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

Top 67. Mar 17, 2000 8:21 AM

» JenL_2 - REITs & Schiller

I emailed Roger asking if he'd like to reply to OakToad's message above. Got this response with permission to post:

Author: Roger Babson
Date: March 16, 2000 02:00PM (email)
Subject: REITs & Schiller

Thanks, Jen, for the invite.

As you know, I strongly share Shiller's conclusions, having recommended at least twice that Suite101 folks visit his site. There is one caveat I would add, however.

REITS, in general, will not fare well, as demographics and massive debt loads will weigh on real estate prices for 15-20 years during the deflationary and debt work-out period ahead.

Still, land and commercial and residential real estate in what Jack Lessinger refers to as "penturbia" will yield the highest returns.

Prices in these areas will fall less in the decade or more ahead and will recover first and rise faster in the next 30-40 years.

The SF Bay Area is particularly unattractive as an investment for the next two decades from the high prices of the past 4-5 years. This area will suffer a breathtaking out-migration of boomers in the next 20 years at the same time there will be a dearth of persons age 25-45 migrating there (as will be the cast virtually everywhere, save for a handful of penturbian enclaves around the country).

Lessinger's site:
http://www.lessinger.com/

Underlying Shiller's premise is that stock prices are discounting 10-20 years of earnings growth and fundamenatals, such as the rate of growth of capital stock and the labor market (population), which, of course, is the primary variables in determining rate of productivity growth.

Unfortunately, capital's share of output for the past decade ("financial capital", specifically) as far outpaced the rate of growth of the capital stock (rate of growth of replenishing savings, physical and human infrastructure), and must eventually give way to a period during which the capital stock is replenished. This process has always resulted in a period of deflation and depression.

Japan is approximately halfway through this process, whereas sometime around 2002-03, Japan should enjoy a modest recovery into 2010-13 during which the U.S. will likewise recover from the first recessionary phase of the depression into a 2008-09 before falling again into the depression trough in the mid-late 2010s).

Thereafter, unfortunately, Japan will enter a 30-year decline into second-rate status behind China.

What we see as the exceptionally good news of wildly rising real estate and stock prices is indeed bad news for long-term (10-20 years)prospects for even normalized returns to stocks (S&P 500). What we must learn without delay is that stocks are investments for "risk" capital and not "savings".

Accordingly, risk capital invested must at some point be "sold" to realize the cumulative returns the market offers and be redeployed into asset vehicles that offer superior "risk-adjusted" return prospects. This concept of "risk-adjusted" returns is forgotten (never learned) toward the end of a secular bull market, just as is the case toward the end of a secular bear market for stocks when either real assets (inflationary bear markets) or bonds and cash (deflationary bear markets) are perceived as the only place one should deploy capital.

In these cases, the aforementioned assets no longer present superior, long-term "risk-adjusted" return prospects compared to stocks.

Likewise, the risk-adjusted prospects for stock returns are similar to 1872-81, 1928-37, and 1966-72, and, therefore, represent extremely low probability of outperforming Treasury bills, notes, and bonds for the next decade or more.

With stocks paying no dividends, the imperative to sell to realize gains is even more urgent with the market being so generous to stock prices.

Alternatively, cash or the liquidity preference today will provide "investors" with opportunities to purchase stocks at much lower prices in the next decade, whereas speculators who fail to sell today will be illiquid and unable to purchase shares at prices that will ensure average or above-average returns for the subsequent two decades.

Good luck. SOS (especially on wild days like today)!

Regards,

Roger

Thanks Roger.....Jen

-- posted by JenL_2

Top 68. Mar 17, 2000 10:36 AM

» Hugs - Well, here's what I'm trying on...

I just "parked" a bunch in a preferred REIT stock paying a fixed, cummulative dividend around 16%. The cash flow is strong, debt is about 50%, trading at about 60% of book (it is 100% commercial property), and FFO continues to grow. The only way I can "lose" any part of the current dividend is if the company just goes outright "belly up," plain and simple. (If they fail to pay the dividend for any period of time, it accumulates and is still due and payable regardless of whether they pay the common stock dividend.) And it's sure doesn't look like they're in any danger of doing that anytime soon from the numbers that I've looked at. On top of that, the preferred is convertible to one common share and cash equivalent to about 30% of the value it's currently trading at. Understand that I don't pay the cash to convert, they give me one share of common plus the cash. Get this... I've accumulated virtually my entire position for nearly the same price as the common stock plus the cash difference. A very small premium, which will pretty much be offset by the first quarterly dividend payment due shortly. This was one sweet looking deal to me, and I've been on it like a bee to honey...

Guess I'll find out what sort of performance it yields down the road a little further... (then it will be real clear whether I've been a bee, or a fly. You all know what flies are attracted to, don't you?)

-- posted by Hugs

Top 69. Mar 17, 2000 2:28 PM

» Hugs - Is the wind shifting?

Several REIT's that I've been watching appear to be on the upswing. From what I understand of a techinical perspective, they seem to have broken a longer trendline downward yesterday and today. At least the few I was more interested in. What I suspect is that once a general "trend" reversal sets in and is talked about more and more, more savy investors are going to not only going to start scrounging around for the straggelers and laggards that may have been overlooked, but may the REIT funds themselves that have been forced to sell some of their holdings may start seeing some money moving back their way looking for some value, and "a piece of the action.." In turn, that might just add to the snowball effect as more attention is given to rising performance... and you know the rest of the story. So many always love to chase performance. I am glad to have already found something here in this sector that I like and have already taken a substantial position in, while it was still "on the lamb." I may still add a little just for the "trading opportunity" that might be coming, because I think it's close.

-- posted by Hugs

Top 70. Mar 17, 2000 7:13 PM

» Kirk - Demographics

Demographics

Just heard congress will let in another 100K H1B visa's. My guess is a large percentage will shoe horn themselves in within 50 miles of my house. I expect this to continue. Perhaps the radius will widen out to Sacramanto/Folsom/Roseville to the East and Gilroy to the South. These high earners will probably bet $50K and higher annual salaries for high technology positions (The Phd's will get closer to $85K).

Just back from a funeral in SF. Visited Daly City, Colma and Pacifica (poorer areas) and you should see all the NEW building and renovation. I read the same is happening in East Palo Alto.

Sure doesn't sound like a crash is about to happen...especially when 1/3 or more of the new residents are not US born.

-- posted by Kirk

Top 71. Mar 19, 2000 1:29 PM

» Roger_Babson - Kirk . . .

. . ., what you're describing, my friend, is the
direct results of the greatest credit and asset bubble in world history.

As for 100,000 more immigrants, to make up for the demographic sag in the next 13-17 years, we would need to permit 1.2 to 1.6 million additional immigrants into the country each year in that period.

Moreover, INS and Census data show that the majority (55%) of immigrants in the last two decades come from Mexico, the Caribbean, Central and South America, and Africa. These persons earn on average one-half of the average American worker; they have much lower rates of high school and college completion; more persons per household; have higher unemployment rates; suffer high rates of substance abuse and incarceration; virtually do not invest in the stock market at all; significantly underrepresented in the professional occupations; and have significantly lower rates of home ownership.

Asian immigrants (including from poor countries like Thailand, Myanmar, Philippines, Cambodia) make up 35% of the total. However, higher educated Asian immigrants from India, Taiwan, Hong Kong, Korea, China, and Japan make up only 11% in the past 20 years and roughly the same ratio in the 1990s.

You may be correct that a disproportionate share
of high-income Asians will move to the Bay Area, but you must also note that they, too, have higher number of persons per household, have relatively low participation in stock market (they invest directly in small businesses for the most part); and they do not have the same spending patterns as do natives for at least one to two generations after immigration.

So, the conclusion one must draw is, just as dramatically rising immigration in the 1930s-40s did not immediately assist the U.S. economy from
emerging from depression, nor will it be the case this time.

The massive demographic wind that has helped propel the U.S. economy forward since the late 1940s and early 1950s soon will encounter a gale to our face for 15-20 years ahead.

Regards,

-- posted by Roger_Babson

Top 72. Mar 19, 2000 4:57 PM

» Kirk - Good points Roger

Do you read the SJ Mercury News?
BIG story there where immigrants from Vietnam (and Mexico and ....) were buying the VERY CHEAP homes on busy streets and setting up their small business inside the garage! Why pay $4K a month to a strip mall to cut and color hair when you can do it in your garage like you did in the homeland? The savings they are giving their patrons is about 50% and making it just a bit more livable here in the Bay Area. VERY interesting article on how some adapt to make things work. These are not engineers designing the latest optical networks in their garages, but regular folks like hair stylists and florests.

I DO worry about shifts that can hurt us, but I just don't feel confident saying demographics will be our downfall. Perhaps the stocks I hold will be the gateway technologies that will be required for all in the 2nd and 3rd World to gain 1st World status? They might still win even if the US slows.

BTW, last week I read of the first Vietnamese "angel" Venture group investment all funded by Vietnamese who are doing well.

-- posted by Kirk

India.net: Microsoft, cultural ties link Indian immigrants leading online ventures

Top 73. Mar 19, 2000 5:23 PM

» JenL_2 - Huh Roger??

This interesting article is from 2/13 The Seattle Times:

by Gordon Black

Pradeep Singh ushers three visitors into his office overlooking Lake Washington. They all gravitate to the large windows offering a lake vista. It's an impressive view.

Almost immediately, the guests comment on the office and its location. They especially want to know the cost of such space, at Kirkland's Carillon Point.

It's a reasonable starting point for chitchat among four people in the software industry, and for whom Eastside real-estate prices are a fact of business life. Never mind that they all earned undergraduate degrees in India or that they are all first-generation immigrants to the United States.

Singh and his visitors - Deepak Amin, Digvijay Chauhan and Vijay Vashee - are members of what has become a growing club, Indian-educated ex-Microsoft software professionals who have helped create Web start-ups in the Puget Sound area. Naveen Jain and Raghav Kher are also members of this unofficial group, which numbers about 10 and is growing.

It's a high-tech masala, curry-dot-com in Silicon Forest, where a generation of Indian immigrants enriched by Microsoft stock options are creating new companies with names like InfoSpace.com, Imandi.com, AskMe.com and vJungle.com.

All products of an intensely competitive education system, most came to America to pursue advanced degrees and soon gravitated to a software industry hungry for talented engineers. Each has a story to tell of overcoming challenges and hardship on the way to financial security.

And each has a drive that may be a combination of personal and cultural that is best summed up in one way: Failure is not an option.

In becoming entrepreneurs, they are following a trail created by a handful of engineers in California, who, faced with a promotion ceiling, began networking to form their own businesses in the early '80s.

"There is a perception that there was an old boys' network here (in Silicon Valley) and it was hard for immigrants to pierce that," said Annalee Saxenian, a professor of regional planning at the University of California, Berkeley. "There have been several high-profile successes that have made it easier for Indians and Chinese to achieve success."

In a study, Saxenian identified 22 companies in Silicon Valley either started or managed by Indian immigrants, including perhaps the best-known, Sun Microsystems, co-founded in 1982 by Vinod Khosla, a leading venture capitalist in the technology sector.

Saxenian said success among the pioneers inspired those who came later. "There is a very strong Indian network," she said. "These guys are in very close contact with one and other."

In Silicon Valley, Indian engineers grouped together to help each other. In the Puget Sound area, the common denominator for the recent start-ups is Vijay Vashee.

A soft-spoken 49-year-old who grew up in Zimbabwe, Vashee could claim the title of elder statesman of Indian software professionals at Microsoft. He reckons he has helped 200 fellow Indians since he joined the Redmond company almost 18 years ago.

The Microsoft connection is another commonality. "In Microsoft, they make that joke about the IM network, the Indian Mafia network," said Kher, chief executive officer of one of the start-ups, Imandi.com. "It has no negative connotation. It is just about the bond and how the news travels faster through the unofficial channel than through the official channel."

There are some very good reasons for the Indian connection: India produces more technically qualified graduates than any other country.

Additionally, software companies often assert they need anywhere from 190,000 to 350,000 skilled information-technology workers to make up for the jobs the domestic work force can't fill.

Accordingly, Indians claimed the largest number of H1-B visas - the type intended to be set aside for specialty occupations that the U.S. labor force cannot itself fulfill.

Many of them trained at the India Institute of Technology, which is highly regarded around the world for the quality of its graduates.

IIT has five campuses around the subcontinent, including in Bangalore, Delhi and Bombay, which not so coincidentally have become incubators for India's indigenous high-tech industries.

Such is the reputation of IIT that, to recruiters, an engineering degree from there holds the same stature as one from Massachusetts Institute of Technology or Stanford University. Gaining admission to IIT might be even tougher than getting into the top schools in the U.S.

"The year I applied, 50,000 applied and 1,800 were given admission," said Vashee. "Today, it is 150,000 applicants. You know what it means to be competitive in a very fierce way."

Competition, in fact, is a feature of the education system in India from the earliest years of schooling, said Sutapa Basu, director of the Women's Center at the University of Washington, also a native of India.

"There is a huge push for education," she said. "Because it is so competitive there is tremendous pressure for students to do well - by both parents and society."

Basu said this drive is particular among middle- and upper-middle-class families. "They are pushing both girls and boys, but in the lower classes that is not always the case," she said.

By the time students are ready to enroll in college, they must all take the national Joint Entrance Exam, or JEE, in which everyone's performance is ranked.

The joke among Indian engineers here is that when they first meet they ask what each other's JEE ranking was.

"I was 270th," said Pradeep Singh, who co-founded Talisma and studied electrical engineering at IIT in Delhi. "I will know that until the day I die."

Along with the competitiveness comes a mindset - a willingness to take risks, said Deepak Amin, the entrepreneur who founded vJungle.com.

And there may be something else, too. "A lot of it is luck," said Kher. "It was luck that I got into Microsoft, but compared to a lot of people who are smart or smarter than I am . . . we were in the right industry at the right time."

......Jen

-- posted by JenL_2

Top 74. Mar 20, 2000 12:24 PM

» Roger_Babson - Jen . . .,

. . ., you need not remind me of the positive
impact of immigrants. Recall, I hire them and
work with them every single day. And not just Indians, but Germans, Dutch, Swiss, Russians, Taiwanese, Argentines, Japanese, Israelis, Iranians, and Pakistani, too!

But you must understand that these individuals in
every nation, developed or otherwise, make up the
very smallest percentage of the entire labor market of respective nations, including ours. They are the high-profile new middle class, so called (and not so rich most of the time).

But I must also remind you that I am directly involved in development work (computer systems security in one case) utilizing some of the most
brilliant minds that India and Pakistan can offer.

These young men and women (mostly men, of course) work for as little as one-fifth to one-third what they earn here in the U.S. And they may be supporting a family of 6-8 people, and perhaps even contributing to a younger sibling's
education costs. I can provide them meals, transportation, health care and paid vacation, additional training, and in some cases housing and still the costs are a fraction of U.S. costs.

Furthermore, these jobs we provide are more than jobs, they are an entree into the developed world's fraternity of the knowledge-worker elite, a member of which they are likely to remain for their entire lives.

However, these people do not and will not for a generation or two have the disposable incomes to become consumers like Americans. Forget this American-centric fantasy. It won't happen.

However, based on slower U.S. growth and faster
Asian growth (despite depression in the next 10-20 years), a country like Thailand will equal and pass Australia in GDP by the 2030s-50s (not in per capita, of course), while China will also pass the U.S. in GDP during that time (again, not per capita).

By then, there will be dramatic strides in alternative energy, water purification (which my partners and I are funding and developing), pollution control, advances in food science, a reformulation of urban development (which I am participating in with NGOs in Asia funded by the UN), which will reduce birth rates, per capita energy consumption, and chronic disease.

So, the future is indeed bright, but not tomorrow or even next decade, for that matter, which today's stock market is incorrectly anticipating.

Yet, the stock market is correct about the long term, as I have often stated, but like the 1870s and 1920s, prices are discounting 10-20 years of corporate profits and fundamental economic growth that will require 30-50 years to achieve. Prices must correct in the next decade or two to balance capital's share of output with labor and a more liquid equity base. But the growth the stock market is forecasting long term will happen.

During this time, however, the U.S. policymakers and corporate leaders must accept China's role as
emerging hegemon, which I and many of my colleagues throughout the world believe is inevitable, and we are activiely working in the context of such an eventuality. The great danger, of course, is protectionism, ethnic tensions, financial, economic, and geopolitical instability in the depression ahead leading to the inevitable Long Wave trough war (cold war or otherwise) late in this decade or in the 2010s.

This would be a sickening tragedy, but I can assure you in no uncertain terms that U.S. policymakers have been and are currently working overtime to prepare for and win (at least the stability of the Pacific region) just such a confrontation. We will "win the peace", so to speak, but eventually lose the war for Pacific hegemony.

China and its lesser allies North Korea and Russia are well on their way to hegemony from Australia to Mongolia, Micronesia to Kazakstan, and from Japan to the Himalayan frontier. This need not be feared, per se, but I expect a wave of immigration from Japan, South Korea, Australia and New Zealand and elsewhere in SE Asia fleeing from the rising Chinese imperial influence to the U.S. and Canada in the decades ahead.

This will be the immigration we and Canada need to make up for our record low births per 100,000 population and assist us in our social and economic development to permit us to adapt to the changing balance of global power with China.

Regards,

-- posted by Roger_Babson

Top 75. Apr 6, 2000 8:18 PM

» RhyneN - REITs on the rise????

REIT stocks seem to be moving up from the low base formed last December. Look at the Morgan Stanley REIT Index (RMS at bigcharts.com). The index broke through 300 today. It hit resistance at 300 earlier this year.

A couple of REITs which analysts expect to have a high AFFO (adjusted funds from operations) growth rate from 2000 to 2001 are SUS (self-storage) and SLG (class B offices in NY). SUS yields about 8.9% and AFFO is expected to grow at a 15% rate. SLG yields 5.9% and its AFFO is also expected to grow about 15%. If the stock price increases in line with the AFFO growth rate, you could have a 20+% total return. Of course, based on the past two years, REIT stocks have not increased in value along with the AFFO growth rate, but sometimes the turnaround must come. SUS is selling a a Price/2000AFFO multiple of about 9X, and SLG is around a 13X multiple.

I own a few shares of both of these. Do your own due diligence. I am not pushing these, just trying to get some discussion on specific stocks started by tossing out an idea or two.

-- posted by RhyneN