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Author: earslookin Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 77310  
Subject: The Frog in the Shower Date: 1/12/2013 10:49 AM
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The story goes that if you put a frog in a pot of boiling water it will jump out, but if you first place it in a pot of cold water and then very gradually heat the water, the frog will be unaware of the danger and cook to death. Apparently the story is not literally true.

Eric Beinhocker wrote a wonderful book called The Origin of Wealth. There's a section in the book where he talks about feedback loops. He uses the example of a hotel shower. When you first turn on the shower you find the water is too cold, so you turn up the hot water, but then it gets scalding hot, so you turn it down, and then you keep adjusting the hot and cold until you get it just right. Now imagine there are 500 other guests in the same hotel all taking a shower at the same time. The hotels I stay at, well if another person takes a shower it affects the temperature of my shower, nevermind 500 showers. Did I mention the plumber in the basement who is adjusting the hot water heater so as to 'smooth out' the temperature? As Beinhocker says, "It is not difficult to see how dynamic systems can quickly become quite complex if one has multiple stocks and flows interacting via both positive and negative feedback loops. The positive feedbacks drive the system, accelerating it, but at the same time the negative feedbacks are fighting back to dampen and control it. When time delays are thrown in, the driving and damping can get out of balance, and out of synch, causing the system to oscillate in highly elaborate ways."

Frogs and showers have been on my mind lately when thinking about REIT Preferred prices. I have this nagging feeling of being a frog in a cold shower that's about to heat up, but so gradually that I won't notice it until I'm cooked! Either that or the water will so quickly turn to boiling that I can't jump out in time. Of course that's if you are a frog like me. If you're a scuba diver in a wet suit then maybe you don't care what the water does.

This was on my mind lately as I gathered data to compare REIT Preferred yields to Baa Bond yields and other yields. Thought I'd share this data with you for discussion even though it is filled with potholes, not the least of which is that the REIT Preferred data is very likely unrepresentative of REIT Preferreds in general. My beer budget gives me limited access to REIT Preferred history, so what you'll see in the graph here is a sampling of only eleven preferreds, all of them not yet called. I left off any REITs called between 2005 and 2012, and also convertibles. So the data set is very sparse, and the timeframe (2004 - 2012) too short to be meaningful. The two REIT Preferred lines are made up of the Min and Max for each month.

Also, here's a question. What drivers determine the change in spread between REIT Preferred yields and Baa yields? If the data is any way representative, notice that the yields have been diverging in the last few months.

Here is a link to the graph: https://docs.google.com/presentation/d/1E1j-RKCElU0TONqfL5pS...

Here are the REIT Preferreds used:

Ticker Name Sector Moodys IssueDate Par Coupon
------ ----------------------------------- ---------------- ------ ---------- ------ ------
PPS-A Post Properties Series A Apartments Ba1 10/1/1996 50.00 8.50%
PLDGP ProLogis Series Q Industrial Baa3 11/13/1996 50.00 8.54%
WRI-D Weingarten Realty Series D Shopping Centers Baa3 4/30/2003 25.00 6.75%
UBP-C Urstadt Biddle Series C Shopping Centers NF 5/29/2003 100.00 8.50%
PLD-L ProLogis Series L Industrial Baa3 6/23/2003 25.00 6.50%
PKY-D Parkway Properties Series D Office NF 6/27/2003 25.00 8.00%
CUZ-A Cousins Properties Series A Diversified NF 7/24/2003 25.00 7.75%
DDR-H Developers Diversfd Realty Series H Shopping Centers Ba1 7/28/2003 25.00 7.38%
DRE-J Duke Realty Corp. Series J Mixed Baa3 8/25/2003 25.00 6.63%
BFS-A Saul Centers Series A Shopping Centers NF 11/5/2003 25.00 8.00%
OFC-H Corporate Office Pptys. Series H Office NF 12/18/2003 25.00 7.50%


Thanks,
Ears
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