Real-Estate Veteran Sees a Rare Opportunity to Buy Quality REITs - Barron's 15 comments
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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.
::::::::::::::::::::::
- In Ghost Malls: Coming to Your Town, author James Quinn makes a compelling case that the retail real-estate turnaround is a long way off.
- David Fessler targets Six REITs for a Recovery Portfolio, while Robert Williams offers One Bulletproof REIT in the Midst of the Real Estate Mess.
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This article has 15 comments:
"It is likely things will get a bit worse before they get better. When you are going through a recession, sentiment is always bad, and things always seem worst near the bottom. The "it's never coming back" chorus is getting louder."
I'd call that one an understatement. Retail is blowing up as we speak, apartments are competing with condos for rents and rents are falling, and office space even in prime markets like NYC are grossly affected by accelerating unemployment.
"Supply and demand were in pretty good balance until recently. Vacancy rates in the New York office market and elsewhere have begun rising at alarming levels."
"The pain will be felt throughout the retail- real-estate market, which is already hurting. It means more vacant space, and there are too few retailers who need that space. Rents are going to fall as retailers renegotiate their leases to cut costs, and landlords, facing more empty space, are likely to go along with them. It isn't a good situation."
And then there are the dividends. The MAIN reason people invest in REITS:
"Two years ago the REIT industry was trading at a 4% dividend yield. Recently, that yield was 12%, but for the first time ever a lot of dividends are being cut. In the past four months, more than 39 companies have reduced or eliminated their dividends. Some companies have used the dividend-cut strategy as an opportunity to preserve capital. Some boards and CEOs have simply panicked and are doing their shareholders a major disservice by cutting dividends. Investors value real estate for its income. Once you interrupt that stream of dividends, you have impaired investor confidence for a long time."
Funny thing is they became accidental high-yielders because their prices dropped so much. Moreover, they're all signing up for that new IRS clarification that allows them to award dividends now in stock, not cash. This can be highly dilutive at these prices.
"Payment in stock instead of cash is the single worst idea hatched in the industry in a long time. Under the expanded rule, a REIT may issue up to 80% of its dividend in stock instead of cash to satisfy its dividend-payout requirement. Given a choice, there is no reason any investor would want stock instead of cash. Pay-in-kind dividends and interest are normally associated with companies that can't pay in cash. Paying PIK dividends sends a damaging signal.
...There is a danger that more and more companies will fall prey to this mentality, further alienating their shareholders. Also, bear in mind that taxable investors and mutual funds, which are major holders of REITs, would have to sell the stock they receive in order to satisfy their own tax or distribution requirements. This can create pressure on share prices."
And yet his first two choices to invest in are Simon Properties, which when they announced earnings on Friday, went 90% stock and 10% cash with their dividend which Cohen fails to mention, but instead touts their 8% dividend and the second is Boston Properties. They, too, just announced earnings and refused to talk about their dividend putting off the deed until March.
I think Cohen is simply talking book and attempting to bring along others. More REITS will be reporting in February and it doesn't look pretty. This is one area that should not be jumped into at this time thinking you've found a bottom.
"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."
Musical chairs. Or, the last out of a theater on fire. Neither scenario is conducive to buying REITs right now. Maybe after the fire has died down a bit, and the corpses have been counted.
"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."
So...the sector is cratering. Great...
At some point the economy will turn, Cohen says, and retailers will start looking for space."
That has to be a joke. Retailers are only BEGINNING to vacate. The worst is most likely yet to come, now that retailers have a stark picture of where they stand after last Christmas. That was the dam breaking...now will come the flood.
Despite your cheery optimism, I'm still not sure if I would want to invest in this sector. Homebuilders have been down for years now, and without any hope of their fundamentals improving in the foreseeable future, there is always that chance of bankruptcy or liquidation. Furthermore, for these REITs, they have assets under management, whereas homebuilders have a fire-and-forget model of business (I know that's not true for some who have been stuck holding land). That significantly increases chances of a cash crunch if things turn out poorly from here onward.
AWP was issued less than two years ago at $20 and is now at $3, but they are still charging 1.5% management fee annually to sit on the 20% of original capital they haven't lost yet. In other words they burned through $40 million dollars of investors' money so they could lose $4B in the process. What a great deal. Even though they recently cut their dividend by 78%, some suckers are still going to get lured by their 12% fictitious return-of-capital-esqu... yield. These guys are fools, and so will you be if you buy them, thinking you're getting something at a discount.
IGR is slightly less horrible. It has the same rate of loss and nonsensical dividend but a less obnoxious excess management fee of 1.2%. It makes up for this with the riskiness of leverage.
If you are still compelled to buy any of this crap, maybe on a trading basis, perhaps Seligman LaSalle International Real Estate Fund (NYSE: SLS) is a better bet. More reasonable management fee, given its size and a better discount. At least in its case half of its dividend is actually real, and its smaller size might make it more versatile. Same lousy return record, though. The only other CEFs that look rational are the Asian ones, RAF and RAP. But those are run by RMR Advisors, Inc., as incompetent a bunch of jackanapes as I've ever come across.
On Feb 01 09:36 PM Scott F wrote:
> Adding to the chorus of negative commentators, I have to say that
> the set of two closed-end funds they suggest are a joke.
>
> AWP was issued less than two years ago at $20 and is now at $3, but
> they are still charging 1.5% management fee annually to sit on the
> 20% of original capital they haven't lost yet. In other words they
> burned through $40 million dollars of investors' money so they could
> lose $4B in the process. What a great deal. Even though they recently
> cut their dividend by 78%, some suckers are still going to get lured
> by their 12% fictitious return-of-capital-esqu... yield. These guys
> are fools, and so will you be if you buy them, thinking you're getting
> something at a discount.
>
> IGR is slightly less horrible. It has the same rate of loss and nonsensical
> dividend but a less obnoxious excess management fee of 1.2%. It makes
> up for this with the riskiness of leverage.
>
> If you are still compelled to buy any of this crap, maybe on a trading
> basis, perhaps Seligman LaSalle International Real Estate Fund (NYSE:
> seekingalpha.com/symbo...) is a better bet. More reasonable
> management fee, given its size and a better discount. At least in
> its case half of its dividend is actually real, and its smaller size
> might make it more versatile. Same lousy return record, though. The
> only other CEFs that look rational are the Asian ones, RAF and RAP.
> But those are run by RMR Advisors, Inc., as incompetent a bunch of
> jackanapes as I've ever come across.
>
Housing stock is about 100,000,000 units Annual losses in available stock, due to age, redevelopment, fires, floods, etc are about 750,000 units per year. Now that construction is at about 400,000 units per year, we are actually losing available units at about 350,000 per year. Since people losing their homes still need a place to live, and the population is increasing, perhaps by 300,000 to 500,000 family units per year, we are quickly eating up the surplus.
With an excess of about 2,000,000 units currently on the market, We will eat up the surplus in approximately two years. However the surplus and demand are unevenly distributed. As a result, in relatively tight markets, in growing states (such as my North Carolina), house prices will begin to increase significantly before that two year point. In fact, I would not be surprised to see increases in North Carolina within 6 months.
What have i done? Purchased as many student- housing apartments in NC as possible. During recessions, the young people that cannot get jobs often go back to continue in college to delay the day of reconing.
SPG: Its balance sheet shows an overall loan to cost ratio of 94%.
BXP: Its balance sheet shows an overall loan to cost ratio of 70%.
DDR: Its balance sheet shows an overall loan to cost ratio of 74%.
SPG has the highest probability of going belly up and never survive because of its initial, impossible leverage financing with 94% overall loan to cost ratio. The overall current loan to value of SPG must be over 120% now. As for DDR, its loan to cost ratio is within an acceptable range from prudent commercial lenders' lending point of view. I warrant DDR's survival.
There is no question that the reit sector is down. It has taken a tremendous hit since October of '08. However, I view this opportunistically. As one commenter stated yields have gone from 4% to upwards of 12%... I don't believe all are paying 12% these days. However, there are many that are. Some very stable secure reits such as NLY and most believe NLY will raise their dividend this coming quarter; they reduced their dividend from $0.55 to $0.50 last quarter.
Are there reits that are in trouble, you bet-cha. PLD, DDR, GGP to name a few. Why are they in trouble - over leveraged! However, PLD is working this issue out. DDR and GGP I really can’t comment on I don’t follow them. However, I do follow PLD and as a result of the stock going on sale I purchased some of their preferred stock, did the same for SLG and BMR both reits beaten down senselessly. Both yielding in excess of 12+%... But note I purchased their preferred shares! If these companies don’t go bankrupt and I don’t believe BMR, PLD or SLG will, they have to pay the preferred dividend in full before paying the common dividend. The preferred dividend is also cumulative meaning if a preferred dividend payment is skipped it has to be paid before common dividend payments resume. Now the kicker, reits have to by their very nature payout 90 of their net income in dividends – so preferred are almost 100% guaranteed, except in the worst case scenarios to receive their dividend payments. And worst case scenario is bankruptcy, which is just not going to happen and IMHO.
So what is an investor to do, take this opportunity, buy safe reits at once in a lifetime yields, don't worry about the day to day price fluctuations of the stock receive 10+% yields and wait out this tumultuous market.
Good luck to all.
More REITs bring stock, less cash to dividends
Mon Feb 2, 2009
NEW YORK, Feb 1 (Reuters) - The credit crisis is claiming yet another victim: the hefty cash dividend that has lured investors to shares of real estate investment trusts.
With sources of lending drying up, the owners of shopping malls, apartment buildings, office complexes and hotels are hoarding cash by paying large portions of their dividends in stock.
REITs, such as Simon Property Group Inc SPG.N and Vornado Realty Trust VNO.N, have traditionally attracted investors because they offer big cash dividends, distributing 90 percent of their taxable income to shareholders.
But the credit crunch and uncertain economic times are changing that. Since May, the boards of 41 REITs have voted to either suspend or cut their cash dividends, according to research firm SNL Financial.
Simon Property Group, the largest U.S. mall owner, became the most recent REIT to change the composition of its quarterly dividend.
Cont. here:
uk.reuters.com/article...
And for the person here who posited positively on apartment REITS, stats out show that 3 out of 4 families who lose their homes are now living with relatives, i.e. NOT RENTING.
The author of this article suggest that SPG is 'well capitalized'. Its balance sheet is far from being 'well capitalized'. Equity cash injection made into most of its real estate projects including equipment was around 5%. SPG seemed to have extended its leverage way too much and much, and the lenders which extended these, impossible 95% LTC construction loans could be in a dire jeopardy. Probably not banks but private lenders with sky hefty interest rates..
Kimco Realty seems to be the far better one. Its balance sheet shows a healthy LTC of 60% for a commercial REIT with a dividend yield of 12.7%. Being the biggest is not always the best, well managed and well capitalized. If overall LTC is only 60%, there wouldn't be any big, major problems when refinancing its real estates with banks.
Why don't you guys check out REITs' balance sheets and come up with LTC ratios first?
SPG just slashed its cash dividends by 90%. SPG's balance sheet as of 9/30/2008 shows an LTC ratio of 95%. What's going to happen?
DDR skipped its dividends back in October, 2008. Its LTC is a little high at 75% according to its balance sheet as of 9/30/2008, but it is still within a lendable LTC range. Besides, DDR has been trying to reduce its LTC by reducing its dividends earlier and saving up cash to pay down its loan balances. Probably, updated balance sheet of DDR will show its LTC to be around 60% - 65% range. If this is shown in DDR's updated balance sheet, DDR will survive through the next real estate boom.