Barron's interviews real-estate guru Marty Cohen, Co-CEO of Cohen & Steers (CNS), who says markets are incorrectly pricing in a protracted period of depressed prices, offering investors an extraordinary opportunity to pick up quality REITs at fire-sale prices:
Property transactions have come to nearly a complete halt. The market has discounted REIT shares to levels that anticipate a drawn-out period of deteriorating fundamentals. They are trading at steep discounts to asset values, even using our reduced estimates of value, historically high dividend yields and low price-to-cash-flow multiples. The single most important factor affecting a recovery will be the course of the economy. Fortunately, in this cycle there hasn't been a great deal of overbuilding, which would have worsened the outlook considerably, as it did in the early 1990s. We expect the record fiscal and monetary stimulation being put in place worldwide to at least stem the economy's decline. We should start seeing evidence of this by the end of 2009, when economic statistics begin to suggest a bottom. REITs tend to be early-cycle stocks, so they could start to perform well sometime between now and then. Meantime, it is hard to imagine valuations getting much worse.
Cohen notes that while REITs' assets under management are way down from two years ago, very little of the contraction is due to fund redemptions - but rather a drop in the value of the assets. Unlike the mass exodus from hedge funds, institutional REIT investors are staying put.
It's true that vacancy rates are soaring, but on the flipside new construction in negligible, both because rents are too cheap to justify building, and because of a lack of reasonably-priced credit. At some point the economy will turn, Cohen says, and retailers will start looking for space.
REITs Cohen recommends:
- The big three - Simon Property Group (SPG) "the biggest owner of malls and other retail properties in the country"; Boston Properties (BXP) "a large owner of Class A offices in New York, Washington, Boston and San Francisco"; and AvalonBay Communities (AVB) "one of the largest owners of rental apartments in the most vibrant rental markets on the east and west coasts." All three are well capitalized and managed, and pay healthy dividends.
- Macerich Company (MAC) and Developers Diversified Realty (DDR) - they use greater leverage, which could translate into big profits, but there's no guarantee they'll survive.
- Brookfield Properties (BPO) - big exposure to the financial industry has cost it big, but the downside from here's limited.
- SL Green Realty (SLG), ProLogis (PLD) and Weingarten Realty Investors (WRI) - their convertible debt looks attractive.
- HCP Inc. (HCP) - 6% unsecured bond offers 14.3% yield.
- ING Clarion Global Real Estate Income Fund (IGR) and Alpine Global Premier Properties (AWP) - invest in global real-estate firms and trade at a discount to NAV. The first is leveraged and the second is not.