REITs: Could It Be Time?

Check out the following chart:

Click to enlarge

The Trend line not only has been broken, it has been demolished to the downside.

What to do? Here is the class of the group, (VNO) Vornado, St Joe (JOE), Winthrop REIT (FUR) and Brookfield Asset Management (BAM).

Brookfield Asset Management Inc.(NYSE:BAM) announced last month its results for the third quarter ended September 30, 2008.

Cash Flow From Operations:

Cash flow from operations for the third quarter totalled $355 million ($0.58 per share). Operating cash flow in the same quarter in 2007 was $255 million ($0.40 per share) on a comparable basis, which excludes a security disposition gain of $66 million, or $321 million ($0.52 per share) including the gain. On a comparable basis, operating cash flow per share increased by 45% quarter-over-quarter due to improved water levels and pricing in the company's renewable power business and an increased contribution from our commercial office business.

Brookfield is diversified with holding in office building and hydro electric plants.

The St. Joe Company (JOE) is a real estate development company. The majority of its land is located in Northwest Florida. The Company owns approximately 700,000 acres, approximately 310,000 acres of which are within 10 miles of the coast of the Gulf of Mexico. It is engaged in town and resort development, commercial and industrial development, and rural land sales. The Company also has interests in timber. The Company operates through four operating segments: residential real estate, commercial real estate, rural land sales and forestry. Residential real estate segment develops large-scale, mixed-use resort, seasonal and primary residential communities. The commercial real estate segment develops and sells real estate for commercial purposes. The rural land sales segment markets and sells rural land from its holdings in Northwest Florida. The Forestry segment focuses on the management and harvesting of the Company’s timberland holdings.

The key on St. Joe? It is virtually debt free and has a decent cash position (over 2 to 1 cash to debt.)

Vornado Realty Trust is an integrated real estate investment trust (REIT) and conducts its business through Vornado Realty L.P., a Delaware limited partnership (the Operating Partnership). Vornado is the sole general partner of, and owned approximately 90.1% of the common limited partnership interest in, the Operating Partnership at December 31, 2007. The Company’s operating segments include New York Office Properties, Washington, DC Office Properties, Retail Properties, Merchandise Mart Properties, Temperature Controlled Logistics Properties and Toys “R” Us (Toys). During the year ended December 31, 2007, the Company owned directly or indirectly, all or portions of 28 office properties aggregating approximately 16 million square feet in the New York City metropolitan area (primarily Manhattan), all or portions of 83 office properties in the Washington, DC and Northern Virginia areas.

NET INCOME applicable to common shares for the quarter ended September 30, 2008 was $31.4 million, or $0.20 per diluted share, versus $116.5 million, or $0.74 per diluted share, for the quarter ended September 30, 2007. Net income for the quarters ended September 30, 2008 and 2007 include $1.3 million and $31.9 million, respectively, for our share of net gains on sale of real estate. Net income for the quarters ended September 30, 2008 and 2007 also include certain items that affect comparability which are listed in the table below. The aggregate of these items and net gains on sale of real estate, net of minority interest, decreased net income applicable to common shares by $31.2 million, or $0.20 per diluted share for the quarter ended September 30, 2008 and increased net income applicable to common shares by $54.5 million, or $0.33 per diluted share for the quarter ended September 30, 2007.

Winthrop Realty Trust, formerly First Union Real Estate Equity and Mortgage Investments, is a real estate investment trust (REIT). The Trust is engaged in the business of owning real property and real estate related assets, which it categorizes into three specific areas: ownership of operating properties, which the Company refers to as operating properties; origination and acquisition of loans and debt securities secured directly or indirectly by commercial and multi-family real property, including collateral mortgage-backed securities and collateral debt obligation securities, which it refers to as loan assets and loan securities, and ownership of equity interests in other REITs, which it refers to as REIT equity interests. It acquires assets through direct ownership, as well as through entering into specific strategic alliances and joint ventures. In March 2008, Winthrop Realty Trust announced that it had sold all of its interest in Lexington Realty Trust.
For the first nine months of 2008, EPS is a loss of $.21 vs a $.36 profit in 2007.

As one looks through the results, the business of being a landlord is still profitable. Rent income is stable. Reduction in results is due to write-downs of investment portfolios and increased reserves required from banks. BAM and VNO are still solidly profitable and would be the pick of the litter.

The group is clearly oversold. The question is, when does the oversold situation reverse itself? That, is a huge question. Sorry, do not have the answer. But in this case, with BAM and VNO, you can get profitable companies selling at discount to their earnings power yielding 4% and 7% respectively. All are bouncing around at their lows. It may be time to take a closer look at the sector, only the top of it though.

Disclosure: None

Comments

[ChipSeal:]

Open your eyes! Retail is being slaughtered! (TIF JN JCP SKS HD)

Mortgage equity withdrawals contributed over 3% to GDP growth in 2004 and 2005, and 2% in 2006. Without US homeowners using their homes as an ATM, the economy would have been very sluggish indeed, averaging much less than 1% for the first six years of the Bush presidency.

In 2005 there was almost $595 billion in mortgage extractions that went into some kind of consumer spending. That translated into a 3% rise in GDP. In 2007, Mortgage equity withdrawals were down to $470 billion, for a boost of 2% to GDP.

The second quarter of 2008 saw an anemic $9.5 billion. At that run rate, we could see a drop-off of over 90% from 2005! Now, think what the second quarter would have been without the federal stimulus program of $150 billion. It might have looked and felt like this quarter!

We have a consumer based economy. Consumers have run out money!

There are no more consumers in America. They are paying debt and hording cash. Their job and that of their spouse is threatened. They will not save the retailers this Christmas.

They are not traveling, so hotels are hurting, and may not be able to refinance when loan covenants are violated.

All REITs are exposed to great risk in these times. Covered malls, strip malls, warehousing, light industrial, hotel, suburban office, and resort properties will lose revenues from failing businesses. Re-financing loans will be difficult at best.

We will miss the high prices and high yields we are seeing today. They will be much lower six months from now.

2008 Dec 07 09:54 AM

[davidbdc:]

Get real, those certainly aren't the most attractive REIT's to be putting money into.

Hotels, strip malls, and suburban office space will continue to get hammered. Some other retail space will get hammered. Need to do real analysis and find those with low debt, strong tenants, experienced management and decent balance sheet.

Buying those four? Might as well open a CD.

2008 Dec 07 01:37 PM

[Dave Lewenz:]

Strip mall and national retailers who lease space, will fall flat on their face this next year. I would not be surprised by year end 2009, that half of the nations national retailers are on the ropes, closing stores and filing for Chapter 11 protection. This depression will make 1929 look like a cake walk due to the amount of Debt that will never get repaid causing a lack of new capital to pull out and rebuild and the goverment does not have the ability to save every one.

2008 Dec 07 01:59 PM

[BerkeleyBob:]

I am sitting on a large unrealized loss on a low profile industrial REIT. May add to my position to average down my cost per share but a review of the third quarter conference and management response to a credit downgrade (who believes those suckers anyway?) did not project a savage drop in share value over a short period of time. The fundamentals appear good, and it does appear the sell-off was due to hedge fund and institutional investor's redemptions. Moral: Know your fellow shareholders, do not assume that their interest and those of a small investor are aligned.

2008 Dec 07 02:51 PM

[{5U}:]

Check the bonds. Best in breed vno and spg are trading at stressed or distressed yields general growth properties debt trades at 26 cents. 29 billion of REIT debt comes due next year. Access to capital is expensive or unobtainable. Defaults would force sales in a market with little liquidity.

So although these companies may have printed some decent numbers, that is backward looking. Going forwatd, This sector will be challenged by headwinds of a distressed credit market and slowing economy.

This is simply a Santa bear market rally with little participation from the credit market.

I'd listen to what the bonds are saying, not technical analysis on a stock chart.

2008 Dec 07 04:46 PM