Brad Thomas'  Instablog

Towards the end of the 2011 Berkshire Hathaway (BRK.A) (BRK.B) Letter to the Shareholders, the Chairman, Warren Buffett, wrote:

My own preference - and you knew this was coming - is our third category: investment in productive assets, whether businesses, farms, or real estate. Ideally, these assets should have the ability in inflationary times to deliver output that will retain its purchasing-power value while requiring a minimum of new capital investment. Farms, real estate, and many businesses such as Coca-Cola (KO), IBM (IBM) and our own See's Candy meet that double-barreled test. Certain other companies - think of our regulated utilities, for example - fail it because inflation places heavy capital requirements on them. To earn more, their owners must invest more. Even so, these investments will remain superior to nonproductive or currency-based assets.

And in the 2010 annual letter, the legendary investor wrote:

Unquestionably, some people have become very rich through the use of borrowed money. However, that's also been a way to get very poor. When leverage works, it magnifies your gains. Your spouse thinks you're clever, and your neighbors get envious. But leverage is addictive. Once having profited from its wonders, very few people retreat to more conservative practices. And as we all learned in third grade - and some relearned in 2008 - any series of positive numbers, however impressive the numbers may be, evaporates when multiplied by a single zero. History tells us that leverage all too often produces zeroes, even when it is employed by very smart people.

And finally, in the Oracle for Omaha's 2009 letter, Buffett wrote

To build a compatible shareholder population, we try to communicate with our owners directly and informatively. Our goal is to tell you what we would like to know if our positions were reversed. Additionally, we try to post our quarterly and annual financial information on the Internet early on weekends, thereby giving you and other investors plenty of time during a non-trading period to digest just what has happened at our multi-faceted enterprise. (Occasionally, SEC deadlines force a non-Friday disclosure.) These matters simply can't be adequately summarized in a few paragraphs, nor do they lend themselves to the kind of catchy headline that journalists sometimes seek.

Real Estate, Dividends, and Communicating with Owners

Next week (November 13-15) I will be attending REITWorld 2012®: NAREIT's Annual Convention for All Things REIT® (in San Diego this year) to take advantage of the many opportunities to hear first-hand from REIT executives, engage your peers, learn from experts in the real estate investment community, and forge new relationships through the many networking opportunities available. REITWorld brings together investors, commercial real estate executives, and service providers to create an extraordinary opportunity to build your business.

For those of you "seeking the most alpha" in REIT-dom, I welcome anyone interested to submit a question or comment and I will try to provide answers when I return. I plan to meet over 25 REIT CEO's and attend several group discussions. As you know, I have written on numerous REITs this year including:

Camden Property Trust (CPT), Essex Property Trust (ESS), Simon Property Group (SPG), Realty Income (O), American Realty Capital Trust (ARCT), American Realty Capital Properties (ARCP). Macerich Co. (MAC), Federal Realty (FRT), National Retail Properties (NNN), Whitestone REIT (WSR), Regency Centers (REG), Vornado Realty (VNO), Kimco Realty (KIM), CBL Properties (CBL), Excel Trust (EXL), Extra Space Storage (EXR), W.P. Carey (WPC), American Campus Communities (ACC), Cedar Realty Trust (CDR), Taubman Centers (TCO), Sprit Realty Capital (SRC), Tanger Factory Outlets (SKT), CapLease (LSE), Monmouth REIT (MNR), Campus Crest (CCG), Healthcare Trust of America (HTA), Weingarten Realty Investors (WRI), General Growth (GGP), STAG Industrial (STAG), AmREIT (AMRE), Cousins Properties (CUZ), Retail Opportunity Investment Corp. (ROIC), Washington REIT (WRE), Equity Lifestyle (ELS), Lexington Realty Trust (LXP), Ventas Inc (VTR), CubeSmart (CUBE), Omega Healthcare (OHI), Entertainment Properties Trust (EPR), EastGroup (EGP), and UMH Properties (UMH).

As Buffet said "leverage all too often produces zeroes, even when it is employed by very smart people". After having witnessed one of the worst financial disasters in the history of REIT-dom, most of the equity REITs are now experiencing a dramatic comeback - making the case that REITs are slowly recovering, corporate profits are healthy, and some of the worst offenders are assiduously moving to repair the damage of the past.

I would love to hear what you think. I will attempt not to offer the "catchy headlines that journalists sometimes seek" but instead provide valuable and sound research aimed to benefit the most "intelligent REIT investors".

For more information on REITWorld click here.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Because real estate private equity funds typically require minimum investment between $5 and $20 million, the option of investing in institutional quality real estate has been unavailable to individual investors. However, similarly to institutions, individual investors are hard pressed to navigate between low-yielding bonds and high-risk equities.

As a result, retail investors (like institutions) are seeking greater exposure to non-correlating alternative investments that provide consistent income with low volatility. High-quality income producing real estate has emerged as a favorite among retail investors, but the question for many investors is: "how should I get my exposure to investment real estate."

Since 2002, individual investors have flocked to non-traded REITs to the tune of $81.3 billion (source: Blue Vault). By definition, the key benefit of non-traded REITs is that they are not yet publicly traded. Subsequently, they offer the reasonably predictable cash flow without the volatility incumbent in the public markets. However, as noted by an Investor Alert by FINRA, non-traded REITs come with issues including high fees (up to 15% upfront), little or no liquidity, conflicts of interest and a lack of transparency.

Faced with the prospect of low-yielding bonds, high-risk equities, and the issues of non-traded REITs, where does the average investor turn when it comes to real estate? A bulk of real estate private equity funds (core open-end commingled funds) such as the Morgan Stanley Prime Property Fund and AEW Core Property Trust, focus on and are built to deliver the traditional benefits of real estate ownership; income, low-correlation to other assets and a hedge against inflation.

The Next Big Wave for Real Estate Investors

Many real estate leaders have imagined the next generation of real estate to come from a way for individuals to invest in real estate private equity. That time has come. One uniquely innovative new product promising to deliver direct real estate ownership to individual investors with the underwriting transparency and fee structure of inherent in institutional structures is Versus Capital Multi-Manager Real Estate Income Fund (VCMRX).

This differentiated new product takes individuals out of the corner of non-traded REITs into the world of institutional real estate private equity funds. Versus Capital provides a differentiated platform in which the retail investor can participate in diversified, non-correlated, income producing institutional quality real estate. Versus Capital is a multi-manager mutual fund that invests with some of the most highly sought after private equity funds. Structured as a 40-Act mutual fund, Versus seems to be more investor friendly and features no upfront load, daily NAV pricing, quarterly liquidity and 1099 tax reporting. By assembling a diverse group of institutional funds, Versus seeks to provide a sound "margin of safety" by investing in a focused cross-section of commercial real estate managed by some of the best real estate fund managers in the world.

This multi-sector and multi-disciplined approach combines the best of institutional asset managers with broad-based diversification that includes income and value added strategies in multiple asset sectors (multi-family, office, retail, industrial, hotel, storage, mezz). Here is the targeted asset sector model:

The Versus Capital is also geographically diversified and the risk-averse fund was developed with the core strategies designed for investors seeking income, diversification, inflation protection and attractive risk adjusted returns.

Ultimately, this wave of opening up institutional fund managers to the retail market lies with the success of the Versus fund and the willingness of investors to embrace a new structure. Time will tell but it looks like this offering is well aligned with the investors' investment objectives of stability, income, and growth (in this order) with a liquidity feature that helps investors sleep well at night.

Versus Capital is targeting a 5.5% dividend and the mutual fund can be viewed on this Bloomberg link.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.