Seeking Alpha
View as an RSS Feed

Brad Case  

View Brad Case's Comments BY TICKER:
Latest comments  |  Highest rated
  • Commercial Real Estate: Good Fundamentals, Increased Default Rates - Why the Disconnect? [View article]
    Robert,
    I completely agree with your last sentence. Your first point is reasonable, although I'm not sure I agree with it. Also, among class A properties (including regional malls) the flight to quality is likely, I think, to mean that performance differences defined by management quality (rather than physical quality) will persist for some time.
    --Brad
    Feb 14, 2011. 10:24 AM | Likes Like |Link to Comment
  • REITS With the Right Stuff [View article]
    HEARTLEAPS,
    That's right: the Barron's article was solely about equity REITs (which own property) while NLY is a mortgage REIT (it owns mortgages or mortgage-backed securities).
    --Brad
    Feb 14, 2011. 10:20 AM | Likes Like |Link to Comment
  • Commercial Real Estate: Good Fundamentals, Increased Default Rates - Why the Disconnect? [View article]
    JLW,
    I haven't heard of defaults along those lines; I can't say that it isn't happening, but I would have to see some evidence of it.
    But there is no way that I'll believe it would happen with the approval of the Fed. That simply isn't the way things work.
    --Brad
    Feb 12, 2011. 12:58 PM | Likes Like |Link to Comment
  • 3 High Yield REITs: High Return or High Risk? [View article]
    Well, I wouldn't call it Vegas: it was a strategic move, not a tactical one, and even with that my total REIT allocation is only 36%, which is still a little bit below my target. I was just substantially underallocated to REITs beforehand, because my main other thrift plan doesn't have any REIT option, and the third has a real estate option, but a poor one.
    Feb 10, 2011. 06:38 AM | 1 Like Like |Link to Comment
  • Constructing a Better Real Estate Portfolio [View article]
    Mitchb,
    You're right about the NCREIF Property Index, but for this analysis we used the Open-End Diversified Core Equity (ODCE) Fund Index, also published by NCREIF, which provides net returns (as well as gross) and includes leverage (averaging about 30% recently, although 20% is more normal). The reason that we didn't use the NPI is that it's not an investible index, but we've actually done the analysis with the NPI (assuming management fees of 1.15% per year to estimate net return) and the result is virtually identical except that unlevered core properties completely displace core funds from optimized portfolios because core funds use leverage and are therefore more volatile but actually have lower returns (gross and net) than unlevered core properties.

    For REIT returns we subtracted 0.50% per year, representing roughly the fees that an (institutional) investor would pay for an actively managed domestic REIT portfolio. (But we used the returns of the index, which would reflect passive rather than active management).

    We did not de-lever returns because this is not a comparison of who produces better returns on an unlevered basis; that question has actually been researched by three different teams of independent academics, and if you're interested then I can point you to their findings, which are that publicly traded REITs produce sharply better returns than the NCREIF Property Index on an unlevered basis. It is difficult for investors to adjust downward the leverage on any of their assets, and few if any seem to do so; it is of course easy to add leverage, and most investors do add leverage to unlevered core property investments, but adding leverage does not generally increase their risk-adjusted returns.

    You are exactly right about the nature of the lead-lag relationship between the public and private sides of the real estate market: there is no lag in terms of actual values, but rather in terms of reported values. Part of it is appraisal lag, which is widely recognized, but another part is illiquidity lag, which I can explain using an example. Say that the government releases a report today indicating that office employment growth will be much stronger going forward than investors expected. The value of any office building is equal to the present discounted value of the predicted future stream of net operating income produced by that office building, and the report just caused our prediction of future NOI to increase. So the implication of the new information is that the value of every office building in the country increased. When? Today. That increase will be reflected today in the stock prices of publicly traded REITs that own office buildings. It will also be reflected in transaction-based indexes of property values on the private side of the market, but not until (1) an owner looks for a buyer, (2) they agree on a transaction price, (3) the transaction is closed, and (4) the transaction-based index is published. (It will also be reflected in appraisal-based indexes, but not until all of those things happen and appraisers then incorporate the new information into appraisals on properties that didn't transact.) That whole process seems to take around a year.

    Yes, the reporting of values on the private side lags reality. Imagine this corollary: you own two blocks of common shares in the same company, say IBM. The daily returns of one block are transmitted to you electronically the same day, and you update the value of that portion of your portfolio as soon as you get the data. But for the other block, the daily returns are shipped by slow boat and they take a full year to get to you--and, again, you update the value of that portion of your portfolio as soon as you get the data. All you've done is delay the news for a portion of your portfolio--and yet that gives you a diversification benefit, called temporal diversification. When IBM stock moves down, the leading part of your portfolio goes down but the lagging part is still going up, thereby reducing the volatility of your overall portfolio; when IBM stock turns up again, the lagging part is still going down while the leading part is going up, again reducing the volatility of your overall portfolio.

    It is certainly a misleading form of diversification, but that pretty much describes the process of valuing illiquid assets (not just real estate) that are not publicly traded. And because assets are valued in that way, the benefit of temporal diversification is very real.

    Thank you for posing an uncommonly good set of questions.
    --Brad
    Feb 9, 2011. 05:54 PM | 2 Likes Like |Link to Comment
  • ING: Global REIT Returns Estimated at 8%-12% for 2011 [View article]
    If the long-term return on any asset were 2.19% or even 3.50%, I wouldn't bother. But the long-term return on REITs isn't 3.50%, it's around 11%. You're talking about literally the worst financial crisis since the 1930s, and you had your money invested with fund managers that somehow produced better returns than the rest of the market through that crisis. If you're not happy with that, I can't see any investment in the world making you happy.

    Do not accuse me of cherry picking statistics to make them fit a thesis. When you asked what they averaged over the last five years, I told you. If you ask for three years, ten years, or whatever, I'll give it to you if I can find it. My analyses don't depend on cherry-picking time periods, benchmarks, or anything else.
    Feb 9, 2011. 05:20 PM | 3 Likes Like |Link to Comment
  • 3 High Yield REITs: High Return or High Risk? [View article]
    User427801,
    Here's my story of being completely lucky in the REIT market. I used to work at the Federal Reserve Board, and a healthy chunk of my overall retirement portfolio is still in their thrift plan. The Fed introduced a REIT option on April 1, 2009, and since it was a good option and my actual REIT allocation was below target, I transferred the entire balance into it. I had no idea at the time that we had reached the market trough just three weeks earlier--but I've made roughly 180% since then on that sizable portion of my portfolio.
    As they say, it's better to be lucky than smart.
    --Brad
    Feb 9, 2011. 05:00 PM | 4 Likes Like |Link to Comment
  • Recommended Reading: PIMCO on Diversified Portfolios for Retirement Investing [View article]
    Actually, I think my response to Jakeman (below) is probably the real answer; 401(k) plan administrators don't think in terms of Munis.
    Feb 8, 2011. 11:08 PM | Likes Like |Link to Comment
  • Constructing a Better Real Estate Portfolio [View article]
    Thanks, BT. Hope you enjoy it.
    Feb 8, 2011. 09:43 PM | Likes Like |Link to Comment
  • Recommended Reading: PIMCO on Diversified Portfolios for Retirement Investing [View article]
    No specific mention, Jakeman, but my guess is that's because they wrote it for 401(k) plan administrators, who are used to looking at equities through the Morningstar style boxes. I bet if you asked them about dividend stocks they'd have much to say.
    Feb 8, 2011. 05:41 PM | Likes Like |Link to Comment
  • ING: Global REIT Returns Estimated at 8%-12% for 2011 [View article]
    Again, Doctorft, over the last five years the ING Global Real Estate Fund has averaged 2.19% per year compared to 1.84% per year for the FTSE EPRA/NAREIT Developed Index, and the Cohen & Steers Realty Shares Fund has averaged 3.50% per year compared to 2.42% per year for the FTSE NAREIT All Equity REITs Index. They don't seem to have been doing such a bad job in a very bad market situation. (The S&P 500 returned 2.24% per year.)
    Feb 8, 2011. 10:55 AM | 1 Like Like |Link to Comment
  • Extra Storage Space: Diversify Your Portfolio With a Self-Storage Leader [View article]
    Ah, very good, cawest--thanks for the insight.
    Feb 8, 2011. 09:38 AM | Likes Like |Link to Comment
  • ING: Global REIT Returns Estimated at 8%-12% for 2011 [View article]
    Doctorft,
    I'm surprised. The returns on the ING Global Real Estate Fund have averaged 12.24% per year since inception, which is very slightly better than the average return of the FTSE EPRA/NAREIT Developed Real Estate Index at 12.06% per year. That's pretty darn good, especially for an investment that has a long-term correlation with the broad U.S. stock market of only about 66%.

    I'm not familiar with the ING Global Natural Resources Fund, but I see on ING's web site that its returns have averaged 7.93% per year since inception (12/1975) and 19.49% per year over the last 10 years. I don't have a benchmark to compare it to, so I can't say whether the fund outperformed a relevant benchmark, but that doesn't seem too bad.

    You didn't mention which Cohen & Steers fund you've been unhappy with, but perhaps their flagship fund, Cohen & Steers Realty Shares, has returned 12.51% per year since inception (7/91), slightly better than the FTSE NAREIT All Equity REITs Index (11.46%)--again, pretty good especially for an investment with a low long-term correlation with the broad U.S. stock market of about 57%.

    I wonder if your disappointing experience was simply the broad REIT/stock market downturn?
    Feb 7, 2011. 10:44 PM | 1 Like Like |Link to Comment
  • Recommended Reading: PIMCO on Diversified Portfolios for Retirement Investing [View article]
    I'm not in a position to give investment advice, Doughboy, only to pass along reports and other information that may help. In general, the allocations that PIMCO shows for people nearing or at retirement are pretty reflective of what investment advisors tend to recommend for people already in retirement: mostly fixed income (35% bonds, 35% TIPS), enough cash to meet liquidity needs (10%), and the rest diversified in equities, including REITs and commodities as well as domestic and international stocks (30%).

    You should definitely talk to an investment advisor, who can help you find assets that will help get the total return you need without making you overly uncomfortable about risking your money.
    Feb 7, 2011. 09:56 PM | 1 Like Like |Link to Comment
  • ING: Global REIT Returns Estimated at 8%-12% for 2011 [View article]
    Drizzt,
    In general, there's little or no systematic relationship between interest rates and equity REIT returns. For example, an increase in interest rates discourages new construction, which helps operating fundamentals for REITs, but can also discourage demand for commercial space.
    --Brad
    Feb 7, 2011. 09:50 PM | 1 Like Like |Link to Comment
COMMENTS STATS
277 Comments
240 Likes