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

REITs Hold Their Ground Amidst Market's Turmoil

Top 77. Apr 6, 2000 9:53 PM

» JenL_2 - REITs Hold Their Ground

This from 4/5 WSJ:

By BARBARA MARTINEZ

What goes around comes around.

As stock prices across the board plummeted midday Tuesday, real-estate investment trust shares held surprisingly steady, a vindication that investors and analysts of this beaten-down industry have been waiting months for.

"We're walking around the office kind of happy here," said John Lutzius, analyst at Green Street Advisors, Newport Beach, Calif. In the middle of the day, when the Nasdaq Composite Index had plunged 13% and the Dow Jones Industrials were down nearly 4%, the Morgan Stanley REIT Index was down only 0.6%.

By the end of the day, the REIT index had risen 0.1%, while the Nasdaq composite fell 1.8% and the Dow industrials declined 0.5%.

For months, REIT investors have had to watch technology stocks -- some with no profits and no assets -- soar while REITs, which own real properties and are posting increased earnings, have watched their share prices erode.

But on Tuesday, the tables turned, and REIT stocks were finally sitting pretty. Trading volume on many of the largest REIT stocks was more than double the average. That means "folks were in some cases taking shelter in this group," says Larry Raiman, analyst at Donaldson, Lufkin & Jenrette Inc.

The reasons why REITs held up in the storm Tuesday are quite simple. "We didn't have the kind of run-up the market had last year and the year before," says Dan Pine, senior vice president and portfolio manager at Alliance Capital Management. Mr. Pine added that much of the fear that took hold of technology investors Tuesday has already been worked into REIT stock prices.

Also, the potential REIT sellers "already did sell" their shares some time ago, says Joseph M. Harvey, senior vice president of Cohen & Steers Capital Management, which manages about $4 billion of real-estate securities. "Everyone rotated out of REITs last year or the year before," he says. "The sellers are done."

Mr. Harvey says investors may now have to adjust their thinking about investments. The current mindset has been: "Give me high beta [volatility]. Give me capital appreciation. I don't care about income. I'm not factoring risk into my investment decision," says Mr. Harvey. "I think the market activity over the past several days reminds everybody that you should be thinking about valuation and you should be thinking about risk and income."

Analysts and investors note that REITs today are offering benefits that highflying high-tech shares simply can't. "The earnings are growing 7% to 8%, REITs are increasing their dividends, the average dividend yield is now 8.5%," says James Trowbridge, portfolio manager at Invesco Realty Advisors, which manages about $850 million in real-estate securities.

What's more, investors can get a good sense of a REIT's underlying worth by its net asset value, or the value of the underlying real estate. Most analysts believe REIT stocks are trading at a 10% to 20% discount to net asset value, when they should more appropriately be trading at net asset value or a little above.

Prospects for REITs had begun to brighten even before Tuesday. DLJ's Mr. Raiman reports that over the past few months, clients have mostly stopped calling to ask him which REIT stocks to sell. Last week, the influential Abby Joseph Cohen, chief U.S. equity strategist at Goldman Sachs, suggested in a television interview that down-and-out real-estate stocks might be a good buy. "Of all the sectors that have been beaten up, that's one of the ones she isolated," says Jonathan Litt, analyst at Salomon Smith Barney.

But what happens Wednesday and in the near term for REIT stocks? Few REIT investors care to hazard a guess after such a short time. Mr. Litt thinks "the more people get cautious about the broader market, the more they're going to look to invest in REITs."

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.....Jen

-- posted by JenL_2

Top 78. Apr 15, 2000 11:12 AM

» Hugs - Woulda, coulda, shoulda...

Sold more tech and bought more of this "dull" stuff.

Sleep better at night.

-- posted by Hugs

While Tech Stocks Were Being Trashed, REIT Shares Surged; Is This Another Head-Fake?

Top 79. Apr 23, 2000 7:40 PM

» JenL_2 - REIT Shares Surged

This from 4/24 Barron's:

By Barry Vinocur

Marty Cohen, president of Cohen & Steers Capital Management, is convinced that this time the bounce in the stocks of real-estate investment trusts is the real thing. He concedes that last spring, when REITs soared following the news that Warren Buffett had taken a stake in two REITs-Tanger Factory Outlet Centers and Town & Country Trust -- he and his longtime partner in the property-stocks investment firm, Bob Steers, had thought the two-year drought for REIT stocks was over. "It turned out to be a head-fake," Cohen acknowledges.

REITs certainly have been drawing investor interest in recent days. While the market was trashing tech stocks, REITs held their own and then some. On April 14, when the market melted down -- the Dow Jones Industrial Average was off 5.7%, the S&P 500 5.8% and the Russell 2000 7.3% -- REITs barely budged. The widely followed Morgan Stanley REIT Index finished the day down a scant 0.6%.

Year-to-date, the index has outperformed the broader averages, but it has been only in recent weeks -- as tech stocks have weakened -- that REIT shares have shown a burst of strength. In fact, as recently as March 15, the index was off for the year by 1.1%. Through last week, though, it was up more than 7% for the year. It closed last week at 310.04.

Such a performance has contributed to REITs' growing image as defensive stocks. But not everyone agrees with that designation or shares Cohen's enthusiasm. The REITs' recent steadfastness amid the market turmoil proved only that it's tough to commit suicide by jumping out of a basement window, according to one bear, a portfolio manager who invests in REITs for institutions. "This has been the deepest and longest bear market for the stocks in a quarter-century," he says. "In the face of that sort of performance, it's tough to argue that because REITs didn't go down further they're suddenly defensive. We all have to be careful not to blur the line between what we want to believe and what's supported by data."

Cohen and other REIT investors cite four reasons for their belief that the current rally has legs:

- Property fundamentals are good. In fact, they have remained strong throughout the stocks' two down years. Buoyed by their mid-1990s stock-price runups, REITs went on a buying spree, using their richly valued stock as currency. The assets they acquired with that stock added to earnings per share. But the stocks had grown plainly overvalued, and when multiples contracted, prices came back to earth, the buying binge ended and REITs had to return to the sort of growth that comes from running real estate. "Earnings kept growing, just not by as much as they had been," Cohen points out, and stock prices continued their slide. Concerns over possible overbuilding further contributed to the slump in shares.
Now, however, REITs have settled into reasonable long-term growth rates, with the possibility that earnings could start trending up late this year or early in 2001.

- Despite the robust recovery in property prices, which benefited REITs, overbuilding didn't materialize as it typically does at that point in the real-estate cycle. Had developers become uncharacteristically prudent? Chicago billionaire Sam Zell, chairman of three publicly traded REITs, has long argued that the inevitable byproduct of so many real-estate companies going public would be "transparency," or, in saltier terms, an "open kimono." In other words, says Zell, the public market would serve as an effective regulator. In the past, lenders lent because it was profitable and because they often saw only the tip of the iceberg. With greater public scrutiny of the business, money doesn't flow so freely. Rising interest rates have also served as a brake on new construction.

- Cohen and others believe the steady returns REITs have produced over the years will appeal to investors looking for something to anchor volatile portfolios. "Investors shouldn't expect REITs to deliver the 36%-plus sort of returns they did in 1996," Cohen says, but they should look for total returns in the 12%-15% range most years. Applying only modest leverage by historic real-estate standards, Cohen and others maintain, companies should be able to increase their earnings by 6%-8% a year. Tack on a dividend yield in the range of 6%-7% and you get 12%-15% total returns.

- Though REITs have ratcheted up their borrowing in recent years, their leverage is still historically moderate. Gone are the days when companies could get away with leveraging themselves to the hilt. Again, Zell and others argue that the open kimono will keep borrowing within prudent bounds. Every now and again, they concede, a company here or there will run into a problem. But that, they stress, happens elsewhere in the public market, as well. Late last week the Morgan Stanley Index, which tracks the total returns of some 130 non-health-care REITs, stood just south of 310. Cohen expects the index to close out the year in the 350 range, implying a total return this year of 20%-plus. Next year, Cohen says, REITs should deliver a total return in the 18%-20% range. He notes that when REITs emerge from a bear market, it's usually with a vengeance. In 1990, for example, equity- or property-owning-companies posted a negative total return of 15.4%. The next year, equity REITs delivered a 35.7% total return.

The REIT market's current strength is attracting institutional interest. Larry Raiman, who heads the REIT research team at Donaldson Lufkin & Jenrette, says he has been getting a lot more calls than usual lately from big investors asking that he pay them a visit. "Six months ago," he adds, "those folks hardly ever called."

In the less bullish camp is David Shulman, who recently took over as the head REIT analyst at Lehman Brothers. He thinks the stocks might climb some more by the end of the year, but he doesn't see them rising by as much as Cohen does. "The Morgan Stanley REIT Index should finish the year in the 310-320 range," he says, and do better next year. Shulman expects the index to finish 2001 in the 350 range. "The bear market is over," he agrees, but he believes the same "transparency" that has helped hold the supply/demand balance of real estate in check is likely to keep the stocks from running up as they have in the past.

Chris Haley, who follows REITs and other property stocks for First Union Securities, is less convinced that the recent REIT rally will hold. He says the recent run-up in share prices is as much the result of a lack of liquidity in the stocks as it is faith in them. "The stocks," he believes, "have been helped by their steady cash flows and cheap valuations."

Further, adds Haley, though it looks as if the downward slide in REITs' earnings momentum is at an end, REIT earnings estimate revisions for this year have been running 2-to-1 negative, as opposed to 2-to-1 positive for the S&P 500.

"Net-net," says Haley, "we believe it's a bit early to support large-scale investment in REITs." For the time being, he advises overweighting apartment and office REITs with positive earnings momentum, companies such as Equity Residential, Liberty Property Trust and Spieker Properties. He also likes the bigger-cap industrial REITs, which he says should be direct beneficiaries of the growth in ecommerce.

"If I had $100 to invest," Haley declares, "I'd put $25-$33 into the sector today, and invest the rest throughout the year." He'd look for dips, which he views as inevitable.

BARRY VINOCUR is editor-in-chief of Realty Stock Review and Property magazine, published by Rainmaker Publications Group in Ocean, New Jersey.

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.....Jen

-- posted by JenL_2

Top 80. May 3, 2000 3:35 PM

» RhyneN - REIT RMS index

Today the Morgan Stanley REIT index closed down 0.44%. This was after ten straight up days. The RMS is up about 21% from the December low.

-- posted by RhyneN

RMS Indices comparison 1 YR Chart

Top 81. May 3, 2000 9:32 PM

» JenL_2 - REIT Index (RMS)

Rhyne - Some charts to illustrate:

RMS 1 YR Chart

RMS Indices comparison 6 MO Chart

WOW! is all I can say about the REIT Index performance since Dec. Did anyone buy REITs at the bottom mid Dec? You REIT investors gave us the heads up on this thread when REITs were near the bottom. Thanks and hope someone listened and followed your advice......Jen

-- posted by JenL_2

REIT Comeback Or Head Fake?

Top 82. May 10, 2000 2:33 PM

» JenL_2 - REIT Comeback Or Head Fake?

from 5/10 SmartMoney.com:

By Lewis Braham

LAST YEAR, for one brief shining moment, real estate investment trusts took the market by storm. For two months, April and May, REITs dominated the charts while the heady tech sector lost its head. Then the situation reversed, and REITs landed in the dumpster. This April it happened again. While the Nasdaq index plummeted 15.6%, the NAREIT Composite Index jumped 6.6%. As a result, REIT funds are now the third best performing fund category in 2000, up an average 9.1% as of May 4. Meanwhile, the average tech fund is down 1.6%.

Is this another head fake? As I wrote in an earlier column, I lived to regret recommending REITs last year. But this rally, REIT fund managers say, is different. "The tip off for last year's rally was the shift towards value stocks, of which REITs were definitely a part," says manager David Jellison of Columbia Real Estate Equity fund (CREEX). "But this year's rally is about a shift from growth at any price to growth at the right price. That's why drug stocks are doing well, although they're not exactly cheap."

So why are REITs rising? Because they're growing at the right price. While REITs were extremely cheap last April, their important earnings measurement, funds from operation (FFO), were still falling from the peak of the real estate cycle in late 1997. "Two-and-a-half years ago REITs' FFO growth peaked in the mid-teens," Jellison says. "Now they're priced to grow in the single digits. The market has said this rate of growth is sustainable." In fact, although Merrill Lynch predicted only an 8.7% FFO growth rate for the sector in 2000, REITs have been surprising on the upside. According to NAREIT, a REIT trade association, first-quarter FFO growth has averaged 12% for the 74% of REITs that have reported earnings......

....Jen

-- posted by JenL_2

A Good Year for REITs -- So Far

Top 83. Jul 21, 2000 7:38 PM

» JenL_2 - A Good Year for REITs -- So Far

This from 7/17 Barron's:

By BARRY VINOCUR

Real-estate investment trusts confirmed their comeback in the year's first half. Spurred by a shift of cash from technology stocks in the spring's "tech wreck," the widely followed Morgan Stanley REIT Index showed a total return of 13.3% through the first half. And despite the runup in share prices, the average company in the index still boasted a dividend yield just north of 7%. Large-cap REITs -- as measured by Cohen & Steers Realty Majors, an index made up of the industry's 30 largest companies -- fared even better, posting a 14.8% total return for the first half.

REITs would have done even better had it not been for a frenetic wave of selling on June 30. Carl Tash, founder and principal with the California-based hedge fund Cliffwood Partners, reports that by his tally, 9.8 million shares of companies' stocks in the Morgan Stanley REIT Index traded in the session's last 12 minutes, compared with an average of 10-12 million shares a day since the REIT rally began. Tash, whose fund specializes in property stocks, and others attribute the flurry partly to a pair of sell programs targeting more than 70 stocks timed to exploit end-of-quarter window dressing by REIT funds. This time selling pressure overwhelmed the buyers, and the sellers got burned. The shares rebounded strongly in the July 4 shortened week, and several brokerage-firm analysts have raised their target rates of return this year to more than 20%.

Not everyone is so bullish. For one thing, the course of REIT share prices depends in part on what happens to tech stocks and other sectors. "There's no way to know how much money was parked in REITs by portfolio managers who sought shelter during the tech wreck," says Tash. If tech stocks rebound, or another sector emerges as the hands-down leader, REITs could suffer.

The Fed and possible further rate hikes also pose a threat. REITs' exposure to floating-rate debt, as well as the need to refinance borrowings in the normal course of business, could cut into earnings growth. For instance, a number of brokerage-firm analysts recently slashed their earnings estimates for General Growth Properties, a shopping-mall REIT, for this year and 2001 because of the impact of rising rates.

Another wild card: The market might have to absorb a flood of fresh shares. Several REIT executives report recent calls from investment bankers about raising cash through the sale of new stock to take advantage of lofty share prices. Though a number of blue-chip REITs are already on record as saying they have no intention of returning to the equity market this year, the combination of rising stocks and strong real-estate fundamentals may be too tempting for some REITs to resist.....

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.....Jen

-- posted by JenL_2

What Will End REITs' Rally?

Top 84. Aug 6, 2000 12:54 AM

» JenL_2 - What Will End REITs' Rally?

This from 8/7 Barron's:

A Technical Answer

By Barry Vinocur

After back-to-back years of negative returns, real-estate investment trusts are having their best year since 1996. The widely followed Morgan Stanley REIT Index has chalked up a total return of some 25% so far, outperforming broader market benchmarks -- most notably the formerly red-hot, technology-heavy Nasdaq.

Helping to fuel the run-up are second-quarter earnings surprises from a long list of companies. Heading into last week, REITs had delivered growth in funds from operations -- the REIT equivalent of earnings -- of 11.5%, well ahead of the expected 9.2% FFO growth, according to analyst Jonathan Litt of Salomon Smith Barney. The sector's performance has brought a step-up in the flow of money into the sector. According to AMG Data Services, in the most recent week, real-estate mutual funds enjoyed the largest fund inflow in recent memory, totaling $146.5 million.

Are those investors arriving at the party too late?

To answer that question, the newsletter Realty Stock Review compared recent valuation measures with the levels at the end of 1997, just before the start of the REIT stocks' two-year slump. Based on that review, it's tough to argue that REITs have become overvalued today.

For instance, at the end of 1997, the average property-owning REIT followed by the newsletter was trading at just over a 20% premium to consensus estimates of its net asset value. As of July 28 of this year, the average REIT was changing hands at a 9% discount to estimated NAV.

The dividend yield on more than 120 REITs tracked by Realty Stock Review at the end of 1997 was 6.3%; as of July 28, it was 8.5%.

Most notably, REIT multiples are well below their late 1997 levels. As of July 28, the universe of REITs and non-REIT real-estate operating companies tracked by the newsletter were trading at 8.6 times consensus estimates of next year's adjusted FFO. At the end of 1997, the stocks were trading at 12.8 times.

What could put an end to the REIT rally? At the top of nearly everyone's list is a sharp and sustained run-up in tech stocks; studies indicate that Nasdaq shares and property stocks tend to move in opposing directions.

In a recent dispatch to clients, analyst Lou Taylor of Prudential Securities noted that since January 1, the Morgan Stanley index has had a negative correlation with the Nasdaq Composite. He also observed: (1) the Nasdaq's peak nearly matched the trough for the Morgan Stanley; (2) even as the Nasdaq rallied in June, so did the Morgan Stanley, suggesting little conviction in the Nasdaq rally; and (3) when the the Nasdaq turned down in early July, REITs went almost straight up.

"So for those wondering when the REIT rally will end, we would look to Nasdaq," Taylor wrote. "If it starts to rally, we think investors are going to take money out of REITs."......

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......Jen

-- posted by JenL_2

Top 85. Aug 6, 2000 8:27 AM

» Oaktoad - I have posted this before, but REITs could be compared to

the new 'I' bond. Interest with inflation protection. Perhaps not as guaranteed, but the total returns should be higher over a long period.

For some reason, even though there is building going on, it does not appear to be excessive. This means that there may not be the usual crash in real estate that there often has been.

Maybe people are getting more rational as we get better educated about economics, etc.

-- posted by Oaktoad