REITs - Real Estate Investment Trusts - Info & Discussion
- JenL_2
- Happy
- RhyneN
- RhyneN
- Kirk
- Hugs
- JenL_2
- Oaktoad
- Oaktoad
- Rande
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» JenL_2 - Are REITs Rousing From Long Slumber?
This from 2/15 WSJ:Are REITs Rousing From Long Slumber?
by Jonathan Clements
If you spot an item in the store tagged "20% off," it's always tempting to take a closer look, which may explain why real-estate investment trusts seem so compelling.
The sector has been knocked down 21.3% in the last two years, while the Standard & Poor's 500-stock index soared 55.6%. Of course, cheap stocks often deserve their bargain price tag, and may get cheaper still.
REITs, however, seem to be stirring from their two-year slump. They were up 3.2% in December. Even in January, when most stocks fell, REITs made a little money, according to Washington's National Association of Real Estate Investment Trusts, which has a Web site packed with useful information:
"Yields on REITs are very high from an historical point of view," says Pittsburgh investment adviser Roger Gibson, who suggests allocating maybe 10% of a stock portfolio to REITs. "We've had two years of back-to-back poor returns. I think there's some catch up due."
At issue here are so-called equity REITs, which make their money by owning properties, as opposed to mortgage REITs, which lend money to property owners. Equity REITs allow you to invest in a diversified collection of apartment buildings, hospitals, shopping centers, hotels, warehouses and office buildings.
What's the attraction? For starters, it sure beats being a landlord. After all, a REIT won't phone you up in the middle of the night and complain that the furnace is broken. And unlike apartment buildings and shopping malls, REITs are easy to buy and sell. You can either trade the exchange-listed shares or dabble in one of the funds that specialize in REITs.
Like mutual funds, REITs aren't taxed themselves, providing they pay out at least 95% of their taxable income. That means fat dividends for shareholders, as REITs pass along the rents and other income they collect. Equity REITs currently yield more than 8%, according to Nareit. Long-run share-price appreciation is likely to be more modest, maybe 4% or 5% a year, as the stocks climb along with commercial real-estate prices.
Put it all together, and you are looking at a double-digit total return. Over the long haul, "the return should be lower than traditional stocks, but higher than bonds," reckons Chris Mayer, a real-estate professor at the University of Pennsylvania's Wharton School.
Shorter-term REIT performance, however, is much harder to predict. Historically, REITs have behaved like stocks. But in the past two years, they have seemed more like bonds, diving as interest rates rose. "They tend to be sensitive to interest rates, because of the yield component," Mr. Gibson says.
The plunge in REIT prices has occurred even as commercial real-estate prices have notched decent gains. "Two years ago, REITs were trading at 15% or 20% above the value of the real estate that they owned," Mr. Mayer notes. "Today, we're trading below, maybe 5% or 10%. Historically, it has been profitable to buy at these levels."
Kevin Bernzott, an investment adviser in Camarillo, Calif., views REITS as a stock-bond hybrid. "If you select quality REITs, they kick off a highly predictable stream of income and eventually you may get some price appreciation," he says. "We plug them into the bond portion of the portfolio. They're almost like a bond with an equity kicker."
For his clients, Mr. Bernzott has bought BRE Properties, United Dominion Realty Trust and Washington Real Estate Investment Trust. All have a history of regularly raising their dividend, which he sees as a sign of a well-run REIT.
Some investment experts don't bother with REITs, arguing that most folks already have plenty of real-estate exposure because they own their homes. Mark Riepe, head of investment research at San Francisco's Charles Schwab Corp., doesn't buy that argument.
"That's like saying I own a small business and therefore I shouldn't invest in stocks," Mr. Riepe says. "With a REIT or REIT fund, you get a much broader, diversified investment. With your house, all you've got is your house."
Because REITs kick off so much income and thus generate big tax bills for shareholders, plan on holding them in a retirement account, unless you intend to spend the dividends.
Intrigued? For most folks, the best bet is to invest through a REIT mutual fund. Steve Savage, editor of the No-Load Fund Analyst newsletter in Orinda, Calif., recommends Brazos/JMIC Real Estate Securities Portfolio, Cohen & Steers Realty Shares and Columbia Real Estate Equity Fund. He also likes Longleaf Partners Realty Fund, which invests in a variety of real-estate securities.
"It's easy to see a double-digit return over the next few years, without too much risk," Mr. Savage says. "The problem is, nobody wants a double-digit return. They want triple-digit returns. If there's trouble elsewhere in the market, you could see more interest in a safe, solid opportunity like REITs. But even without a catalyst, you should get a decent return."
Subscribe to WSJ & Barron's Online @ http://www.wsj.com
.....Jen
-- posted by JenL_2
» Happy - Jen, Regarding hotel REIT's, I do remember reading that because
Jen, Regarding hotel REIT's, I do remember reading that because of the prosperity in this country, about 135,000 new hotel rooms were built in the country last year.In a normal year this should be more like 100,000 new rooms per year. This will probably lead to pressure on hotel pricing for the next couple of years. Bay area apartments sound like a winner to me.
-- posted by Happy
» RhyneN - REITs slowly sinking
The Morgan Stanley REIT Index(RMS) seems to be down most days lately. It got down to 265 in the mid-December tax selling frenzy, and then bounced up to about 299 in early January, a nice upward move. But it has drifted downward since then, to 286 today.Some of the strong REITs like SPK have held up well, but there are some bargains now, and if this keeps up I guess there will be a lot more.
-- posted by RhyneN
» Kirk - REIT Thoughts
OK Hugs, here are my REIT Thoughts. Lets hope we can get a discussion going.My guess is appreciation in many will tie in well with housing market. The housing market ties in to the stock market in that higher stock prices means people with options and/or stock purchase plans can buy more expensive homes. Right now, I prefer to own the banks over the property the banks lend money to purchase.
Commercial Real Estate REITs. Will Internet competition hurt retail malls? We have already seem retail stocks are in a bear market so you would think that people are not stepping over each other to open more retail space. I like to buy stuff that I can make a positive supply/demand case for. These may be cheap now on a valuation basis for good reason: small or negative growth!
Office space. IF you have the office space in Palo Alto, you can name your price and ask for a part of the business. Owners are getting stock options in the start-ups that rent from them with the valuable Palo Alto, CA office. Proximity to the VC's has its advantage.
Also, ALL land between San Francisco and San Jose is looking very prime right now. There are about 5 other metropolitan areas in the US that are getting large infusions of VC dollars (much smaller than in SF Bay Area, but still significant) so I would expect office space to be increasing in value there as well.
Office REITS look good when the economy is booming, but they are HUGE liabilities when the economy tanks. These ALSO tie into the stock market…. But stocks I buy don't have huge debt burdens to service when times are bad.
Anyone have any others thoughts to add?
-- posted by Kirk
» Hugs - Okay, a few of my thoughts on the matter.
If my thinking is correct, even during "not so hot" economic times, people like entertainment. It seems to me that "traveling" is one of the last things that most people will abandon or refuse to do. (Be it for business or pleasure.)I opted for a Hotel REIT that not only survived last year, but had potential for growth in spite of the economic forecast. Sure, like any REIT, the stock has been hit. But don't good stocks always get dragged into the mud by the not so good ones? Not only that, but I was after one with a reasonable debt load that wasn't going to be bombarded with higher interest rate payments this year, and seemed to have a stable high dividend payout.
Many factors to consider, of course, but so far I am rather pleased with my pick. It appears I have caught it at a "double bottom" technically speaking. But, I am still waiting for "the breakout." Not that it "moves" like a "nut" stock or anything, but stability and security was also a primary consideration.
Hu
-- posted by Hugs
» JenL_2 - REITs
These posts copied from the "Ask Rande" thread:Author: Hugs
Date: February 23, 2000 5:57 AM
Subject: REIT's
Elsewhere I have seen it suggested that REIT shares might be closer related to bonds than to stocks, and could (or should, even) be considered as part of the bond allocation in a portfolio.
What do you think Randy? Where do they fit into an asset allocation model?
Hu
Author: Rande (Rande Spiegelman)
Date: February 23, 2000 6:12 AM
Subject: Hugs,
Hugs,
That's a tough one. REITS are clearly a separate asset class. On the one hand, real estate tends to be correlated to inflation in a way opposite to bonds -- higher inflation is good for real estate (hard asset), but bad for bonds (financial asset). Location (supply and demand) is certainly a factor as well (e.g., SF Bay Area real estate mania). Of the two primary types of REITS -- mortgage REITS and equity REITS -- I would say that mortgage REITS are most like bonds since the primary objective is current income. I would tend to view equity REITS as a better way to diversify out of financial assets completely. In either case, REITS have had a tough couple of years after doing well for awhile there back in the mid-90s. Some are viewing them as a value buy right now. For those who want to add real estate to the portfolio as a diversification tool without the headaches of individual ownership (management, lack of geographical diversification, etc.), REITS could be a viable way to go. Personally, I wouldn't have more than 10% of the portfolio there as I believe we continue to be in an overall, long-term environmnet favorable to financial assets, despite the temporary headwinds we currently face.
Rande Spiegelman
-- posted by JenL_2
» Oaktoad - Shiller's new book
that is due out in April..contends that the Dow could be at 10,000 in 2020.. One of the alternative investment areas he recommends is real estate and for many, REITs are a good way to do this.Owning your home is good, but managing rental real estate is not always that much fun and can be less profitable than you might think. Often Bob Brinker has commented negatively on this and as an owner of two properties I somewhat agree with him.. as the properties are in the Bay Area, I have done quite well tho, but get tired of the management aspects...
REITs are best for a tax deferred or tax exempt (Roth) acccount.. or for those that would like a higher income than bonds pay this might be something to look at.
This thread has been ignored a lot as I think most here are younger and not as interested in more conservative investments, but lets see if we can get a few posts..
I saw that one article mentioned funds for REITs.. Vanguard has one that has low fees and I think would be good.
Also, for those who would like a good read on REITs, I suggest Bayisle.com and find the REITweek column that is there at least twice a month. the guy is a good writer and there is some good info as well.. My guess is that if you find Alan Abelson's writing fun you will find his fun too...
-- posted by Oaktoad
» Oaktoad - Irrational exhuberance
this is a review of Shiller's bookBy David Henry, USA TODAY
NEW YORK - Feeling queasy about the stock market? Worried that you're depending a bit much on compounding stock returns to pay for retirement or college tuition?
If so, you might throw up after reading a new book by Robert Shiller, a Yale economics professor, and published by Princeton University Press. Irrational Exuberance should be in bookstores in early April, and it is likely to cause a stir as reviews come out in the next few weeks.
Shiller illustrates how the current market is like a naturally occurring Ponzi scheme in which investors become promoters for the game after receiving initial payments with money taken from subsequent investors.
His big push is to attack the conventional wisdom that stocks have and will always be the best investment, even at times like this after prices have rocketed. He argues that what comes next may well be a grinding, decade-long decline from which investors won't recover until about 20 years from now.
In short: Dow 10,000 in 2020. "There's a lot of uncertainty, but that's a good prediction," Shiller said this week. Between now and then, he says it's plausible the market could lose half its value, or roughly the value of all U.S.
homes.
If you're going to need to take money out of the market in 20 years, Shiller would have you try out zero and 1% as assumptions for annual stock returns in your financial planning. He hopes to prod you to start saving more, invest in some inflation-indexed bonds and real estate. He would like universities and foundations to spend less of their endowments. And while the Yale professor doesn't suggest it, parents might tell their kids about the virtues of community
colleges.
Shiller compares the 1990s bull market to those that peaked in 1901, 1929 and 1966. Those years registered the highest spikes in valuations in his records going back to 1881. By his calculations, early this year valuations were one-third again higher than the 1929 record.
Don't fear a crash as much as endless torture. The 1901 peak was followed by a gradual decline in which dividends were basically the only source of return. After 20 years, investors had an average annual real return of negative 0.2%.
The October 1929 crash was followed by an encouraging rebound that first made the crash look like a buy-on-the-dip opportunity. The horrible damage followed in the ensuing two-year slide. Twenty years later the average annual real return was 0.4%. From the market's 1966 peak, the average annual real return 20 years later was 1.9%.
The prospects could be even worse this time around. Dividends that helped offset price declines were much higher at earlier peaks than today's 1.2%.
Shiller is likely to be criticized for the price-to-earnings ratio he uses as his measure of valuation. His earnings number is an average from past 10 years' earnings. Some will say that amounts to driving while looking in the rearview mirror. Wall Street generally prices stocks off of estimates for earnings a year or two in the future. Bulls says that's essential now so as not to miss the benefits of earnings gains from productivity improvements to be realized from new technology.
Shiller says Wall Street is chronically too optimistic, particularly after a run of climbing earnings. Besides, if you use current earnings or earnings a year out,the recent ratio would still be around the levels of 1929.
(You can get his data at www.econ.yale.edu/~shiller/.)---see link---
His title is from Fed Chairman Alan Greenspan's Dec. 5, 1996, speech when the Dow was around 6000. Shiller had argued to Greenspan the market was irrational two days earlier in a hearing of market experts held by the Fed. Shiller says the Dow's climb to 10,000 doesn't prove he was wrong. His time frame for disappointing returns was five to 10 years from then. Many stocks have lagged since, even though tech stocks have taken the major indexes higher.
Surprisingly, Shiller aims to reduce the confidence in stocks that started building on a friend's book, Stocks for the Long Run by Jeremy Siegel of the University of Pennsylvania. Siegel encouraged Shiller to write this book. He says Shiller is good at describing investor psychology that has taken tech stocks ridiculously high. But he adds, "I'm happy with the overall market."
Yet, Siegel, too, recommends buying inflation-indexed bonds and real estate, as well as stocks. Will there be periods of 15, maybe 20 years, of no real gains from stocks? "Certainly," Siegel says.
Eye on the Street appears Thursdays. E-mail David Henry at
dhenry@usatoday.com.
-- posted by Oaktoad
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