REITs: boom or bust

[renferme]

What does everyone think of REITs ? I've owned them for quite a while now and have done reeeeaaaaallllllyyy well with them ! I have stuff like HCP, FRT, EOP, NNN, and ASN. But if the real estate market BUSTs, what will happen to the REITs. I'm thinking that this BOOM market is mainly in housing, not commercial stuff like the REITs that I own, so no big deal when the BUST comes; am I right ?

Ray

 

[Calgary_Girl]

I would have to agree. I only own one REIT (commercial) but it's done fairly well also. I believe that it will be okay as long as the economy keeps humming along even if there's a rise in interest rates.

 

[Spanky]

After a heated run for the last 5 years, many pople believe it will cool off.

 

[saluki9]

After a heated run for the last 5 years, many pople believe it will cool off.

If you bellieve in mean reversion, then you have to think they will somehow make up for their superior performance. However, that can come from lower long term performance, and does not have to lead to a bust.

They also server an important role from a diversification standpoint that should not be overlooked.

 

[unclemick]

Hmmm

Since my Vanguard REIT Index has an R squared 7-11ish - then a 'true' slice and dicer would want it to drop like a shot - making use of correlation.

 

[MooreBonds]

Well, the performance on REITS will be directly correlated between long-term interest rates, and indirectly by the overall economy.

If the (so-called) risk-free interest rate (US Long-term bonds) rise, then the relatively riskier REITs will have to adjust to yield more with their risk premium (exact amount of which to be determined). Also, if the economy starts to go South, it could likely effect rent rates (exact opposite of low rates drawing people from renting into buying houses, and impacting housing rental rates).

So, the two biggest factors are simply long-term rates and overall economic health. As long as long term rates don't jump up to 7%, and assuming modest growth in earnings/FFO for REITs, then they should perform in-line with the market (they've already skyrocketed 30%/year for 3 years, so the supermajority of the gains have already been realized).

My REIT holdings total
10% of my tax-advantaged accounts
5% of my taxable
6% of my overall equity accounts (reduce percentages by 1/4 to reflect percentages of total net worth).

My REIT holdings are:
PCC
JRS
SRO
IGR
AHR
AMV (Danger Will Robinson - Dividend Suspended by the board of the insane and incompetent directors
CLP*
LXP*
HCN*
OHI*
PLD*

*Participating in their DRIP plan, which offers a DISCOUNT (from 1% to 5%) for reinvested dividends! Some of the above even let you buy your initial purchase direct and then give you a discount off of your initial purchase!

I also have a few preferred stocks in REIT stocks, but those don't really count....

 

[greg]

I think the next few months would be the time to 'rebalance' out of REITs. They've had there big run. Get the heck out of Dodge. This is my conservative position.

If you own apartment REITs, you know that rents are mildly depressed because everyone has rushed into buying new homes (remember the housing bubble) and consequently there are more vacancies whick drive rents lower. I don't see apartment revenue in general going up in the near or mid-term future.

Commercial REITs are walking on the razor's edge: On one side the possibility of a recession; on the other is the possibility of inflation. Because REITs are bond-like they go down when inflation creeps into the economy.

Of course, like that not-th fellow, who the heck knows where to actually find a risk free invenstment. All my invenstments have some problems.

 

[Spanky]

..who the heck knows where to actually find a risk free invenstment.

While it is true that a totaly risk-free investment does not exist, some are more risker than others. T-bills or T-bonds are considered risk-free even though there is a small possibility that the government may forfeit their debt obligations. That applies to human existence also - an asteroid could hit earth at any time.

 

[greg]

Spanky: I am prepared for an asteroid hit. Therefore, it won't happen . I've changed my name because DW doesn't like DHs that tell lame lawyer jokes. I'm now in hiding.

Because of my razor's edge problem I've sort of created my own mini-hedge fund (of course, DW will get half of these brilliant mistakes if I keep telling lame jokes and she finds out who I really am/are/may become--shhh): I pair very safe income investments (US bonds?) with precious metal shares (gold). If we have a recession the gov't should continue to pay me interest on my bonds. If inflation takes off gold goes up (usually?). PM shares are leveraged to the price of gold about 3:1, much like GM is leveraged to the price of cars. If car prices go up 2% GM is even more profitabe--given that everthing else at GM stays the same--haha (not a lawyer joke). So if gold goes up 2%, the stock price of gold shares goes up 6%. Wha la! Safe investment.

The old adage that I read years ago was that investors should maintain 10% of their portfolio in gold, real gold. This is done not to make money but to have a safe haven--an historically stable asset--if the world gets hit by an asteroid--or just if something unexpected happens. Not like that will ever happen to anyone. In our times, many people overlook gold as an investment device.

By having a foot in both the deflation and inflation world, I don't make as much money as everyone else. But if something happens, DW will always have enough money to dye her hair blue in the rest home, plus tip the cute hairdresser guy. If I stop telling lawyer jokes which I, of course, am very, very sorry for doing .

I rebalance as needed.

 

[cute fuzzy bunny]

While it is true that a totaly risk-free investment does not exist, some are more risker than others. T-bills or T-bonds are considered risk-free even though there is a small possibility that the government may forfeit their debt obligations. That applies to human existence also - an asteroid could hit earth at any time.

Heres another risk to tbills and tbonds...they yield below what I think broad based actual inflation takes away.

Larger risk than an asteroid...being hit in the head by "blue ice". Hell of a way to go...

 

[wildcat]

Boom or Bust? What about Flat?

 

[cute fuzzy bunny]

I'm going to bet reits always do well. Simply because I dont think theres going to be a lot of volatility in ownership. Most people that own reits are at least a little bit investment savvy and own them as part of a balanced asset class portfolio. If they really dropped, many of those investors would take that as a buying opp (right Charlie?). Having them roar upwards helps them ying something elses yang.

Without a lot of buying and selling volatility, will they move very much? I mean, compared to some common cheesy fund or a particular individual company stock?

 

[treypar]

REITS are subject to interest rates and the local market conditions. When interest rates rise REITS will get dinged. Market condition go up and down depending on the product and location.

 

[greg]

notth--RE is mostly a moot point for me. I'm at about 25% in the aset allocation model. But the DW keeps trying to mess with that number . Hey, aren't you the guy with lead sinkers on his mind? Don't I know you?

 

[cute fuzzy bunny]

REITS are subject to interest rates and the local market conditions. When interest rates rise REITS will get dinged. Market condition go up and down depending on the product and location.

Then how come rates have tripled in the last year and reits have continued to rise?

 

[cute fuzzy bunny]

Don't I know you?

NO!

 

[unclemick]

The SD for REIT's depending on where you look and time frame is ballpark 14 to 17ish.

Expect action if you hold them.

 

[wildcat]

Thought I would share this Economist article on real estate US and global


http://www.economist.com/opinion/displayStory.cfm?story_id=4079458

 

[MooreBonds]

Then how come rates have tripled in the last year and reits have continued to rise?

Long-term rates, grasshopper....long-term rates. Do not be swayed by the short-term.

REITs are not normally compared to short-term rates, since most people make investment decisions in real estate using a fairly longer horizon...and, when making comparisons between two different asset classes (for example, when people use a common comparison between the 10-year Treasury yield and the yield on the S&P 500), they commonly opt for longer-term rates as the benchmark since that rate can be locked in for a significant time frame. If you look at 1-year CDs and say "well, I can get the same rate in this 1-year CD as I can in this REIT", you can't guarantee that rate past 1 year. REITs, on the other hand, are fairly stable enough to assume that yield will maintain (and hopefully grow) over time, so a longer maturity is required for a good analysis.

So, to respond to your question, while st rates have tripled, long term have remained, for the most part, flatlined.

 

[cute fuzzy bunny]

Yet conventional wisdom also says that when short term rates rise, long term rates should also. When they dont, really really bad things are supposed to happen. Yet Sir Greenspan suggests that is not the case this time (the bad stuff happening).

So given that conventional wisdom is wrong twice so far in this matter, why wouldnt it be possible that the conventional wisdom regarding reits and interest rates also falter in this matter.

Also, is there any way possible I could be associated with a different kind of bug rather than a grasshopper? I just cant shake this lime green thing.

 

[MooreBonds]

Yet conventional wisdom also says that when short term rates rise, long term rates should also. When they dont, really really bad things are supposed to happen. Yet Sir Greenspan suggests that is not the case this time (the bad stuff happening).

So given that conventional wisdom is wrong twice so far in this matter, why wouldnt it be possible that the conventional wisdom regarding reits and interest rates also falter in this matter.

Well, when people consider REITs as investments, they aren't saying "well, I can stick this money in a REIT for long-term investment/income, or I can stick it in a 30 day CD" - they look at long-term instruments/rates. So, in that respect, it doesn't matter if the yield curve is Mt. Everest or a pool slide (wildly inverted) - all that matters is the long term rate. Same as a 15/30 year mortgages - it doesn't matter what short-term rates are, but rather primarily long-term rates, since that is what the financiers are using to underwrite their mortgages. They won't tack on an extra 3% to their 30 year rate simply because short-term rates are as high as long-term, since they can still fund the mortgage using a 30 year funding interest rate.

So, it doesn't matter if Greenspan is right, wrong, or insane. The major influence on how REITs do in the next 5 years is what long-term rates do in the future. (IMO)

Also, is there any way possible I could be associated with a different kind of bug rather than a grasshopper? I just cant shake this lime green thing.

(time for another mental image of 95 year old Asian kung fu grand master in a white robe...or should it be Greenspan? )

Ah, grasshopper, must be patient. Once, caterpillar say to grand master "Master, I want to be faster. I want to be bigger. I want to be better looking." So, grand master show caterpillar how to spin cocoon and grow into butterfly. Caterpillar spun cocoon and turn into butterfly. Butterfly emerge from cocoon. Start to fly, say "Oh, look at me, I move faster, I am bigger, I look better." Five second later, butterfly go "splat" on car winshield.

Moral of story: patience, grasshopper, patience.

 

[unclemick]

Patience my butt - the Norwegian widow is praying every night for the darn REIT Index to go down so she can get a decent dividend/payout rate - the little old lady wants a new pair of shoes.

Again - if you are a true blue slice and dicer ala the Four Pillars crowd - who cares about up and down as long as your asset correlation doesn't get out of whack.

Down baby, down! - so I can buy some more NXL at 12% yield in my putz stocks.

 

[greg]

The way I see it: My job is to find reliable income streams for retirement. My paid for home is part of this because what was once a debit to the income stream--a mortgage--is now gone. I look for diverse streams. REITs are a possibility, but if rents dry up or decrease, my income goes down. I can't believe I'm saying this, but I trust US bond income more than I trust renter income--retail, apartments, or commercial.

I'm figuring that if the USA defaults on its bonds, I'll get all those new fangled Depends from California when I forclose. Boy, will I be ready for that asteroid.

 

[Spanky]

Off topic,

Maybe 25% allocation to REIT is high. Reducing its exposure is not a bad idea. My allocation is about 11%.

Spanky

 

[cute fuzzy bunny]

So's mine.