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Marc Gordon  

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  • Say Goodbye To The 4% Rule? [View article]
    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.
    Oct 1, 2015. 01:21 PM | 6 Likes Like |Link to Comment
  • The Story Of STAG And Mr. Market [View article]
    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!
    Sep 25, 2015. 02:09 PM | 1 Like Like |Link to Comment
  • Whitestone REIT: Risks To The Business Model [View article]
    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.
    Sep 23, 2015. 01:17 PM | 3 Likes Like |Link to Comment
  • The Sucker Yield Smack-Down [View article]
    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?
    Sep 11, 2015. 02:52 PM | 2 Likes Like |Link to Comment
  • I Pity The Fool That Chases Fool's Gold, Invest In REIT Preferreds [View article]
    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.
    Sep 7, 2015. 12:20 PM | Likes Like |Link to Comment
  • I Pity The Fool That Chases Fool's Gold, Invest In REIT Preferreds [View article]
    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.
    Sep 6, 2015. 02:45 PM | Likes Like |Link to Comment
  • I Pity The Fool That Chases Fool's Gold, Invest In REIT Preferreds [View article]
    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?
    Sep 5, 2015. 02:11 PM | Likes Like |Link to Comment
  • I Pity The Fool That Chases Fool's Gold, Invest In REIT Preferreds [View article]
    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.


    Sep 5, 2015. 12:48 AM | Likes Like |Link to Comment
  • W.P. Carey: 20% Of The Business That's More Exciting Than Scary [View article]
    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.
    Sep 4, 2015. 11:36 PM | 5 Likes Like |Link to Comment
  • I Pity The Fool That Chases Fool's Gold, Invest In REIT Preferreds [View article]
    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.
    Sep 4, 2015. 02:32 PM | 4 Likes Like |Link to Comment
  • The REIT Way To Measure Risk [View article]
    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?
    Sep 2, 2015. 01:01 AM | Likes Like |Link to Comment
  • 3 Takeaways From W.P. Carey's Second Quarter Earnings [View article]
    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.
    Aug 31, 2015. 05:02 PM | 3 Likes Like |Link to Comment
  • National Health Investors Lost Its CEO But Gained A New Shareholder [View article]
    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.
    Aug 25, 2015. 06:43 PM | 1 Like Like |Link to Comment
  • Strange REIT Price Movements And How To Play Them [View article]
    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.
    Aug 24, 2015. 02:03 PM | 1 Like Like |Link to Comment
  • Strange REIT Price Movements And How To Play Them [View article]
    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!
    Aug 22, 2015. 02:36 PM | 2 Likes Like |Link to Comment