REIT Wrecks » FRT http://gdmig-reitwrecks.com High Yield REITs And Commercial Real Estate Thu, 28 Apr 2016 02:18:47 +0000 en-US hourly 1 https://wordpress.org/?v=4.2.30 Real Estate as an Inflation Hedge? Don’t Bet On It http://gdmig-reitwrecks.com/2009/07/reits-real-estate-inflation-hedging.html http://gdmig-reitwrecks.com/2009/07/reits-real-estate-inflation-hedging.html#comments Tue, 07 Jul 2009 19:36:00 +0000 http://reitwrecks.com/wordpress/?p=287

One major reason for investing in commercial real estate and REITs is that real estate is thought of as an effective hedge against inflation, yet commercial properties were an abyssmal inflation hedge in the early 1990s. So why are they still considered to be an inflation hedge if that isn’t always the case? As usual, it’s mostly about timing and location. (Note: For the time being, I am ignoring the actual likelihood of inflation or deflation – more on deflation here; more on inflation to follow. You may also be interested in a recent Brookings Institute report on recession proof real estate)

As this NAREIT chart conveniently shows, equity REITs (in green) declined in the early 1990s (circled in blue), even though the Gulf War and high oil prices were driving commodity prices (in black) higher:


Even more conveniently, this NAREIT chart, with inflation added in via the CPI, shows that REITs were actually highly correlated to the S&P 500 (i.e. stocks!), and that both performed horribly during the early 1990s:

These NAREIT charts help illustrate that the market value of all types of commercial properties actually collapsed after about 1989, even though the CPI and commodities rose. So why did this happen? The lesson from the early 1990s is that in the short run, private real estate equity and public real estate equities are not effective hedges against inflation if there is a large overhang of supply. Indeed, this video on retail big box vacancies in Orange, CT shows that one result of oversupply is high vacancy rates:

For those of you who prefer more excruciating detail, this study by Wurtzebach, Mueller and Machi (circa 1991) takes an academic approach to explain what may already be intuitive to those of you that own and operate commercial real estate: real estate is an effective hedge against inflation only if the markets are in balance. If the markets get out of balance (defined as vacancy rates above 10%), high vacancy rates make it impossible to raise rents to combat inflation:

According to Wurtzebach, et al., imbalances are especially pronounced after periods of capital markets excess, such as the one we just experienced. No property sector is totally immune to the current imbalance, but retail real estate in particular faces a lot of pressure given bankruptcies at GM, Chrysler, Circuit City, Mervyns, Steve & Barry’s, Linen’s ‘N Things, etc.

In the auto industry alone, 881 car dealerships were closed in 2008, and GM and Chrysler have announced closings of over 2,000 more in 2009. Skyrocketing vacancy rates mean that the vast majority of these sites will languish and sit empty for several years, nevermind generate any income or appreciate in value.

REITs and commercial real estate can be an effective inflation hedge if you have a longer-term investment horizon, or if you invest specifically in REITs that own quality assets in protected markets that provide pricing power (Federal Realty Trust (FRT) being a good example). But not all investors have the luxury of the buy-and-hold approach, and if you’re hoping that inflation will be the panacea for a poorly-timed asset purchase in a weak market (e.g., Phoenix, Las Vegas, Tampa), it’s definitely time to implement Plan B.

REIT Investments




]]> http://gdmig-reitwrecks.com/2009/07/reits-real-estate-inflation-hedging.html/feed 2 REIT Stocks: 4 Ways to Play the Carnage http://gdmig-reitwrecks.com/2009/03/reit-stocks-4-ways-to-play-carnage.html http://gdmig-reitwrecks.com/2009/03/reit-stocks-4-ways-to-play-carnage.html#comments Wed, 04 Mar 2009 17:00:00 +0000 http://reitwrecks.com/wordpress/?p=213

If you’re looking for the best REIT stocks, you should review the definition of an oxymoron and maybe also have your sanity checked. Since REITs peaked in February 2007, the sector is down 75%, as measured by the benchmark MSCI U.S. REIT Index and 64% since last September alone.

Equity REIT yields are the now the highest they have been since 1990, and when compared to corporate bonds, valuations of Real Estate Investment Trusts are at their cheapest levels since 1993, according to Green Street Advisors. If you’re a contrarian, this also means that investing in REITs could also be a great value play, especially if you have a longer term investment horizon.

On average, the highest equity REIT yields are in hotels and leisure sector, followed by industrial, apartments and retail. All yields are not created equally however, and you need to avoid REITs paying dividends in stock, as well as REITs with balance sheet issues. Even healthy REITs like Vornado Realty Trust (VNO) and Simon Property Group (SPG) have elected to pay their REIT dividends in stock, while General Growth Properties (GGP), a retail REIT that has been struggling to refinance billions in debt for months, could be in bankruptcy by the time you read this.

Accordingly, investors need to stick with companies that have low leverage and that are covering their dividends with operating cash. The former allows them to be buyers of accretive investments rather than distressed sellers, while the latter makes large dividend cuts less likely. Do not blindly chase high yields, as many have proven to be illusory. REITs also need to be operating in markets where they still have pricing power, and this is the most difficult criterion of all.

The Best REIT Stocks for 2009

One large cap name that has not yet cut its dividend is Avalon Bay (AVB), a well capitalized Apartment REIT with a portfolio concentrated in large, high-barrier-to-entry cities. This will protect AVB from the downturn, as will its focus on apartments. Apartment REITs are likely to outperform almost all REIT sectors but for healthcare. (click here for a list of Apartment REITs, including current yields. However, apartments will not be immune to the economic slowdown, so exercise caution in this sector too.

Highly levered AIMCO (AIV), also an apartment REIT, just reported a horrible fourth quarter, slashed its dividend and cut 300 jobs. In stark contrast, Mid America Apartment Communities (MAA) reported fourth quarter net income that was a penny ahead of last year as well as low levels of leverage. MAA’s strong balance sheet will allow the company to be one of those REITs able take advantage of the downturn by making accretive investments. That’s one of the reasons MAA will be the best Apartment REIT investment for 2009. (Update: on May 7, MAA reported FFO of $1.01/share, ahead of expectations and a 5% increase over Q1 ’08)

In comparison to apartments, Healthcare REITs offer more safety for dividend-oriented investors. Healthcare REIT (HCN) reported very strong earnings for the quarter and full year, including FFO that was up 4% and 8%, respectively. HCN has a very strong balance sheet, was added to the S&P 500 in January, and just announced the company’s 151st consecutive quarterly dividend (.68/share per quarter – payable in cash).

Retail REITs are suffering almost as much as hotel REITs and pricing power will continue to erode. However, one interesting play for more adventurous investors is Federal Realty Investment Trust (FRT). FRT actually managed to increase average rents over last year, which helped them post posted better-than-expected quarterly funds from operations (FFO). However, FRTs forecast for fiscal 2009 was cautious. FRT holds a high-quality portfolio in prime markets, including Washington D.C. and certain markets in California, which has largely screened it from the downturn.

Almost all REITs face severe, almost unprecedented headwinds and lots of uncertaintly. The combination of falling asset values, excessive leverage and frozen credit has already been a toxic combination for investors in many REITs. Friday’s jobs report is expected to show the largest one-month decline in employment in nearly 60 years, and that will only exacerbate the toxicity.

Nevertheless, valuations are now beginning to reflect that and more. According to Green Street Advisors, REITs are trading at a 45.3% discount to the value of privately held real estate and also at their cheapest levels since 1993, the start of the modern REIT era. Bargains are beginning to show, but instead of chasing unrealistic and unsustainable dividend yields, the best REIT stocks for this market will be those with low leverage and high quality cash flows, especially in the apartment and healthcare sectors.

Click here for a list of Healthcare REITs
Click here for a list of Hotel REITs
Click here for a list of Industrial REITs
Click here for a list of Mortgage REITs
Click here for a list of Non-Traded REITs
Click here for a list of Office REITs
Click here for a list of Retail REITs
Click here for a list of Storage REITs

Click here for a REIT ETF List
Click here for a list of all REITs
Click here for a list of REITs paying dividends in stock

Information on how REITs work can be found in the post REIT Definition.

REIT Stocks

Disclosures: None at the time of publication

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