Marc Gordon

Bonds, reits, portfolio strategy, long-term horizon
Marc Gordon
Bonds, REITs, portfolio strategy, long-term horizon
Contributor since: 2013
Reuben, I forgot to add "thanks for this excellent article." Although I come to a different conclusion (I believe WPC is now and likely will remain a great performer) your rationale is certainly reasonable, and there is no denying that change represents potential risk, both good and bad. I just think that if past is prologue, WPC will weather this change just fine.
Marc
Reuben, I agree that WPC is a great company, but I don't really see a lot of difference between owning WPC today with three internal divisions, versus owning the same company split into three separate institutions (with separate ticker symbols) with presumably the same managers running the separate companies that ran the internal divisions before. It appears to me to be of a similar vein to a stock split, where the value before and after the split remains the same, but the structure is somewhat altered. Obviously splitting the company is a bigger deal than a stock split, but hopefully this conveys the idea. Either today, or after the WPC split, we should still have the same managers performing the same due diligence and generating the same results, so if you hold all of the split's entities you will have the equivalent of today's WPC.
Brad, first it was ARCP, then it was UDF, and now it is Brixmor having accounting irregularities. This seems to be happening a lot recently in the REIT sphere. Is there something in the REIT industry that breeds management that is prone to accounting irregularities?
Brad,
"suc-sector" = the REITs that lost money?
I know its a typo, but it gave me a chuckle.
I agree with Philipsonh, Mr. Market is telling investors that one of CORR's tenants is likely to go bankrupt, and with the price of oil so low, might even stop using their pipeline, which would really hurt CORR's FFO. If that scenario plays out, then CORR is going to stay low for a long time. If oil prices rebound, CORR will likely move up as fast as it has dropped. For those who bought at much higher levels I might hold on, since the majority of your stock value is already gone on paper, but I certainly think that there is too much risk to buy CORR now for the average REIT buyer.
Brad, you keep noting in your articles that you are writing a book on Donald Trump, and "when it comes to Donald Trump, we all know he has considerable brand equity." And what kind of brand equity does he have? Does this mean you agree with and respect his race-baiting and bigotry? Do you agree with his recent call for "a total and complete shutdown of Muslims entering the United States" (comment made December 7)? Do you agree with him that Mexican immigrants are "bringing drugs. They're bringing crime. They're rapists. And some, I assume, are good people" (comment made June 16)? How can you extoll the virtues of a man who when asked about making a religious group in America "have a special identification that noted their religion" he replied " We're going to have to look at a lot of things very closely." (comment made November 19)?
If this man has brand equity as you state, it is a negative brand equity.
Darren, being concentrated is a problem when the concentration is in Los Angeles. I live in California (San Jose) and can state with certainty that LA will have a major earthquake, I just can't tell you if that major earthquake will happen tomorrow or maybe in 20 years. Unlike economic events, it is impossible to anticipate the timing of this value destroying event. But it WILL happen and I would not want to own any REIT concentrated in LA when it occurs. So (for me) I will stay away from DEI.
PS - Also, for some reason the name and location of Douglas Emmett reminds me of "The Beverly Hillbillies"! :)
Brad, thanks for the update. I notice that you did not include DOC (which you rated a buy a couple of days ago) in the list of VTR, OHI, and NHI right now. Why is that?
Brad, I think people are misunderstanding your what your "Target" means. They seem to think it is your target for for the price to appreciate to, but I have understood it to be your target to "Buy below." Am I correct?
"The 7.5% dividend growth and a low FFO payout ratio are attractive, but the 2.44% current yield is not competitive due to AAT shares trading at such high FFO multiples."
Bill, you hit the nail squarely on the head! Thanks.
Robert, I may sell the asset management arm if that is split off, but I would keep both the US and European REIT portions, since WPC has proven adept in both places. Why mess with WPC's demonstrated diversified success?
hingroyield, I have owned WPC since they became a publicly listed REIT. A key reason for my liking WPC is that they are an amazingly diversified business, which is a drawback in many companies due to management not having expertise in all of the businesses, but WPC manages to run each division extremely well and realize potential synergies (rather than just talk about synergies). I am not the least bit nervous about holding the stock because WPC is one of a very few companies where I trust that the management will make a decision that is in the best interest of the shareholders. If they split off the asset management arm I may sell that and put the money back into the remaining WPC REIT portion(s), since that tends to be less volatile. But I will definitely keep the US and European REIT portions since WPC management has so clearly demonstrated superior REIT management in both continents. It would not really matter to me too much whether the REIT portion is one company or two (although I would prefer one company to maximize management's go-anywhere flexibility), and if two, I will keep them in the proportions that they split as, so that I have the same diversification going forward as I do now.
Bill, thanks for this interesting article. I have owned WPC since they became a publicly listed REIT. One of the reasons that I like WPC is that they are an amazingly diversified business, which is a drawback in many companies due to management not having expertise in all of the businesses, but WPC manages to run each division extremely well and realize potential synergies (rather than just talk about them). I don't know if splitting itself into two or three separate entities is a good idea or not, but WPC is one of a very few companies where I trust that the management will make a decision that is in the best interest of the shareholders.
Snoopy44, this sounds like the typical "it is not my fault!" irresponsible excuse making that I have come to expect from the FAST CEO (and other CEOs too). Next will come "The dollar is strong" excuse for poor earnings (even though it makes their raw inputs cheaper), and who knows what after that. Excuses sound better than "I am doing my job poorly."
David regarding "the S&P500 is in an earnings and revenues recession":
While the forecast consecutive decline in S&P 500 earnings is called by many as an “earnings recession,” and they suggest stocks will be stuck in neutral until earnings resume growing. But the slight dip in earnings is almost entirely due to cratering Energy sector profits, the result of a global oil supply glut, NOT a faltering economy. Analysts currently expect S&P 500 earnings to rise 0.2% y/y in 2015, but excluding Energy they are expected to grow 7.3%. We are not in an earnings recession, we are in an energy sector recession, which isn’t a recession.
Brad, your logic about the cycle appears incorrect. Homer Hoyt documented the typical life cycle for real estate is 18 years, from PEAK to PEAK (as shown in the Foldvary table). That means that there must be an intervening bottom in between the peaks, somewhere around 9 to 12 years after the prior peak. Since the last bottom was in 2008, then there should be a bottom between 2017 (9 years) and 2020 (12 years) after the last bottom, or 2 to five years from now. So isn't it wrong when you write "there's another nine years of growth until we see another real estate correction"?
Achilles, I respectfully disagree with "the equity offering comes at the right time." If they had sold the same number of shares early this year they could have obtained roughly an additional $50 million for exactly the same amount of dilution.
bkkdude, if they can perform "like berkshire hathaway" except with a 5% yield, that will make me very satisfied.
Disclosure: a long time O holder.
I read Pau's work yesterday, and I thought it was a thinly veiled sales brochure for annuities. I lost a lot of respect for his integrity. The article made poor assumptions such as 1% annual fees (most ETFs and index funds charge a small fraction of that), and suggested that today's low interest rates will persist forever, and that stocks are unlikely to underperform historical norms going forward. One can assume the worst (heck, why not assume another Great Depression that lasts decades?) and come up with a tiny maximum withdrawal recommendation, but that does not make it a sensible recommendation. It should also be noted that if Pfau were to be correct, the insurance companies would lose large amounts of money on their annuity contracts and go out of business, potentially leaving the annuity holders with broken contracts. I do not think that insurance companies will lose money for the same reason that I do not believe absurdly low withdrawal rates are justified, that is, Pfau's pessimistic assumptions are highly flawed.
A 4% withdrawal rate could end up being more generous than desired, but 2% is ridiculously small (as well as impractical for most retirees). The best option is to make realistic assumptions, start with a 3-4% withdrawal rate, and adjust the withdrawal rate to suit the CURRENT market returns, not some ludricously pessimistic projection.
Brad, a friend of mine who lived on a farm and had a mole/gopher problem in his yard had an effective, but rather extreme, method of solving his problem. He would spend a day on the weekend sitting in his yard with game on the radio, a beer, and his shotgun. When one of the critters popped his head up, KABOOM! Mole gone!
Reuben, another good article. I should note that I am long WSR, so it should be clear that I think WSR is an excellent investment. But I am surprised how negative some of the comments on the article are. I think this is a thoughtful piece, and that you note some real concerns to keep an eye on. For the next year I expect the economic winds will be blowing in WSRs favor and it will do well, and it might continue for a lot longer than that. But at some point the real estate cycle will turn, and I will (hopefully) get out of WSR before that because WSR will be more volatile to the downside than many other REITs, for the reasons you outlined. Longs who hated this article should note that you do not get an elevated dividend like WSR's without there being some elevated risks.
Hi Brad, thanks for another interesting article. I saw that IRT was one of your green colored REITs and it yields a 10.2% dividend, plus it recently increased its dividend, but I am unfamiliar with it, so I looked it up to see what you had written on it. To my surprise, it appears that you have not covered it, so I would like to ask that you consider writing a SA article on this high yielding REIT. In the interim, do you think it is a buy at its current price?
Waldipup, I assumed most investors always used yield to worst calculations so that above/below par issues are mitigated. All I can tell you is that the amount of resistance you are getting on this is surprising.
Mark A, that is why Waldipup and I use "yield to worst" to assess which bond (or preferred) may give the best total return. The yield to worst is calculated by making worst-case scenario assumptions on the issue by calculating the returns that would be received if provisions, including prepayment or a call, are used by the issuer. This metric is used to evaluate the worst-case scenario for yield thereby eliminating the downside risk should an issue bought at above par be called. Of course, if the above par issue is not called then the investor has a better total return than expected, which is even sweeter.
Pen, I think you and Waldipup are addressing two different situations, and you both are correct (not surprisingly). You are saying that for the same issue, buying below par is more profitable, which is correct.
Waldipup is saying that when comparing different issues with different yields, that buying above or below par is only part of the equation, and buying above par may be more profitable, which is also correct. To use an unrealistic example to make the point, if two issues are both callable in one year, but one pays a 10% yield annually with a $20 par value and is selling for $20.10, and the other pays 3% with a $20 par value at and is selling for $19.90 (perhaps the latter one is much more creditworthy), clearly buying the first issue above par and getting the additional 7% yield for the $0.20 purchase price increase is the better buy. I find that with bonds, which I buy frequently, issues that trade above par sometimes pay a better yield to worst because a lot of investors seem to not like paying above par, even though the total return may be better than other issues available at the time that trade at or below par.
I hope this clarifies the discussion. Unless I am misinterpreting one of you?
Hi goldenretiree, thank you for your compliment. I just looked at PDT as you suggested, but it is not clear to me why you think it is very REIT related. While it does own preferred stocks, it also owns dividend paying common equity securities. Further, it invests more than 25% of total assets in the utilities industry. Plus it has a very substantial chunk of financials, For example, its top four holdings as of July 31 were:
Bank of America Corp., comprised 4.50% of holdings
JPMorgan Chase & Company, comprised 3.83% of holdings
PPL Capital Funding, Inc., comprised 3.33% of holdings
Morgan Stanley, comprised 3.29% of holdings
Also, as a separate thought, it has a Total Leverage Ratio of 35% (which if interest rates start to increase could result in a downward bias). Please note that I am not passing any kind of judgement on PDT since I have not done due diligence, I am only noting that it appears to be unrelated to unleveraged REIT preferred shares.
Regards,
Marc
Reuben, nicely written, I totally agree with you. I would argue that of the many things that are critical to a company's success, excellent management personnel is the most important. WPC has demonstrated over a very long period that it has a management team and culture that can consistently deliver great results, even as the regulatory framework that governs the business changes. WPC management has both expertise and flexibility, and given this it should be able to successfully transition its non-traded REIT business to something that will be sustainable in the future. WPC is one of only a few companies that I have this kind of faith in, and I fully expect to reap rewards down the line.
Unnecessary disclosure: it is likely obvious, but I am strongly long WPC.
I know that I will be in the minority here, but I want to warn SA readers to strongly consider staying AWAY from preferred stocks. They combine the worst of both stocks and bonds. Since the article nicely details the positives of preferred stocks, I think it is appropriate to note the huge disadvantages of this investment vehicle.
Preferred Stocks Have Interest Rate Sensitivity:
Investors typically buy preferred stocks for high current dividends. The dividends on most types of preferred stocks are fixed, which makes them similar to other types of fixed income securities such as bonds. Fixed dividends also make preferred shares sensitive to interest rate changes: When interest rates rise, prices of fixed income securities decline.
Preferred Stocks Have Limited Upside Potential:
Unlike common stocks that offer unlimited upside potential, preferred shares’ upside is limited by the additional features they carry. For example: Callable preferred stock can be called, or redeemed, by the issuer at par, or face value. Investors are reluctant to pay a premium over par if they know that the stock can be called from them at par.
Preferred Stocks Have No Dividend Growth:
Most preferred stock dividends are fixed and cannot increase over time, unlike common stock dividends. A preferred stock investor might initially be happy with the amount of dividend income, but inflation could erode its purchasing power over time.
Preferred Stocks Have Dividend Income Risk:
Preferred stock dividends are not guaranteed. Issuers that experience financial difficulties can reduce or suspend preferred dividends. Preferred shareholders have been stuck with shares that had neither appreciation potential nor dividends, and that nobody wanted.
Preferred Stocks Have Principal Risk:
If an issuer files for bankruptcy, preferred shareholders have priority over common shareholders in filing property claims to recover their investment, but they are behind bondholders. Usually there are NOT ANY assets left when it is the turn of preferred shareholders to be paid. So preferred shareholders can suffer the same complete loss as common shareholders, despite their seniority.
Preferred Stocks Have Lack of Voting Rights:
In most cases, preferred shares do not confer voting rights. That means their holders do not have a say in the important affairs of the corporation, such as a merger or amending the corporate charter. Nor can they participate in the election of the board of directors at annual shareholder meetings.
Preferred Stocks Have The WORST of Both Worlds:
Preferred stocks combine the worst features of stocks and bonds. That's because unlike common stocks, preferred stocks have limited upside potential, and their income and principal are less safe than those of bonds. An investor who is seeking capital appreciation is better off buying common stocks; if he is seeking safety of income and principal, he is better off buying bonds.
I want to give thanks to Slav Fedorov, who is the original author of most of this.
Regarding "An investor with a time horizon of 10 years or more should seriously consider a minimum 10% allocation to REITs, and should feel comfortable with 20% or more." Is that 10-20% of a stock allocation, or 10-20% of a total portfolio, which would also include bonds, commodities, and alternative investments?
Reuben, thanks for another helpful summary. I agree that WPC is "a different kind of REIT" which is why it so nicely complements my holdings in O and NNN. WPC has great management that plans for the long haul rather than the just the next quarter.
Brad, thanks for this excellent article. Also, I found your comments regarding NHI versus DOC and MPW very illuminating. One minor suggestion is that when you use jargon such as RIDEA, that you include a sentence to explain what it is. Something like: "RIDEA stands for REIT Investment Diversification and Empowerment Act, which allows REITs to participate in the actual net operating income, as long as there is an involved third party manager." Explaining jargon in a short manner improves the clarity of the article for those of us who are not experts in the REIT field.
Dane, thanks for your great articles! I agree with you, and I picked up a position in WSR this morning when it hit $11.50.
If you are buying value REITs, what do you think about small cap CORR, BRG, WSR, and DOC, that are getting incredibly cheap? Although they are a little further out on the risk curve, at these prices I am being sorely tempted to jump on these!