pitfalls. For instance, a highly leveraged company's DCR is less sustainable than a company with the same DCR that has lower leverage. Comparing Developers Diversified and Kimco, say, shows that DDR's dividend yield is roughly three percentage points higher than Kimco's. Further, its dividend-coverage ratio is substantially higher than Kimco's, 143.6% versus 135.2%.
However, as suggested by comparing the two companies' interest- coverage ratios, Diversified is substantially more leveraged than Kimco. According to a recent analysis by Green Street Advisors, of Newport Beach, California, which specializes in the analysis of property stocks, Diversified's leverage ratio was 65.6%, versus 47.3% for Kimco. Put simply, when gauging dividend sustainability, the dividend coverage ratio by itself isn't enough.
Any comments from our REIT investors? How do you decide which REIT to buy? In your opinion, is 2000 going to be a good year for REIT investing?....Jen
-- posted by JenL_2
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