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A. R. Rotsevni
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I am a private investor. I use and promote simplified analysis as the most understandable methodology for investment pricing. Investment selection rests almost exclusively on identifying highly skilled and motivated CEOs. I employ a simple benchmark for all investments, i.e. The Market... More
  • Global REITs-An approach to investing & Individual Suggestions 0 comments
    Sep 2, 2009 9:31 AM | about stocks: VNO, PLD, JOE, FUR, EQY, BAM, BPO, FCE
    REITs remain an attractive asset class. REITs are a basic asset class in free markets. Real estate is intimately integrated with the corporate performance and has traditionally been levered at 50%-60% from which the public REITs have in recent history generated total returns in the 12%-13% range. I note that prior to 1986 tax changes REITs produced returns in excess of 14% in the period of 1974-1986. The rise of the "Tax Shelter" industry in the early '80's prompted tax changes in the US which reduced returns. My current preference is for exposure to Global REITs.

    Rational investors are not "momentary traders", but invest for the cycle within historical performance history by focusing only on those CEOs of known expertise. Investment can be through individual companies or by the use of mutual funds. The historical performance of the NAREIT(http://reit.com) and AWCI/REIT(global index) Indices is presented below, Chart 1.

    Chart 1

    The investment cycle can vary in length. The previous cycle began in early 2000 as investors abandoned REITs for Internet stocks during the Internet Bubble. This cycle was prolonged by excessively low interest rates and US government sponsorship of sub-prime lending which in turn led to excessive performance from a historical perspective and subsequent crash. All real estate lending is in the form of mortgages and totaled over $14Tril at the end of 2007. This almost equalled the market capitalization of SP500 of $15Tril. The importance of real estate lending cannot be overstated regarding the health of global financial systems and subsequently global economies.

    REITs and other investments which are based on development of natural resources, i.e. oil, gas, copper and etc, exhibit very attractive investment properties which differ significantly from manufacturing and service based investments. Natural resource based companies depending on how they are structured can grow during both periods of inflation and disinflation. Taking REITs as the example: cash flows measured as FFO(Funds From Operations) rise during inflationary periods with mortgage costs generally fixed for periods of 10yrs or more. However, when disinflation occurs and lease rates rise more slowly, mortgages are refinanced at lower rates often at the discrecion of the REIT. Thus during disinflation REITs can lower costs and improve FFO. It is nice to have your cake and eat it too. Investors should not overlook the fact that real estate prices rise during periods of inflation and there is high demand for ownership in investment portfolios. Real estate prices also rise during disinflation periods as financing costs fall and this also causes demand in investment portfolios. Natural resource companies which have been well run, i.e. XOM, display similar net investment performances. Success is highly dependent on the skills of management.

    The Rational Investor first analyzes and identifies a selection of highly qualified managers for potential investment. This is accomplished by first identifying attractive long-term price performances. Then, by carefully going through historical financial statements, annual reports and importantly "Letters to Shareholders" so that one can ascertain the quality of management and the predictability of their business forecasts. From this process a ready pool of CEOs and associated companies are available for investment when asset class Return/Risk ratios are attractive. In our current environment REITs are attractive.

    Companies with highly qualified CEOs that appear attractive in my opinion include Vornado(NYSE-VNO)-Steve Roth, St. Joe(NYSE-JOE)-Britt Greene, Brookfield Asset Management(NYSE-BAM)-Bruce Flatt, Forest City Enterprises(NYSE-FCE-A)-Bruce Ratner, Brookfield Properties(NYSE-BPO)-Rick Clark, Winthrop REIT(NYSE-FUR)-Michael Ashner, Equity One(NYSE-EQY)-Jeff Olson, Prologis(NYSE-PLD)-Walt Rakowich and others. Chart 2 is that of VNO from Yahoo Finance. It should be obvious that Steve Roth has been a superb manager. But, he is not the only skilled manager in this space.

    Chart 2



    If one prefers a money manager, mutual funds offer multiple alternatives. My preference is the ING Global Real Estate Fd. run by Steven Burton since 11-2001, Chart 3. There are a number of other choices available. What I liked about Steve Burton is that he sold General Growth Properties well before the REIT collapse of Oct-Nov 2008 because he recognized they were likely to have refinancing difficulties in a frozen credit market.

    Chart 3-Morningstar-ING Global Real Estate IGLAX


    There is no simple prediction as to what price any security will rise as tax laws which are dependent on the whims of government can change the economics. One needs to monitor the asset class to determine if past performance is being repeated and if not then a decision is required.

    I characterize all asset markets as relatively inexpensive with REITs particularly so. My preference is for Global REIT exposure. Treasuries are particularly expensive and can be thought of as still in a "panic bubble". I will post a discussion on valuing relative returns and how to measure the core investment benchmark, the Market Capitalization Rate(MCR) in the future.

    The author is long all of the positions mentioned and has been buying since Dec08.
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