Seeking Alpha

Brad Case

 
View as an RSS Feed
View Brad Case's Comments BY TICKER:
Latest  |  Highest rated
  • Did REITs Actually Make the Real Estate Bubble Less Severe? [View article]
    You're wrong, Titans. The reason other publicly traded REITs didn't file for bankruptcy is that, unlike GGP, they had capital structures that weren't as vulnerable. Yes, investors were very afraid many of them would either default or go into bankruptcy, which is why REIT returns sank during the liquidity crisis in October 2008 to March 2009--ultimately down to about 70% below their pre-downturn peak. Banks weren't lending, the CMBS market had disappeared, and investors weren't sure that the REITs could pull off secondary equity offerings (or corporate debt offerings).

    Then in late March 2009 the REITs started successfully raising capital, first through equity offerings and then (starting in August 2009) through debt offerings as well. The liquidity crisis has been over for more than 18 months, Titans. As a group, publicly traded REITs are simply not cash strapped any longer. That's why their returns have been so strong: investors think they're no longer in danger of defaulting or going into bankruptcy (even GGP has exited bankruptcy); and they have access to all forms of capital--secondary public equity, private equity, corporate debt, mortgage debt, bank lines of credit, etc.--at favorable terms; and as a result they're the most active purchasers of properties at the bottom of the market.

    You are right that the IRS gave REITs permission to pay their dividends partly in the form of stock; something like seven did so. You're also right that many REITs either reduced or suspended their dividends; in general (at least for those that reduced dividends) their stock prices went up, suggesting that investors thought it was the right decision to avoid default.

    And you're right that REITs have issued lots of secondary equity (as well as several IPOs) to raise money--first to pay off near-term debt, second to reduce the debt in their capital structure, and finally to acquire properties. That's very, very similar to the situation in the early 1990s, when REITs took advantage of their superior access to capital to grow dramatically in a bull market that lasted more than seven years with returns averaging more than 20% per year.
    Nov 17, 2010. 08:08 AM | 1 Like Like |Link to Comment
  • 10 High Yield REITs: Do the Yields Justify the Risk? [View article]
    Nice article, Chuck. Please consider me a resource for any information you need that you don't find on NAREIT's web site.
    Nov 16, 2010. 05:43 PM | 1 Like Like |Link to Comment
  • How to Build a Low Risk, Income Producing Portfolio With Higher Returns [View article]
    Just to clarify, BuyItCheap, I have no relationship with MyPlanIQ and have not been involved in developing their model. I don't remember offhand the time periods used by the academic researchers who studied the relationship between interest rates and REIT returns.
    Also, my research on REITs as an inflation hedge didn't look at the role of interest rates in the process--just at the question of how dependably each asset's returns protected purchasing power in inflationary environments. I used data going back to the beginning of 1972, although I've also looked at shorter periods.
    Nov 16, 2010. 05:15 PM | Likes Like |Link to Comment
  • How to Build a Low Risk, Income Producing Portfolio With Higher Returns [View article]
    BuyItCheap, I can't answer your question but I can provide a little background info. There have been some independent academic studies of the relationship between interest rates and returns on publicly traded equity REITs, and surprisingly there's essentially no systematic connection. That's because REIT investors will buy and sell by anticipating future changes in the interest rate environment rather than waiting for them to happen; moreover, a change in interest rates will affect both the demand for and the supply of commercial property.

    Separately, I've done quite a bit of research on how publicly traded REIT returns perform as a hedge against inflation. Real estate is not the only good inflation hedge--certain commodities, and TIPS, also provide inflation hedging. But REITs have been a much more dependable inflation hedge than TIPS in the sense that their total returns are more likely to protect against declines in purchasing power. Commodities have done the same thing, but they expose investors to prediction risk in the sense that commodity returns in low-inflation environments are generally terrible whereas REIT returns remain strong even in low-inflation environments.

    (Two caveats. First, TIPS returns are available back only to 1997, so to look at how they perform in a truly inflationary environment you have to use a synthetic index; I use the one created by Morningstar Ibbotson. Second, commodity returns can be measured using several very different indexes, and the evidence on commodities as an inflation hedge is sensitive to which one you use.)

    Finally, historical evidence on REIT returns isn't very sensitive to the starting or ending date used (within reason, of course): for example they've been in the 10%-11% range (or higher) over the last 10, 15, 20, 25, 30, and 35 years.
    Nov 15, 2010. 03:17 PM | Likes Like |Link to Comment
  • PricewaterhouseCoopers Report: REITs a 'Best Bet' for 2011 [View article]
    I still disagree with you, K--but it's a relief to be talking about a simple disagreement as to what the future will bring, rather than to be accused to trying to deceive uninformed investors. My goal--in my articles as well as in my responses to comments--is to help investors become more informed. I'll look forward to engaging in more discussion with you on that basis.
    Nov 15, 2010. 12:40 PM | Likes Like |Link to Comment
  • Why REITs Will Benefit From the Real Estate Crisis [View article]
    Your numbers are dramatically mistaken, RE PhD. The NCREIF Property Index of returns on unlevered core properties has an inception date at the end of 1977, and average returns have been 8.82% per year (about 7.60% net of fees and expenses). Since the end of 1996, average returns have been 8.89% per year (7.67% net of fees and expenses).

    NCREIF's index of returns on private real estate funds with a core strategy also has a 1977 inception date and shows average returns of 7.96% per year (6.93% net of fees and expenses). Since the end of 1996, returns have averaged 7.32% per year (6.36% after fees).

    NCREIF's index of value-added private real estate funds has an inception date at the end of the first quarter of 1983 and shows average returns of 6.45% per year (5.10% net of fees and expenses). Since the end of 1996, returns have averaged 6.44% (4.89% after fees).

    NCREIF's index of opportunistic private real estate funds has an inception date at the end of the third quarter of 1987 and shows average returns of 8.52% per year (6.27% net of fees and expenses). Since the end of 1996, returns have averaged 11.55% (8.78% after fees).

    Average annual returns for publicly traded equity REITs over the same periods have been: 12.83% since the end of 1977; 11.34% since the end of the first quarter of 1983; 10.89% since the end of the third quarter of 1988; and 8.87% since the end of 1996. So the only comparison in which any of the categories of private real estate funds has outperformed REITs is opportunistic funds since the end of 1996--meaning that, during that period, opportunistic funds earned less at the property level but boosted their returns (and their risk) by using dramatically higher leverage than publicly traded REITs.

    Finally, there is no available source of data on returns to private real estate investment funds open to individual investors, so no way to know whether they perform any better than those available to institutional investors.
    Nov 15, 2010. 12:34 PM | Likes Like |Link to Comment
  • Did REITs Actually Make the Real Estate Bubble Less Severe? [View article]
    I neglected to add the link for Professor Geltner's commentary. It's at www.realindices.com/pd....
    Nov 15, 2010. 11:55 AM | 1 Like Like |Link to Comment
  • Why REITs Will Benefit From the Real Estate Crisis [View article]
    Thanks for your thoughts, CB. I would never want to say that private real estate investment funds are "forced" to sell properties--especially since many are specifically barred from selling assets for the purpose of meeting redemption requests. My point was that the need to maintain that cash cushion means that they may not buy when buying would be a good idea for their investors. I think the fact that they haven't been buying as actively as REITs have in the current downturn is just one piece of evidence of that.

    But your point about distributions makes no sense to me. REITs must distribute at least 90% of their taxable earnings. They have plenty of flexibility to produce capital appreciation (growth) as well as income. In fact, a portion of the dividends that they distribute to investors represents long-term capital gain (rather than income), and therefore is taxed at a more favorable rate.

    More importantly, because publicly traded REITs have access to more sources of investment capital (public equity and public debt as well as private equity and private debt), they have better opportunities to invest in ways that generate capital appreciation as well as income.

    Finally, Publicly traded REITs have, in fact, produced much, much greater growth (capital appreciation) than core private real estate investment funds, while producing essentially identical income. Publicly traded REITs have averaged around 6% per year in income--same as core funds. They've also averaged around 3% per year in capital appreciation--while core funds have averaged zero.

    If I've misunderstood your point, I apologize. But the average performance of publicly traded REITs is dramatically better than that of private real estate investment funds.
    Nov 12, 2010. 10:07 PM | Likes Like |Link to Comment
  • Why REITs Will Benefit From the Real Estate Crisis [View article]
    I'm very puzzled by your numbers,
    RhinoRealty. First of all, the expected returns for publicly traded REITs have been in the 10%-11% range, so I have NO idea where you come up with the idea that they return 4%. Second, there is no source that I know of for returns on non-traded REITs, so I don't know where you come up with the idea that they return 7%-8%, much less that they're superior to publicly traded REITs. Finally, non-traded REITs typically have very high fees, so I doubt their returns are very great after fees.
    Nov 12, 2010. 12:55 PM | Likes Like |Link to Comment
  • Bad News for Private Real Estate Investors Is Good News for REITs [View article]
    Sorry about that, JBowen. Mostly I'm referring only to publicly traded REITs because mostly that's the only info I have. I try to make it clear, but sometimes I fail to.
    Nov 12, 2010. 12:46 PM | Likes Like |Link to Comment
  • Bad News for Private Real Estate Investors Is Good News for REITs [View article]
    Hmm.  The net expense ratio is 1.25%, and average returns since inception (including the worst downturn in history) have been 11.21% per year, so expenses eat up only a little more than one-tenth of returns--not one-quarter.

    I agree fully with your broader point, though: investors need to watch out how much they pay in fees, and many investment managers charge more than they earn.

    ING is an actively managed fund whereas Vanguard is a passive index fund, so it's no surprise that ING's fees are higher.

    In general, independent academic research concludes that actively managed funds don't earn enough to pay for their higher fees, so investors are generally better off in passive index funds.

    BUT the research on REIT funds isn't so clear: REITs seem to be the only part of the mutual fund market where there's evidence that actively managed funds actually earn their higher fees.
    Nov 12, 2010. 12:18 PM | Likes Like |Link to Comment
  • CoStar Group: Investment Climate Highly Favorable for REITs [View article]
    One thing to think about, Missiondweller, is that publicly traded REITs own only 10%-15% of the investment-quality commercial real estate in the U.S. (More in regional malls.) Most of it is in the hands of private investors and investment managers who aren't as good at managing it to generate healthy operating income by keeping occupancy and rent growth strong. REITs have been eating their lunch for a long time. So, even if there's too much retail space in this country (and I don't have an opinion as to whether that's correct), that may be worse for other retail property owners than for retail REITs.
    Nov 12, 2010. 08:50 AM | Likes Like |Link to Comment
  • PricewaterhouseCoopers Report: REITs a 'Best Bet' for 2011 [View article]
    Essentially the same conclusion, from another source: www.thestreet.com/_yah....
    Nov 9, 2010. 02:47 PM | Likes Like |Link to Comment
  • PricewaterhouseCoopers Report: REITs a 'Best Bet' for 2011 [View article]
    You're wrong, K. REIT returns lead property values by about 1 1/2 years. That's because REIT investors sell stock if they think things are going to get worse in the future, and buy if they think things are going to get better. REIT returns started going down in February 2007, about 18 months before the bad news started showing up in vacancy rates, rents, and other operating fundamentals; and they started moving up in March 2009, about 18 months ago. The same thing happened in the late 1980s and early 1990s, the last great real estate market downturn.

    Basically, if you see a vacant office park, it doesn't mean you should sell your REIT stock--it means you should have sold it a year and a half ago. And if you wait for things to start looking better, then you've missed out on the first year and a half of the REIT bull market.

    Commercial real estate WAS, as you say, "a disaster waiting to happen." The thing is, it happened. The REIT market, as you say, tanked: REIT returns went down by about 70% between February 2007 and March 2009. That's old news--and since the low point they've gained back most of the lost ground.

    I'm ready with whatever other information you need to understand the dynamics of the REIT market.
    Nov 7, 2010. 09:53 PM | 4 Likes Like |Link to Comment
  • PricewaterhouseCoopers Report: REITs a 'Best Bet' for 2011 [View article]
    I don't feel comfortable going very far out on a limb there, B2B--I've looked much more closely at equity REITs so far. But that kind of yield tells me that investors are lumping them together with banks, even though they're not exposed to the same kinds of risks that banks face.

    I'll have a better sense starting November 15, which is when NAREIT's annual convention starts. I'll be sitting in a presentation from MFA Financial, and perhaps some other mortgage REITs as well.

    Anyone else have an opinion on where mortgage REITs are going from here?
    Nov 6, 2010. 09:20 PM | 1 Like Like |Link to Comment
COMMENTS STATS
277 Comments
240 Likes