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Subject:  Retail REIT: Time to Get In? Date:  3/26/2009  10:49 AM
Author:  HaoJin98 Number:  30 of 48

The market is not as efficient as it used to be. As Clark Winter, author of The Either/Or Investor, points out, huge number of new entrants in the market distorts the information. These days, we not only do have American, European and Japanese views of the market, we also have views of growing number of other investors around the world. Each person might view the same information differently. Another reason is that there are not enough people to integrate all the information. If you are willing to do some homework, there is a great chance to beat the market.

This past week, the Fed surprised everyone by annoucing the infusion of trillion of more dollars into the market. With the plunging US dollar, hard assets values will certainly rise. Other than commodities, gold and bond, real estate is of interest to me.

Simon Property Group (SPG) is the US’s largest real estate investment trust (REIT) in retail areas (by market cap). Its real estate properties consists of over 300 properties including regional malls, Premium Outlet centers, community/lifestyle centers and Mills in US and other countries such as France, Italy, Poland, Japan, Mexico, South Korea and China.
RioCan Real Estate Investment Trust (RIOCF.PK) is Canada’s largest REIT and retail landlord, with interests in over 200 properties and 33 million sq.

As you can see from following comparison, SPG is way over leveraged, with a Debt/Equity ratio of 661%. Please note debt is always 100 cents for a dollar. However, we have to discount asset value. So the actual asset value might be much less than it shows in the book (same applies to RioCan).

2008 Data Comparison (click to enlarge):

From the payout standpoint, both companies have around 200% payout ratio (based on EPS). If you look at cash flow, SPG seems to be safer because it only paid out half of its operating cash flow. By the way, both companies have around 10% yield.

To protect inflation and diversify my portfolio, if I have to pick one retail REIT, I choose RioCan. Its occupancy rate at December 31, 2008 was 96.9%. 2008’s revenues increased 6%, which reflects higher income generated from rental income, an increase in fees and other income and higher interest income. Best of all, it is not in US$.

Disclosure: I have long position on RioCan. This was original published in
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