Real Property Alpha - Latest Comments in More on REITs

Re: More on REITs

Fri, 15 Jan 2010 11:03:36 -0000

Not every REIT has a portfolio superior to the market but in general, REITs do own higher quality assets. Take GGP and Simon for example. Think of the nicest mall(s) in your area and one of those two REITs will most likely own them. This is not to say that they haven't experienced their share of pain but they also benefit from "flight to quality."

All in all, I think we can all agree that nothing makes a whole lot of sense right now. It's best that everyone just tries to take full advantage of it.

Re: More on REITs

joshua — Thu, 14 Jan 2010 19:19:20 -0000

i have a couple with this. first, to john, if a investor (of any type) is able to acquire distressed assets or debts that necessarily implies a discount to market pricing due to dealing with the risk of a distressed situation. so, i dont disagree with your statements, but the reality is you can buy deals at X CAP and then by distressed (discounted) assets at a positive spread and that will not negatively impact your holdings. now, where you absolutely right is that plenty of reits have SEC filings stating that their book value of a property is 6.5% CAP while the broader market is 7% CAP. now, im no rocket scientist, but that doesnt make a ton of sense. why does every reit have a portfolio superior to the market? but, that gets into all kinds of details that are boring to type about.

to T, last time i checked the first two words in reit were real estate. the purpose is to allow individual investors access to institutional quality diversified portfolios without direct real estate exposure. the NAV of the assets IS the value of the company. anytime that multiple rises above 1.0x it means that the company has significant earnings potential in the direct future. that can be done via acqusitions or improved property operations/noi growth. but what we see today is reits trading at multiple of their yeilds - capitalizing on the capitalization - and that makes ZERO sense. i do agree that the growth and follow-ons weve seen have basically been the rebound from an overreaction to the CRE doom. but that doesnt mean they make any sense. retails sales were 5.5% better than last year, yet mall reits are up 60%. that does not compute.

lets call a spade a spade. most reits are trading at multiples during a period in which they should be trading based on yield. recovery or not, the future earnings are priced into reit values. so traders are making a big bet that the recovery will boost stocks to the current valuation levels. this is indicative of the market as a whole, though. so, trade up, trade up, trade up, until it suddenly corrects. then do it again.

Re: More on REITs

Thu, 14 Jan 2010 15:12:05 -0000

It's an interesting model for sure with a lot of benefits, especially in times like now. It also doesn't hurt that some companies have non-recourse mortgage debt so they can literally just hand over the keys when they don't like the assets anymore (see Sunstone).

Looking at NAV is where the asset values start to bite the REIT but fortunately that's not what they are mainly valued on (most are now trading at a premium to NAV, rather than the big discounts seen early last year).

By the way, I like the site. One of my main reads everyday.

Re: More on REITs

Reeder — Thu, 14 Jan 2010 15:01:50 -0000

Thanks for the thoughtful comments. I won't play a game of "I got the last word here", but I do have one more minor point to make. REITs can be essentially boiled down to what they own and what those assets produce in the way of income. While it's true that their stock prices will be based on the earnings growth and dividend, it's also true that it's difficult to separate out their earnings from the earnings of their assets. REITs are essentially the public markets response to essentially securitizing ownership of real estate.

Re: More on REITs

Thu, 14 Jan 2010 14:50:38 -0000

I didn't mean to imply that the potential acquisiton opportunities can largely explain the market performance of some of these REIT stocks. It does however play a role since many of the large REITs have been open about their acquisition appetite and have made some, albeit, smaller acquisitions. For valuing a REIT stock it's not about the cap rate, it's about the earnings growth per share and dividend yield. If a REIT can still make investments that are accretive to earnings then that will drive their valuation even if the cap rates on the new acquisitions are Xbps above their legacy portfolio.

Like I said, a lot of the performance is recovery performance from being beaten down so far and then driven by deleveraging events that took place. Performance in 2010 will come from slightly improved fundamentals (depending on sector) and investment opportunities.