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And REIT stocks did well, providing an annualized total return of 12% during the period, according to the National Association of Real Estate Investment Trusts, compared with 17% for the Standard & Poor's 500 stock index. But now, the real-estate market has famously unraveled. Office occupancy was down to 84.3% in the third quarter, with the average rent down to $22.11, and both are still dropping, Reis says. The market for apartments is considered weaker. So, have REITs lived up to their billing as safe harbors for investors in economic storms? By the measure of total returns to investors - the ultimate bottom line - the answer must be: Yes. That said, the industry made huge miscalculations about real-estate fundamentals that threaten to play havoc with REIT results, and REIT stocks, in the next couple of years. It's worth pausing to note that REITs kept their promise of acting as a counterweight to other equity investments. Their long leases locked in income even as their tenants' finances hit the skids, while relatively low amounts of debt allowed most to comfortably make dividend payments. And while office vacancy rates are soaring, the fact that most office development was preleased, and not speculatively built by landlords, provides something of a cushion. Indeed, about 28% of the national vacancy is sublet space paid for by tenants, according to Reis. But the current downturn is much worse than anyone was expecting only a couple of years ago, and is the result of a big miscalculation: that Wall Street scrutiny of real-estate markets would end real estate's wild cyclical swings. It hasn't. For instance, apartment owners are being hammered by the continued addition of units to the market at a rate of 300,000 a year, despite a downturn in the landlords' net income, says Craig Leupold, a Green Street Advisors Inc. analyst. Mr. Whyte points out that leases can last only so long, and two big sectors, apartments and offices, are facing extreme conditions that might take years to overcome. After a strong run in the first part of the downturn, REIT shares may now be poised to give back those gains. More Stats of 'Doom' Dean Starkman, WSJ 10-29 In suburban Denver's high-tech corridor, Merrill Lynch has on the block a sparkling, but empty, office campus for $53 million, or $125 a square foot - way below what it would cost to replace it. In suburban Boston, faltering telecom and Internet companies concentrated along famed tech corridor Route 128 and further west and north have left vacancies in some areas near 30%, local brokers say. That hurt struggling telecom-equipment maker Lucent when it sold a 500,000-square-foot complex in Marlboro this summer for $27.5 million, or about $55 a foot, a very low price. Real-estate investors have watched nervously as the national office vacancy rate has jumped to 15.7% as of the third quarter, from recent lows of 7.9% in December 2000, and is expected to top 16% next year, according to Reis Inc., a New York real-estate research firm. That's not that far from a 1991 peak of 19.3%. More 'Doom' Martha Smilgis, San Francisco Examiner 11-01 For the last month, the Wall Street Manipulators (smart money pros) have been methodically abandoning REITS -- real estate investment trusts. Over the last three months, there has been a 9 percent reduction in returns on REITS because of the growing vacancy rate in commercial real estate. Nationwide, the vacancy rate for office space is up 16 percent, the highest since 1993. Late to the party as usual, small investors who fled the declining stock market have piled into REITS. This year, these investors have put $3.46 billion into REITS as opposed to $302 million in 2001. Given that the Wall Street Manipulators and institutional investors have now switched into tech and healthcare stocks, it would be prudent for small investors to sell their REITS now!
The answer to that question, Wall Street analysts tell me, will depend heavily on whether the economy picks up in 2003. A double-dip recession could be bad news for REITs and for their dividends. I discussed the possibility of dividend cuts with Wall Street analysts and with several industry experts. At this point, they said, they expect a relatively small number of dividend cuts but not widespread reductions. But they generally agreed that if the United States goes into a double-dip recession, many more REITs may have to cut their dividends. "The likelihood of some dividend cuts is very high. The likelihood of most companies cutting dividends is very low," said David Shulman, managing director and senior REIT analyst at Lehman Brothers. Shulman, who described himself as "bearish" on REITs, said that if the economy can avoid a double-dip recession, REITs will find themselves in a "muddle-through" scenario in 2003. "In that kind of environment, we'll have a dividend cut here or a dividend cut there," he said. "But investors will be worried about it through most of the year," he added. Once REITs get past 2003, Shulman predicted, "2004 will be a pretty good year." Any dividend cuts, analysts said, probably would take place among the REITs that have been most affected by the economic slowdown. These include the ones that invest in apartment and office buildings. Vacancy rates have been rising in both sectors for some time. Michael Grupe, senior vice president of research and investment affairs at the NAREIT notes: In 1999, earnings growth among REITs averaged about 10%. In 2000 that dropped to 8%, and in 2001 it fell to about 5%. In recent quarters, he said, the earnings growth had dropped to 1 or 2%, and some forecasts for next year are even lower. Nevertheless, he said, REITs are still making money. "Just because the economy weakens," he noted, "it doesn't necessarily mean that all of that weakness immediately translates into the earnings of that company. It translates into the earnings as those rental contracts roll over." Steve Sakwa, first vice president and head of REIT research at Merrill Lynch, follows about 60 companies. "I would think generally, for most of the companies we cover, we believe the dividends are safe," Sakwa said. But "if business conditions continue to deteriorate . . . maybe a year from now, we'll have a different answer for you." There is reason to be optimistic about the outlook for REITs, says Richard Imperiale, manager of the Forward Uniplan Real Estate Securities Fund, a $22 million fund that invests in 40 REITs and real estate companies. "This real estate cycle ended differently than previous cycles. Most cycles end with a big supply of properties - call it overbuilding - that floods the market and causes values to go down. In this cycle, the markets were very stable, there wasn't a lot of excess supply and the demand just faded away. I would say that if the economy were to uptick just modestly, that would translate into a fairly quick tightening of the real estate market." That, in turn, would help REITs increase their income, he noted. If you invest in REITs, try to relax about what happens to your stocks in the short term. As Gus Sauter, managing director of the Vanguard REIT Index Fund, told me: "Things are never as good as they look during a bull market. They're never as bad as they look during a bear market."
A study recently conducted by Merrill Lynch & Co. found that some office REITs would need to lose only a bit more occupancy by 2004 to leave them with just enough cash to cover their dividends. REIT Sector Performance Ralph Block, REIT Week 10-25-02 Relative REIT sector performance can bounce around wildly from year to year; indeed, the Sector Sweetheart of one year can be the Ugly Witch the next. The following data shows just how volatile sector performance can be from year to year.
The data below starts with NARIET's list of REIT companies, WSJ data on market capitalization, dividend yield, stock analyists recommendations, and dividends by year. Dividend growth was calculated here. This differs from prior lists because small cap stocks were included. The data was as of market close on Friday Oct 18th. Some data is from the SNL August report - and it is stated that SNL is the source when that is the case. Apartments
Data from SNL August Report
Factoid original content On 10-29-02 I completed the purchase of a sector balanced REIT portfolio for a relative. When you purchase stocks, you are supposed to commit to paper the reasons you purchased them and your sell criteria. This is my attempt. On all purchases [except HIW], I expect and demand dividend and FFO growth in excess of the yield on the ten year U.S. Treasury. Also demanded is a coverage ratio that keeps the outlook for future growth positive. A rising interest rate environment should cause price pressure on all REIT's. So price will not be a 'Downside Sell Criteria' on any stock. The REITs were bought for income and it is a threat to the increasing income stream that will activate any sell. '02 profit growth for many REITs has come by having lowered interest expenses. Same store NOI growth is weak. It is not the best of times to buy REITs. But I also do not expect it to be the worst of times. All purchases were at the 100 share level with the exception of HIW and UDR (200 shares) and VNO (120 shares). Total portfolio cost was just under $30,000. If I had more to invest, I would have included some shares in the hotel and manufactored home sectors. HIW was purchased in a victory of greed over fear. At the time it was purchased, it had a dividend yield of over 12%. No other large-cap office REIT was in the double digits. It had estimated '03 FFO of $3.82, giving it a growth of 3.8% - higher that EOP's and roughly equal to BXP's. It's Price/NAV at 10% yield was 85.6%. Compare that to EOP's 107.7%, BXP's 95.4% and SLG's 111.0%. HIW has a good history of raising dividends. Wachovia Securities analysts Christopher Haley and Donald Fandetti stated [7-11-02] 'We believe Highwoods is well positioned in early cycle markets, with solid long-term growth prospects.' Further, Haley and Fandetti cited the company's 9.5% plus dividend yield [higher now since the price drop] as attractive and secure. I also felt that the expected FFO growth meant the current dividend was secure. That is the case for the 'greed'. HIW has exposure to WordCom, and has an unusually high percentage of leases expiring in the next 2 years [12% vs the mid to high-single digits for most office REITs]. That is the case for the 'fear'. I am reminded how Kimco's stock price was temporarily disproportionately punished after the K-Mart bankruptcy - and felt that this, the current punishment of HIW, was history repeating itself. This is the highest dividend paying REIT in the chosen portfolio, and some disappointment is already priced into the stock. With the purchase of 200 shares, HIW is over 13% of this 10 stock portfolio [second only to VNO in cap weighting]. So a disporportionate share of the success or failure of this stock picking experiment depends on HIW. Downside Sell Criteria: (1) a dividend cut of over 50%; (2) '03 FFO of under $3.00 [$3.82 is expected] or '04 FFO projection of under $3.50. Upside Sell Criteria: (1) A price that increases 90% in less than 18 months without an accompanying change in FFO growth [this is the highest price growth sell criteria in the portfolio - due to the suspicion that big price growth may come because of HIW's dividend may be more widely regarded as being 'safe' in the near future - and thus dramatically raising HIWs share price] or (2) a NAV that grows above 120%. CRE was purchased to add geographic diversity to the office portfolio, and it is also a 'value' choice. It's PEG ratio (.85) was the selling point here - all other large cap office REIT had PEGs over 1.0. CRE's Price/NAV @ 10% is 84.1. [CarrAmerica Realty has nine projects under way in Washington, including a $145 million new headquarters for the International Monetary Fund.] It's analyst recommendation rating came in third behind BXP (a choice in my runner-up group with a Price/NAV @ 10% yield of 95.4) and SLG (which I thought was too concentrated in New York and with a price/NAV @ 10% of 111.0). CRE had a poor history of dividend growth since '97, and that must change. The whole point in buying REITs is getting dividend growth that is above the inflation rate. Downside Sell Criteria: (1) any dividend drop; (2) a analyst recommendation drop below that of EOP. Upside Sell Criteria: (1) A price that increases 50% in less than 18 months without an accompanying change in FFO growth or (2) a NAV that grows above 110%. While value was the theme in the office sector, growth is the theme with MLS. MLS has been hot, the off-price segment of retail is hot, it has a big development pipeline and pays a good dividend given its growth. MLS's NAV was very high [224%]. Its same store NOI growth was average. Downside Sell Criteria: (1) any dividend drop; (2) a analyst recommendation drop below '3'; (3) failure to grow FFO/share. Upside Sell Criteria: (1) A price that increases 50% in less than 18 months without an accompanying change in FFO growth [Note: MLS had a total return in excess of 70% in '01.] or (2) a NAV that grows above 275%. MRR was a venture into small-cap REITs. I was sold on its stead dividend growth and its high (1.3) analyst recommendation. Its 5.99% predicted FFO growth for '03 was better than average. MRR's price/NAV @ 10% is 96.1. WRI (a choice in my runner-up group with a price/NAV @ 10% yield of 161.8) and KIM (with a price/NAV @ 10% of 124.8) both had better predicted '03 FFO growth (WRI=6.79% and KIM=8.25%). So MRR was a 'value' choice. Downside Sell Criteria: (1) any dividend drop; (2) a analyst recommendation drop below '3'; (3) failure to grow FFO/share. Upside Sell Criteria: (1) A price that increases 35% in less than 18 months without an accompanying change in FFO growth or (2) a NAV that grows above 120%. RSE sells for slightly less than SPG and has a slightly less dividend/share than SPG in '02. That relationship is predicted to flip in '03. RSE's price/NAV @ 10% is 112.6%. SPG's price/NAV @ 10% is 248.9%. In retrospect - I should have gathered more data to GGP - but GGPs large recent additions to its properties scared me away. Between RSE and SPG, RSE was the easy choice. Downside Sell Criteria: (1) any dividend drop; (2) failure to grow FFO/share by at least 3% [8.85% is expected]. Upside Sell Criteria: (1) A price that increases 40% in less than 18 months without an accompanying change in FFO growth or (2) a NAV that grows above 150%. UDR and HME were the two apartment REITs that had the highest analyst recommendations (2.0 and 2.5 respectively). Both have a consistent history of dividend growth - but not strong growth. Those Apartment REITs that do have a strong dividend growth history (AIV, AVB and ESS) have lower analyst recommendations and lower '03 FFO growth expectations. [Note: AIV was a close third to HME in my choice for a second stock in this sector.] The two had the highest expected FFO growth for '03. Property Magazine's Guide to REITs Apartment Valuations from last winter predicted strong AFFO growth for UDR and slightly better than average growth for HME. David Lee, who has run the T. Rowe Price Real Estate Fund, says of UDR: 'United Dominion is a well-established nationwide apartment REIT that hired a new chief executive, Thomas Toomey, in February of last year. Toomey has an excellent track record and was formerly at Apartment Investment & Management (AIV ). Before buying United Dominion, however, we wanted to see that the company could deliver some strong quarterly performances under his stewardship, which it did.' [from Bunsiness Week 9-12-02] From Bear Stearns commentary in September '02: HME generated 5.9% same-store NOI growth in Q2-02, the highest growth among the 17 multifamily REITS for both the quarter and the first half of '02. Occupancy fell 200 basis points to 92.2%, but rental rates grew 6.7%, enhanced by the effect of prior renovation activity. Stripping out the effect of renovations, NOI growth would have been 1.7%, still more than double the growth of the number two performer in the sector. HME acquired six communities [$132.3 million] in Q2. HME's strategic plan is geared towards doubling in size over the next several years. Downside Sell Criteria: (1) any dividend drop; (2) failure to grow FFO/share by at least 3% [6.06% is expected for UDR, 6.79% for HME]; [Note from 12-23-02: Those expectations have proven far too optimistic. UDR's 03 FFO is expected to be 1.62, a penny drop from 02. A drop in expectations to 1.50 without a simular percentage drop in the sector would be a red flag. HME's 03 FFO is expected to be 3.04, a five cent improvement. A drop to 2.85 would be a red flag. HME is the only top ten market cap Apt. REIT expected to increase FFO in 03 - and UDR has a smallest expected decrease.] and (3) a drop to below average in analyst recommendations. Upside Sell Criteria: (1) A price that increases 40% in less than 18 months without an accompanying change in FFO growth or (2) a NAV that grows more than 30 points [SNL's Price/NAV @ 10% is 139.8% for UDR and 182.0% for HME - but Bear Stearns put a book or NAV value for HME at $33/share, giving it a NAV of 94.5% when a 7.5% Cap Rate is used by them]. Note: The lowest NAV for the large cap apartment REITs was EOP's at 136.8%. AMB is the second largest Industrial REIT with the third highest expected FFO growth in '03 [8.43%] - PLD finishing in first in cap and second in FFO [8.62%]. AMB's Price/NAV @ 9% is 85.6%. The mean for Industrial's was 94.1%. PLD's Price/NAV @ 9% is 228.7%. I let E.D. Jones's sell rating on CNT [Jone's only sell rating on REITs] scare me off that one. But CNT had the highest expect FFO growth [13.82%] and a better history of dividend growth. CNT's NAV was even higher than PLD's [247.0]. Price-to-Book echoed the NAV results. Payout-to-FFO stats showed AMB at 62.2%, PLD at 63.9% and CNT at 103.1%. So AMB won with acceptable growth, good NAV's and a safe pay-out ratio. [I could have picked up a better dividend with Liberty Property Trust, First Industrial Realty or Keystone Property Trust, but none of them had positive FFO/share growth over the last 12 months. That, plus the lower analyst ratings, nudged me away from them] Downside Sell Criteria: (1) any dividend drop; (2) failure to grow FFO/share by at least 4%; and (3) a drop to below average in analyst recommendations. Upside Sell Criteria: (1) A price that increases 35% in less than 18 months without an accompanying change in FFO growth or (2) a NAV that grows above 125%. VNO was purchased in March of this year. Its 2.0 analyst recommendation is second highest in the diversified sector. Its dividend growth since '97 [of 93%] is the highest in its sector. VNO's Price/NAV @ 10% is 86.3% is well below average. VNO's expected FFO growth in '03 is 18.61% - not only highest in its sector, but it is too high to be believed. Second choice RA had expected FFO growth in '03 of 6.07% and a price/NAV @ 10% of 80.0%. Third choice DRE had expected FFO growth in '03 of 6.11% and a price/NAV @ 10% of 113.0%. So VNO gives the expectation of growth at a value price - the best of both worlds. At 120 shares, VNO represents 14.7% of the ten stock portfolio. If VNO and HIW prove to be winning bets - then this ten stock group should beat the RWR and ICF indexes. Downside Sell Criteria: (1) any dividend drop; (2) failure to grow FFO/share by at least 6% [18% growth is expected]; and (3) a drop to below average in analyst recommendations. Upside Sell Criteria: (1) A price that increases 35% in less than 18 months without an accompanying change in FFO growth or (2) a NAV that grows above 115%. The HR purchase was a small mistake - it should have been HCN. Both HCN [127.4] and HR [122.7] had a lower price/NAV @ 10% than HCP [145.1] - the largest of the Health Care REITs. HCP's expected FFO growth in '03 is 4.06% vs HCN's 6.01% and HR's 2.96%. HCN and HR both have higher analyst recommendations (2.0) than HCP (2.4). The dividend/'03 EPS ratio of HR = 88.1%, HCN = 83.4% and HCP = 91.6% - stats that are echoed in the Feb-02 SNL article on the problem in low coverage ratios in Health Care REITs - where data on HR was not included. I would have preferred to go with the postives in FFO growth and dividend coverage of HCN. But HR does give an equal analyst recommendation and a better NAV. It was a small mistake. Downside Sell Criteria: (1) any dividend drop; (2) failure to grow FFO/share; and (3) a drop to below 2.5 in analyst recommendations. Upside Sell Criteria: (1) A price that increases 35% in less than 18 months without an accompanying change in FFO growth or (2) a NAV that grows above 150%. A final note - I made three dummy portfolios at a tracking site in which to measure the wisdom of the above choices - one being comprised of large cap REITs and two of index REIT funds (RWR and ICF). I will post the results at the end of the quarter for the next 4 quarters. The time and effort of picking stocks was large - so the results of this effort need to be measurable. Portfolio Update as of 12-20-02, above group is up $1566.00 compared to RWR (assuming a begining potfolio of an equal $29,900.00 investment in 271.2 shares) being up $913.49 and ICF being up $1,321.25 (a portfolio of 382.3 shares with a $632.22 dividend). The dummy portfolio of the biggest REITs is acually down, being drug there by HCP. Portfolio is also ahead of share equivalent RMS, NAREIT 'All REITs' and NARIET 'Equity REIT' performance.
Ten malls were sold in tertiary markets in the third quarter, while only two were sold in the top 20 metro areas. Transaction volume totaled about $456.2 million for malls in tertiary markets, compared with about $30 million for malls in major markets, according to Real Capital Analytics. The returns on malls in tertiary and secondary markets were about 9.5% to 10.25%, compared with about 8% for malls in major markets, says Douglas Healy, principal-managing director at Lend Lease Real Estate Investments Inc. in Atlanta, which has been selling malls in secondary markets on behalf of pension-fund clients. But the time for seeing these malls as relatively affordable buying opportunities may be nearing an end. Some analysts say there already are indications that prices of mall assets have risen, marking down the higher yields for the tertiary mall. Quick Facts, Stats & Opinions Value Investor Likes Host Mariot What seems most cheap to me now are companies like Park Place Entertainment, [the world's largest hotel-casino operator], and Host Marriott [the REIT]. Both are selling at depressed prices because travel is way down, but that's something we think is temporary. In both cases we think they could get back to their 2000-type earnings by 2004. If they do so, we should earn about a 25% [annualized] gain between now and then. (Wally Weitz, Weitz Partners Value Fund - which had averaged a 13% annualized gain in the 15 years ending Sept. 30 - WSJ 10-31) Research Shrinks CIBC World Markets Corp. has exited the real-estate investment trust research business. This comes on the heels of J.P. Morgan Chase suspending analyst coverage of REITs and FleetBoston Financial Corp.'s shutdown of its Robertson Stephens investment-bank unit, including its REIT research team. "The thing to remember is that banking business pays for the research teams, and there's been no banking business and likely very little going forward for a while," says Keith Pomroy, senior real-estate editor at SNL Financial. (Ray Smith, WSJ 10-30) Calpers Asset Allocation Calpers, the nation's largest public pension fund, with assets of $149 billion, approved a plan Tuesday to change its long-term investment strategy. The fund will cut its fixed-income allocation target by two percentage points to 26%, and increase its private equity and real estate targets by a point each, to 7% and 9%, respectively. Calpers's target for conventional U.S. equity will remain unchanged at 39% as will the target for international equity at 19%. (WSJ 10-16) Retail Sector is OK Strip centers held steady with a 7% vacancy rate in the latest period, same as in the second quarter and up from 6.3% a year earlier, according to Reis. But regional malls continued to surprise with vacancies of 6%, up only slightly from 5.8% in the second quarter and the year-earlier period. Mall retailers took up an additional 4.9 million square feet in the third quarter, despite growth in same-store retail sales that has been very weak. Les Morris, a spokesman for Indianapolis-based Simon Property Group says rents and occupancies at the real-estate investment trust have both improved this year from 2001, "and we don't see any change in that for the balance of the year." (Dean Starkman, WSJ 10-9) If Bubble is Pricked If the real-estate bubble is pricked, don't expect it to re-inflate again anytime soon. When real-estate prices crashed in the late 1980s and early 1990s, they didn't rebound for years. "We have seen long stretches of time when real estate is sort of a neglected asset class," says William Goetzmann, professor at the Yale School of Management. "It's certainly possible for that to happen again." (Ray Smith, WSJ 10-10) Zell's Forecast Sam Zell, chairman of three REITs, said that while U.S. markets remain weak for commercial property investors, conditions are slowly improving. He predicted a better market for landlords in 2003, when a paucity of new construction could drive up rents in office and apartment buildings. With REIT stocks trading at a discount of about 20 percent to the value of the assets they own, yield-hungry investors will add them to their portfolios, he said. But he tempered his optimism with a warning that inflation will return to the economy, slicing corporate profits and perhaps causing business expansions to grind to a halt. The basis for his fear is a massive increase in government spending to fund the war against terrorism. (David Roeder, Chicago Sun Times 9-27) Dallas Office Market The floodwaters of empty office space just keep rising in North Texas. The totals are 49.7 million square feet of vacancy, or 27%. [National office vacency is around 15%.] Counting sublease space, almost 50 million square feet of vacant office space is available in the Dallas-Fort Worth area, according to third-quarter office market estimates done by broker Studley Inc. There's more vacant office space on the market than was built in D-FW during the last seven years. The average office rent is currently $18.34 per square foot annually, compared with more than $20 per square foot last year. And those prices don't include concessions such as free rent and tenant finish-out. (Steve Brown, Dallas Morning News 9-27) Home Page Previous REIT Update Top Sites
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