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I have been looking at some reits but dont know how to evaluate them or what to look at. Some of the yeilds are good. IE FelCor 12.8%, Health & Retirement Properties 15%, Nationwide Health Properties 12.1%, and Omega Healthcare Properties 16%. Yeilds seem too high??? Is there something wrong with these reits...why do reits seem out of favor on the market. Thanks in advance sorry I dont know much.
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> why do reits seem out of favor on the market

[I will leave your other questions to folks more knowledgeable than I, but I think I have a pretty good handle on this one.]

A dependable 12-15% return is apparently considered not very good by current market participants.

Of course, we know that is quite a good return for ANY type of investment vehicle *over the long term*. Just look at any "growth" or "growth and income" type mutual fund -- very few average over 15% annually for 10 years. (10 years is the key - you've got to include at least one good bear market to get a realistic idea of performance).

But rather than a fixed rate of income, many of the solid REITs offer significant opportunity for dividend growth -- which is usually met with a rise in stock price. From my own experience, the more solid REITs are still yielding right around 10%, although this REIT bear market has punished a lot of the top players.

Beware of 18% yields, however! A few recent dividend cuts have followed such yields recently, although Prime Outlets (PRT) is yielding 18+ %, I'm hoping it doesn't get cut. They deserve the suspicion the market is viewing them with, because of extremely high debt (2.1 debt to equity) and minimal opportunity for growth in a saturated US outlet mall market. Their preferred stock is yielding 16% and should have a safe dividend.

As far as market timing, I'd wait till a little more interest rate damage occurs, since the euphoria of this tech market will certainly be stunned when that happens. There is great possibility of that this week with the numerous economic and jobs indicators coming out. I personally don't believe the no-inflation baloney, and we are going to be in for some nasty numbers. People will credit-spend (at record levels) this holiday season. When they have to pay it off in 2000, we could be in for a big slowdown -- a Y2K hangover, if you will.
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xylophone,

The companies you have asked about are in the healthcare and hotel sub-sectors. Please refer to message #1441 and the messages that follow for a discussion on these high yielding sub-sectors.

The market has extracted a very high yield from these sectors as investors have bailed out in near panic proportions. If you feel confident that you can pick the companies that will prosper over the next five years, you should do well. Unfortunately, I don't feel confident enough from my own research to make recommendations on either of these sectors.

However, if 7.5%-9.0% yield with 3%-6% growth sounds good to you, there are several very high quality REITs in the more traditional sub-sectors ( apartments, retail, industrial, and office ) with stronger balance sheets, higher cash flows, lower payout ratios, and better growth prospects. They are out of favor with investors as well, many selling at or near their 2 year lows.

Good luck to you.

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xylophone,

While I was posting a reply to your inquiry, Hackshark posted a great reply. Right on!!
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I have been looking at some reits but dont know how to evaluate them or what to look at.

It's a little time-consuming, but I'd go to the little box marked "search" and enter the words, 'health' or 'medical' or the names or symbols for some of the stocks you've identified. Many of them have been discussed at some length here in the past.

The [very] short answer is that reimbursements to many of the lessors of medical facilities have been under great pressure recently. Thus, current earnings and future prospects are a bit dicey.
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<<why do reits seem out of favor on the market>>

Xylophone, we all have our own opinions on this; here are mine:

First, REIT stocks have delivered 12.6% average annual total returns to investors over the past 20 years (per NAREIT data), and have generally been regarded as safe and conservative investments due to the stable and predictable cash flow streams available on most property types. However, things went badly out of kilter commencing in 1994. In that year, REIT organizations began to take advantage of a once-in-a-lifetime buying opportunity caused by the real estate depression of a few years previous, and began raising lots of equity to acquire real estate at attractive prices.

Investors began to anticipate much more rapid growth in FFO (funds from operations, the common (though somewhat flawed) measurement of cash flows for REITs), and bid their shares up sharply. Total returns were 15.3% in '95, 35.3% in '96 and 20.3% in '97, while we saw a major influx in new REIT investors who expected REITs' double-digit FFO growth to continue for at least a few more years. Unfortunately, by 1997 it was becoming apparent that the real estate markets had improved markedly, and that REITs were having to compete with all sorts of other buyers; real estate prices rose, making it impossible for REITs to find great deals. As a result, growth rates would be slowing to a more normal pace.

From the beginning of '97 through mid-'98, REITs raised $49 billion in new equity (a 54% increase in the market cap of the REIT industry), believing that these shares were being issued to long-term investors who believed in the REIT industry. And these funds were invested in reasonably good properties at decent prices (although there were some instances of overpayment). Unfortunately, many of these investors were "closet traders," and began to sell the shares when a slowing of the growth rates became apparent. The elimination by Congress of special "paired-share" treatment by which a few well-known and rapidly-growing REITs were "grandfathered" with special tax treatment didn't help.

So, the selling began. It commenced as early as October 1997 (which, with hindsight, was the top of the REIT market) and continued with a vengeance in '98, when the REIT industry dished out negative total returns averaging 17%, the worst performance since 1974. On a price-only basis, the decline was closer to 24%. This performance caused many to wonder whether REITs were truly defensive investments. Since many REIT investors were new to the industry, they didn't have much patience with such poor performance, nor did they want to wait around to find out where REITs' FFO growth would bottom out.

The selling has continued throughout 1999, as shares in REIT mutual funds have been heavily redeemed ($1.21 billion so far in '99, compared with $924 million last year) and unit investment trusts are being liquidated; we are now seeing tax loss selling. (I should add that in almost all cases the REITs were reporting solid FFO growth, actually a bit in excess of analysts' expectations.)

On the other side of the investment world, it's likely that many institutional investors, such as pension funds, significantly slowed their investments in REITs. They had been taking a close look at REITs -- and investing in them -- viewing REITs as an intelligent way to own real estate due to its "transparency" (public disclosure, alignment of management's interests with those of the shareholders, strong insider stock ownership, etc), liquidity and proven management teams. But perhaps they decided that negative 17% total returns didn't correlate too well with the performance of direct real estate holdings and, in all likelihood, have been very slow to add to their REIT holdings.

Then there were some major blunders by some high-profile REIT organizations, such as Patriot American (now Wyndham) and Meditrust, who took on excessive amounts of debt with near-term maturities. The former barely escaped bankruptcy, thanks to some very expensive equity, and the latter will, most likely, have to cut its dividend. Meanwhile, there were some deals pulled off by a few REITs whose managements are taking their companies private which have left a bad taste with investors. Under the circumstances, they had no desire to take the time or effort to sort out the bad guys from the rest of the industry, and decided that REIT stocks were just not worth the bother, especially as they've been such lousy performers.

Finally, REIT stocks are value, yield and small cap investments, and that's just not the place to be right now. This year in particular, funds are flowing only into Internet, tech and other growth stocks; the last time I looked at the Dow Jones and S&P Utility indices, they were each down by 7-8%, and value stocks were performing poorly. To make matters worse, interest rates have been rising all year. Individual investors don't care much about yield today, as they're scoring (at least for now) 50% a year on their wondrous investments. Meanwhile, mutual funds, being so focused on performance, cannot afford to invest in REIT stocks; they're not going up, and if they don't participate in the party they'll end up with no assets with which to buy anything and their managers will be collecting unemployment.

The irony, of course, is that the REITs, as opposed to their stocks, are doing quite well. Although FFO growth is continuing to slow (double digit last year, 9% this year and about 7-8% next year), this is still pretty good performance, particularly by historical standards. REIT managements are not, in most cases, levering up with more debt in order to goose growth rates; rather, they are focusing on property leasing and management, selling assets to repay debt, buy in stock and, in some cases, doing selective developments. Real estate markets are, by and large, healthy today, with only hotels and some healthcare properties hurting a bit, and new supply is being readily absorbed while occupany rates are holding firm.

There is clearly loads of value in these stocks today. Whether you measure value by dividend yields, price to cash flow multiples, discounts to estimated net asset values, spreads over the 10-year T-note, whatever, these are very cheap stocks. Today, of course, no one cares; they've lost credibility with investors, and their attributes are very much out of favor in this go-go investment climate. I have no idea when the stocks will turn around in the short term, but have no doubt that anyone with the patience of a 2-3 year time horizon will do very well with these beaten up creatures. But they are clearly investments for those who don't mind marching to their own drummer. Lemmings need not apply.

Ralph
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Some solid REITs with high yields (in ascending order by yield, starting in the mid 8%s:

HME, PP, SPG , BTR, KRC, SMT, URB, FFA, REG,

In the 9%s:

BED, GL, CCG, HMT, SUS

The 10%s:

MAC

THE 11%s and up:

SKT (A Warren Buffet pick)

FCH, KPA, HPT

Just my opinion.
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Ralph,

Excellent, excellent and informative post.

I sure hope you never leave this board.

And concerning the decline, there is also the
E-Commerce phobia in the Mall area that you
and other have mentioned before.

R.
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One of the really nice things about this board is that there are so many of you who are willing to cover old ground for new posters – and to do it in an interesting way. I sometimes intentionally do not reply to these questions first, because a discussion is almost always more interesting and more informative than a monologue.

This thread is a good example. Thanks to Xylophone for the good question, and thanks to the board for all the good answers.

Michael
((The (for just this once) not so long-winded))
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MSG 1578 from Ralph on REITs. Very informative. I am invested in REITs with a percentage of my portfolio. Thought it was a pretty reasonable safe area to be in, not making more land and seem to have growth and good income. Have been averaging down for a year and would like to continue, but more in REITs now than I would like to have. Hard to understand how they can be rated so low by investors, but your post certainly makes a lot of sense. Thanks
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Retinut's post number 1578 was a masterpiece!

By the way, this post has been retransmitted onto Yahoo boards and is receiving rave reviews there as well.

Thanks!
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