Reconsidering REITs

[roger r]

I bailed out of my REITs in a bit of fear (panic) several months ago and would like to think that I cut some losses, though I guess it's against the theory of not timing the market. One of the feature stories in our local news last night was that that housing market is stabillizing, and I've been rethinking things.

I'm wondering if others are reconsidering REITs and how they fit into your portfolio these days? Seems like before the financial blowup there were many who thought REITs were an important asset class to have in their portfolio. Considering that real estate has pretty much been ground zero for a lot of our financial problems, have you changed your attitude about this, or pretty much staying the course?

[WilliamG]

I too considered bailing REITs a while back, but decided against it. Some of the big REIT advocators (e.g. Swenson, Malkiel) seem to have lowered their previously pretty high allocation recommendations. We hold 5% in REITs (10% of equity allocation) and this seems like a very reasonable "bet" on long term diversification benefits. Also, that generous dividend cash flow is very attractive for those of us in distribution phase. Bottomline, after some taking stock of allocation goals we stayed with them, neither lowering or increasing our target.

[ziggy29]

Quote:

Originally Posted by WilliamG I too considered bailing REITs a while back, but decided against it. Some of the big REIT advocators (e.g. Swenson, Malkiel) seem to have lowered their previously pretty high allocation recommendations.

As a contrarian, that would convince me to get back in. I usually have about a 7-8% allocation in REITs. Yes, that hurt last year, but not nearly as much as it helped me in the bear market of 2000-2002.

[W2R]

I have never owned REIT shares but have been planning to get into REITs for diversification purposes, at some point.

I am going to wait a while longer, though. No rush! Maybe in a year or two or three.

[FUEGO]

I actually added a REIT allocation to my permanent asset allocation back in November at the low point (11/19/2008). 5% in US REITS and 5% in International REITS. Up 25% and 35%, respectively, since then. Historically, REIT returns have been less correlated with other equities both domestic and international. So you do get some good non-correlated diversification benefits. Sometimes they go down a lot when everything else goes down less though.

They seem to be attractively priced versus where they have been most of this decade. And they have the fear factor of OMG real estate is scary = may be more discounted than what their fundamentals suggest.

[WilliamG]

Fuego - where do you hold international REITs?

[ziggy29]

Quote:

Originally Posted by FUEGO 5% in US REITS and 5% in International REITS. Up 25% and 35%, respectively, since then.

Yeah. International REITs got brutalized last year. (Want to see something to make the skin crawl? Look up AIGYX for 2008 -- down more than 71%! Until last year that was steadily a good fund in the international REIT sector and may yet become one again.)

That might be a good sector to play in the "ohmygodtheskyisfalling" area.

[FUEGO]

Quote:

Originally Posted by WilliamG Fuego - where do you hold international REITs?

An ETF at Fidelity - its ticker is WPS. iShares is the fund sponsor. There were a few others I considered but decided against: DRW - Wisdomtree's fund - higher expense ratio than WPS and at the time higher bid/ask spread.

RWX - SPDR Int'l REIT - higher expense ratio and not sure why else I didn't select it?? It does have a higher avg daily volume which would suggest lower bid ask spreads than its competitors including WPS.

IFGL - also from Barclay's ishares - slightly higher ER, not sure why I didn't pick this one over WPS either... It may have been WPS was selling at a steeper discount to NAV versus IFGL/RWX on the particular day I bought it.

[FUEGO]

Quote:

Originally Posted by ziggy29 Yeah. International REITs got brutalized last year. (Want to see something to make the skin crawl? Look up AIGYX for 2008 -- down more than 71%! Until last year that was steadily a good fund in the international REIT sector and may yet become one again.) That might be a good sector to play in the "ohmygodtheskyisfalling" area.

My thoughts exactly. I picked up WPS at 66% off what it was selling for around it's peak in Oct 2007. Other US REIT fund and small cap international and more emerging markets were picked up at similar discounts off their Oct 2007 prices.

Buy what is on sale I guess. I figured fear was pervasive throughout the market, so why not buy the stuff people fear the most? I didn't figure the market would turn around so quickly, but I figured in 5-10 years these purchases would pay off. They are a permanent part of my allocation though. Hopefully the will have low correlation with the rest of my portfolio so I can get some modestly juiced returns from rebalancing.

[WM]

We're planning on getting into REITs next month, as part of a diversification plan I put together about a year ago. The timing is coincidental, but I'm happy with it. We'll DCA in up to about 5% of our portfolio over the next year or so.

[charlie]

Normally I would advocate buying a REIT index fund or ETF rather than
individual REIT stocks with one exception ....... Washington Real Estate
Investment Trust (WRE). I do not own it now, but have on and off for
many years and will probably buy some when I sell my laundromat.

WRE is a vertically diversified company in a concentrated geographical
area .... greater Washington D.C. They are well positioned to take
advantage of the new "big government" era now unfolding.

WRE is the bluest of the blue when it comes to REIT companies.

Cheers,

charlie

[ziggy29]

I used to own WRE. As mentioned above, it concentrates its holdings in a region which has one of the most recession-proof industries imaginable. About the only major concern I'd have with WRE is that it also has its holdings in an area with a very elevated risk of terrorism.

[FIREd]

I never gave up on VGSIX and even took advantage of the market volatility to accumulate more shares. I bought large blocks of shares every time the NAV dipped below $10 and I have been able to lower my cost basis per share considerably, from $23 to $13, over the past 6 months. The dividend has been surprisingly stable too so far.

[CyclingInvestor]

REITs have been a major part of my portfolio in the past, pretty much 100% from late 1998 thru 2005. They are a major reason I am retired now. However, I moved out of almost all financials in late 2007 - early 2008 when the debt refinancing situation made debt-dependent stocks impossible to analyze.

For that reason I am still staying out of them. One of the reasons I got into them in the first place was the stable, increasing cash flows and dividends in the commercial property market. That world is long gone. Not that you might not make alot of money here - but my investment style requires stable fundamentals. I do not need any more home runs - a bunch of singles suits me fine.

I still track REITs, however. I agree that WRE is one of the most stable REITs around, and was always one of my core holdings. I think other top-quality REITs are VNO, ARE, AVB, BXP, and KIM.

[FUEGO]

Quote:

Originally Posted by CyclingInvestor For that reason I am still staying out of them. One of the reasons I got into them in the first place was the stable, increasing cash flows and dividends in the commercial property market. That world is long gone. Not that you might not make alot of money here - but my investment style requires stable fundamentals. I do not need any more home runs - a bunch of singles suits me fine.

I have never analyzed any individual REIT, but I tend to agree that things could get rocky in the real estate markets that typical REITs are involved with. All negatives: depreciating value of properties, difficulty refinancing existing debt and getting new financing, difficulty selling properties, higher delinquencies in rent collections, harder/more competitive to acquire new tenants, etc. It all points to a tough couple of quarters or years coming up. But that is priced into the market. Dividends could decline, particularly on some of the weaker REITs that don't have as strong of a history of dividend payments. But in 3-5 years when we will likely be back in the upswing of an expansionary economic cycle, these guys should be just fine and paying increasing dividends.

One good thing REITs and the commercial property market (retail and office) is that hardly anyone is building new construction today. I work with a number of retail and office developers during the pre-construction phase, including some REITs discussed in this thread, and up until the last few weeks, virtually zero activity for the last 8-10 months. So when the economy turns, there will be a lot of demand for a limited amount of commercial square footage. And the development cycle can take quite a while, so it may be a few years in some places before Certificates of Occupancy can be issued from the inception of a development project.

Today, commercial real estate is a buyers/tenant's market. Some time in the future, it will be a seller's/LL's market.

[ziggy29]

Quote:

Originally Posted by FUEGO One good thing REITs and the commercial property market (retail and office) is that hardly anyone is building new construction today. ... Today, commercial real estate is a buyers/tenant's market. Some time in the future, it will a seller's/LL's market.

This is very much a Warren Buffett-style thought process. Not just the concept of buying into something when the market despises it most, but looking ahead to the future, willing to wallow in low valuations for a while, knowing that at some point a new economic cycle will result in the pendulum going wildly in the other direction.

[DblDoc]

My AA has a 5% allocation to REIT's. Been buying more as needed to maintain that allocation. I see no reason to believe it is no longer an asset class with limited correlation to equities. FYI TSM has ~2% REIT in it.

DD

[Darryl]

I was anti-REIT for years and finally came around last year (oops). That meant I got to buy more this year in order to hold the 5% target I have.

I find the following statement of interest "You are not truly diversified if none of your holdings make you at least a little bit nervous"

[WhoDaresWins]

I own VGSIX. Initial investment was six years ago, I have added to it recently.

[Midpack]

I also own VGSIX, never sold. Was about 4% of my AA, now about 2.5%, and I'm fine owning it...