REIT Disappearance

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REIT Disappearance

Post by White Coat Investor » Tue Mar 03, 2009 11:26 am

The asset class I hold that I think would be most likely to go to zero without requiring a nuclear war or other horrific catastrophe is REITs. Like any individual bank, any given REIT tends to be highly leveraged and can go bankrupt. Of course, given the 75% loss this sector has seen, one starts thinking what if A LOT of these REITs started going bankrupt and disappearing from the index. So I took a look at the NAREIT site and was surprised to see that the number of REITs actually fluctuates quite a bit.

It is no surprise to see that Equity REIT capitalization has dropped from $400 B to $176 B, but 25 of 138 of them have disappeared completely (merged?, taken private?, went bankrupt?). Of course, in the midst of the REIT bubble we lost 38 of 176 over 10 years, so this might not mean much.

Anybody know where these REITs are going and know how many of them have gone bankrupt as opposed to going private or merging?
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Post by Opponent Process » Tue Mar 03, 2009 11:40 am

remember equity office went private. I'd guess several switched out of REIT status.

I don't really see the need to overweight REITs. however, for those who do, I also don't see any reason to abandon them. before this recent little mess, the number of REITs worldwide was growing, i.e. the structure would seem to be a popular one and as soon as we can move on, REITs should continue their growth (probably stronger than before with a few weeds removed).
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Re: REIT Disappearance

Post by Valuethinker » Tue Mar 03, 2009 12:41 pm

EmergDoc wrote:The asset class I hold that I think would be most likely to go to zero without requiring a nuclear war or other horrific catastrophe is REITs. Like any individual bank, any given REIT tends to be highly leveraged and can go bankrupt. Of course, given the 75% loss this sector has seen, one starts thinking what if A LOT of these REITs started going bankrupt and disappearing from the index. So I took a look at the NAREIT site and was surprised to see that the number of REITs actually fluctuates quite a bit.

It is no surprise to see that Equity REIT capitalization has dropped from $400 B to $176 B, but 25 of 138 of them have disappeared completely (merged?, taken private?, went bankrupt?). Of course, in the midst of the REIT bubble we lost 38 of 176 over 10 years, so this might not mean much.

Anybody know where these REITs are going and know how many of them have gone bankrupt as opposed to going private or merging?
One sign of REIT cheapness is when private equity and management start to take them private.

Watch also for insider buying.

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Re: REIT Disappearance

Post by gatorman » Tue Mar 03, 2009 12:47 pm

Watch also for insider buying

VT- Do you know of any sites which focus on REIT insider transactions?
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Re: REIT Disappearance

Post by White Coat Investor » Tue Mar 03, 2009 1:06 pm

Valuethinker wrote:

One sign of REIT cheapness is when private equity and management start to take them private..
Seems like that would hurt those holding a public REIT index fund like Vanguard's for the long term, no?
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Re: REIT Disappearance

Post by bob90245 » Tue Mar 03, 2009 1:17 pm

EmergDoc wrote:
Valuethinker wrote:
One sign of REIT cheapness is when private equity and management start to take them private..
Seems like that would hurt those holding a public REIT index fund like Vanguard's for the long term, no?
No. I would say it would be similar to a takeover announcement. And generally, takeover announcements give a boost to stocks in the sector.

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Re: REIT Disappearance

Post by saurabhec » Tue Mar 03, 2009 1:23 pm

EmergDoc wrote:The asset class I hold that I think would be most likely to go to zero without requiring a nuclear war or other horrific catastrophe is REITs.
This is a very simplistic analysis, but if there were statistics available on what FFO is as a % of revenues for the REIT index, and one made the simplyfing assumptions that :
1) all costs are fixed so that a $1 reduction in revenues leads to a $1 reduction in FFO
2) market value of equity goes to zero if FFO goes to zero (ie can't pay any dividends)

Then one could estimate what reduction in revenues (rents) would lead to a 100% loss of equity market value.

For example, I think for apartment REITs FFO margins of 20% are not out of the realm of reasonableness, so a 20% decline in rents would wipe out the public equity.

Of course it is unlikely that if rents went down that much REITs would not find a way to cut operating costs by reducing staff salaries, cutting down on maintenance etc. However the above might provide a useful way to assess current dividend yields as simply looking at payout ratios and estimates for 2009 FFO might be misleading (analysts might be too optimistic about 2009). Might not be totally unexpected if REIT dividends are cut in half in a worst-case scenario.

For someone looking to establish a position in REITs I think it makes sense to wait a bit for Q1 earnings to come out and for 2009 to be reset to more realistic levels. In fact I think it might even be worthwhile to wait till Q2 earnings come out as there might be a lag between deterioration in employment and declining occupancy rates.

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Post by Murray Boyd » Tue Mar 03, 2009 2:47 pm

I'm mostly taxable so I've never payed any attention to REITs. I just looked over at Morningstar. Holy cow! That is ugly.

At least it's yielding 12%. :)

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Post by G12 » Tue Mar 03, 2009 3:03 pm

For someone looking to establish a position in REITs I think it makes sense to wait a bit for Q1 earnings to come out and for 2009 to be reset to more realistic levels. In fact I think it might even be worthwhile to wait till Q2 earnings come out as there might be a lag between deterioration in employment and declining occupancy rates.
For the millionth time, I second that. Recently allowing REITs to pay distributions/dividends with additional shares instead of cash should be a screaming warning to steer clear of this nuclear waste yard. What would you like buddy, another share of sh*t or real cash? Sorry, we have no cash, you will have to like this sh*t. :shock:

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Post by Random Musings » Tue Mar 03, 2009 3:11 pm

I did nibble at this sector with about 1.5% exposure (now around 0.75% exposure). I recall that REIT's were a big chunk in the more optimal allocations to get to the "efficient frontier" not even two years ago.

Backtesting for EF calcs, even with more academia "acceptance" to these methodologies can have flaws.

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Post by LH » Tue Mar 03, 2009 7:44 pm

Do more REITS go bankrupt/dissapear than small cap stocks?

Its really unclear to me that REITS are more risky than a small cap stock per se. Also how about compared to just stocks in general, I would imagine several stocks are dissappearing/merging/bankrupting........

Just because they are leveraged, does not make that leverage more risky than a company per se, they are fundamentally different things, land ownership and business ownership. It seems concievable that leveraging land is less risky than similiarly leveraging a company. Everyone goes out and leverages there home to the hilt, thats not percieved as risky per se in the past, and despite current events, I expect it to continue in the future. Now I now homes=reit analogy is problematic, granted. But, Land is land, it sits there, exists, a business can be buggy whips, and just dissappear. Creative destruction of companies is par for the course, creative destruction of land???? I guess there is something akin to it, but really, maybe a superfund cleanup site, or detroit sure, but they are just fundamentally different animals. Detroit land still exists, and 30 years from now, the land might actually be worth something again. The buggy whip business is not expected to rise again (heh maybe it will). I do not know if thats the case, that land leverage is less risky than business leverage, but it seems plausible.

Are more REITS dissappearing than small caps stocks disappearing?

This appears to be the most easily answerable question. I do not know the answer.

neat topic,

LH

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Post by Beagler » Tue Mar 03, 2009 7:51 pm

I'd love to know if Mr. Ferri is still asking his clients to rebalance into REITS. I trust his take on the market and investing.
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Post by Beagler » Tue Mar 03, 2009 7:59 pm

Well, at least VG's REIT fund (VGSIX) is still ahead of TSM

$10K invested 10 yrs ago now worth
VGSIX = $13,582
VTSMX = $7,709


("But who invests all at once, yadda yadda yadda." Hey, VG puts these numbers up on their web site, OK?)
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Post by DaveS » Tue Mar 03, 2009 8:07 pm

If they are disappearing, keep the certificates, they might be valuable someday as antiques - sort of like old mining certificates.

When Zell sold Equity Office to Blackstone. I decided to take the hint and roll out of REIT. Mostly I replaced them with Utilities (XLU and DBU) and TIPS. I did not post anything because I did not have enough confidence I was right. But I think to move saved me quite a bit. The conventional wisdom regarding REITS is that they are not affected by inflation or deflation but do poorly when there is over building resulting in vacancies. I would say they are overbuilt right now. Like others I would love to know Rick's advice. Dave

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Post by supertreat » Tue Mar 03, 2009 11:19 pm

I couldn't wait any longer and am now buying REITs. I don't see how you can lose with them at this point if you're going to hold them long term...
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Post by Gekko » Tue Mar 03, 2009 11:23 pm

Stay Away from Malls

Howard Davidowitz expects the real estate collapse will spread to the malls, and is looking for a large number of them to close.

http://www.youtube.com/watch?v=I97IPJOH_fM

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Post by saurabhec » Wed Mar 04, 2009 3:26 am

supertreat wrote:I couldn't wait any longer and am now buying REITs. I don't see how you can lose with them at this point if you're going to hold them long term...
I have been watching the REITs fairly closely - don't have even an initial position in them yet, but want to take a long-term position of 5-10% of portfolio). I would urge caution, things are at an inflection point. Most REITs I think are still assuming modest low single-digit growth in NOI, which is probably not going to happen.

If you looked at my admittedly simplistic analysis you should be able to see that what might seem like small declines in revenues can really hammer FFO because of their largely fixed cost structure (at least in short-run). This in turn will lead to reduced dividends and hence reduced stock prices.

I suspect you are tempted by dividend yields. To me however it looks like the value trap that hurt a lot of legendary investors in financials. This bear market is quite unique and one has to consider worst case scenarios. Also remember that many REITs are now paying dividends in stock as noted by another poster. When a REIT will pay a stock dividend its stock price will theoretically decline by the same amount (this should hold true for cash dividends as well, but I think in the real world stock price more sensitive to former mode of dividend payments).

It's not like buying stock in some cylical industrial with a 4%-5% current dividend yield, that might still be able to make dividend payments if they have a low payout ratio before the downturn hit. It would not surprise me at all if REITs cut dividends in half or something drastic like that. Remember they their rents and occupancy levels are more levered to unemployment than anything else and that statistic is still rising.

The way I look at it, I would rather risk my missing the bottom and investing 15%-20% up from the bottom rather than risk another 35%-50% decline. I think the latter is a real possibility and could result in fundamental changes to the public REIT asset class in terms of both perception as a legit asset class as well as result in a situation where best public REITs choose to go private, so you are left with mediocre REITs.

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Post by Valuethinker » Wed Mar 04, 2009 3:37 am

saurabhec wrote:
supertreat wrote:I couldn't wait any longer and am now buying REITs. I don't see how you can lose with them at this point if you're going to hold them long term...
I have been watching the REITs fairly closely - don't have even an initial position in them yet, but want to take a long-term position of 5-10% of portfolio). I would urge caution, things are at an inflection point. Most REITs I think are still assuming modest low single-digit growth in NOI, which is probably not going to happen.

If you looked at my admittedly simplistic analysis you should be able to see that what might seem like small declines in revenues can really hammer FFO because of their largely fixed cost structure (at least in short-run). This in turn will lead to reduced dividends and hence reduced stock prices.

I suspect you are tempted by dividend yields. To me however it looks like the value trap that hurt a lot of legendary investors in financials. This bear market is quite unique and one has to consider worst case scenarios. Also remember that many REITs are now paying dividends in stock as noted by another poster. When a REIT will pay a stock dividend its stock price will theoretically decline by the same amount (this should hold true for cash dividends as well, but I think in the real world stock price more sensitive to former mode of dividend payments).

It's not like buying stock in some cylical industrial with a 4%-5% current dividend yield, that might still be able to make dividend payments if they have a low payout ratio before the downturn hit. It would not surprise me at all if REITs cut dividends in half or something drastic like that. Remember they their rents and occupancy levels are more levered to unemployment than anything else and that statistic is still rising.

The way I look at it, I would rather risk my missing the bottom and investing 15%-20% up from the bottom rather than risk another 35%-50% decline. I think the latter is a real possibility and could result in fundamental changes to the public REIT asset class in terms of both perception as a legit asset class as well as result in a situation where best public REITs choose to go private, so you are left with mediocre REITs.

Good analysis.

Basically most REITs have financial gearing.

So falls in rental income (due to vacancies or to lower leases) have a disproportionate effect on free cash flow.

They are quite similar to other financial stocks in that regard.

The key is watching what insiders do. And, as you say, when the time is right, many will take their companies private-- to break up and sell the assets.

RE is a real 'insiders' industry. Insiders just do a lot better than outsiders, long term.

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Re: REIT Disappearance

Post by Valuethinker » Wed Mar 04, 2009 3:39 am

gatorman wrote:Watch also for insider buying

VT- Do you know of any sites which focus on REIT insider transactions?
gatorman
I don't per se.

Check Barron's (great source for all investment info).

Also SEC disclosures but these are indexed by company, I think.

Take privates will be the ultimate insider buys, and will occur in time.

I think insiders are sitting on their hands, because of the absence of bank financing and the uncertainty about how low this is going to go.

I am particularly bearish about retail mall owning REITs. The outlook for US retailers is just bloody (ex the Big Box value merchants, like IKEA or WalMart).

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Re: REIT Disappearance

Post by gatorman » Wed Mar 04, 2009 5:41 am

Valuethinker wrote:
gatorman wrote:Watch also for insider buying

VT- Do you know of any sites which focus on REIT insider transactions?
gatorman
I don't per se.

Check Barron's (great source for all investment info).

Also SEC disclosures but these are indexed by company, I think.

Take privates will be the ultimate insider buys, and will occur in time.

I think insiders are sitting on their hands, because of the absence of bank financing and the uncertainty about how low this is going to go.

I am particularly bearish about retail mall owning REITs. The outlook for US retailers is just bloody (ex the Big Box value merchants, like IKEA or WalMart).
IIRC ICF has ~12% invested in Simon Properties and Vornado and VNQ is somewhere around 10% invested in those two also. So there's a significant exposure to malls/shopping centers just in those two holdings. But I'd go a bit further in my pessimism in regard to real estate. The latest Fed Beige Book sums up the outlook for the commercial real estate sector quite nicely, and it's not pretty:
Real Estate and Construction
Commercial real estate markets deteriorated in most Districts. Contacts in the Boston District described the commercial real estate market as grim and depressing, and market conditions continued to deteriorate in Richmond. In the Minneapolis District, a contact noted that the market remained in a downturn that has now lasted more than a year. Commercial real estate transactions in the Dallas District have reportedly ground to a halt. Leasing activity was minimal in the Boston District, continued to fall in the Philadelphia District, and was assessed as ranging from slowing to frozen in the Richmond District. Contacts in the Chicago District reported increases in sublease space. Office and industrial leasing is expected to remain steady through the first half of 2009 in the St. Louis District, but San Francisco reported that conditions in their commercial office market remained exceptionally weak. The New York District reported that Manhattan's office vacancy rate climbed to its highest level in two years. Contacts in the Chicago District noted elevated vacancy rates, and contacts in the Kansas City District expected higher vacancy rates going forward. Contacts in the Atlanta District also anticipate that more commercial space will become available.
quote]
gatorman

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Re: REIT Disappearance

Post by Valuethinker » Wed Mar 04, 2009 5:45 am

gatorman wrote:
Valuethinker wrote:
gatorman wrote:Watch also for insider buying

VT- Do you know of any sites which focus on REIT insider transactions?
gatorman
I don't per se.

Check Barron's (great source for all investment info).

Also SEC disclosures but these are indexed by company, I think.

Take privates will be the ultimate insider buys, and will occur in time.

I think insiders are sitting on their hands, because of the absence of bank financing and the uncertainty about how low this is going to go.

I am particularly bearish about retail mall owning REITs. The outlook for US retailers is just bloody (ex the Big Box value merchants, like IKEA or WalMart).
IIRC ICF has ~12% invested in Simon Properties and Vornado and VNQ is somewhere around 10% invested in those two also. So there's a significant exposure to malls/shopping centers just in those two holdings. But I'd go a bit further in my pessimism in regard to real estate. The latest Fed Beige Book sums up the outlook for the commercial real estate sector quite nicely, and it's not pretty:
Real Estate and Construction
Commercial real estate markets deteriorated in most Districts. Contacts in the Boston District described the commercial real estate market as grim and depressing, and market conditions continued to deteriorate in Richmond. In the Minneapolis District, a contact noted that the market remained in a downturn that has now lasted more than a year. Commercial real estate transactions in the Dallas District have reportedly ground to a halt. Leasing activity was minimal in the Boston District, continued to fall in the Philadelphia District, and was assessed as ranging from slowing to frozen in the Richmond District. Contacts in the Chicago District reported increases in sublease space. Office and industrial leasing is expected to remain steady through the first half of 2009 in the St. Louis District, but San Francisco reported that conditions in their commercial office market remained exceptionally weak. The New York District reported that Manhattan's office vacancy rate climbed to its highest level in two years. Contacts in the Chicago District noted elevated vacancy rates, and contacts in the Kansas City District expected higher vacancy rates going forward. Contacts in the Atlanta District also anticipate that more commercial space will become available.
quote]
gatorman
Commercial RE is long cycle. It bottoms well after the economy bottoms, normally. REIT prices may move up in anticipation of a recovery though, earlier than that.

This cycle, apartment rents (the most stable REIT business) could come under pressure, as the US is 'over housed' and there are moves to turn all these houses that default into rental properties. Also condos being rented out will be a big factor.

Thank you for your quote, also Calculated Risk has been on top of this story for months. Lead cycle items like architects billings have been plunging, in fact Frank Gehry (of Bilbao Art Gallery fame, also Brooklyn towers and the LA Boulevard projects) has just laid off half his staff.

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Re: REIT Disappearance

Post by gatorman » Wed Mar 04, 2009 6:09 am

Valuethinker wrote:
gatorman wrote:
Valuethinker wrote:
gatorman wrote:Watch also for insider buying

VT- Do you know of any sites which focus on REIT insider transactions?
gatorman
I don't per se.

Check Barron's (great source for all investment info).

Also SEC disclosures but these are indexed by company, I think.

Take privates will be the ultimate insider buys, and will occur in time.

I think insiders are sitting on their hands, because of the absence of bank financing and the uncertainty about how low this is going to go.

I am particularly bearish about retail mall owning REITs. The outlook for US retailers is just bloody (ex the Big Box value merchants, like IKEA or WalMart).
IIRC ICF has ~12% invested in Simon Properties and Vornado and VNQ is somewhere around 10% invested in those two also. So there's a significant exposure to malls/shopping centers just in those two holdings. But I'd go a bit further in my pessimism in regard to real estate. The latest Fed Beige Book sums up the outlook for the commercial real estate sector quite nicely, and it's not pretty:
Real Estate and Construction
Commercial real estate markets deteriorated in most Districts. Contacts in the Boston District described the commercial real estate market as grim and depressing, and market conditions continued to deteriorate in Richmond. In the Minneapolis District, a contact noted that the market remained in a downturn that has now lasted more than a year. Commercial real estate transactions in the Dallas District have reportedly ground to a halt. Leasing activity was minimal in the Boston District, continued to fall in the Philadelphia District, and was assessed as ranging from slowing to frozen in the Richmond District. Contacts in the Chicago District reported increases in sublease space. Office and industrial leasing is expected to remain steady through the first half of 2009 in the St. Louis District, but San Francisco reported that conditions in their commercial office market remained exceptionally weak. The New York District reported that Manhattan's office vacancy rate climbed to its highest level in two years. Contacts in the Chicago District noted elevated vacancy rates, and contacts in the Kansas City District expected higher vacancy rates going forward. Contacts in the Atlanta District also anticipate that more commercial space will become available.
quote]
gatorman
Commercial RE is long cycle. It bottoms well after the economy bottoms, normally. REIT prices may move up in anticipation of a recovery though, earlier than that.

This cycle, apartment rents (the most stable REIT business) could come under pressure, as the US is 'over housed' and there are moves to turn all these houses that default into rental properties. Also condos being rented out will be a big factor.

Thank you for your quote, also Calculated Risk has been on top of this story for months. Lead cycle items like architects billings have been plunging, in fact Frank Gehry (of Bilbao Art Gallery fame, also Brooklyn towers and the LA Boulevard projects) has just laid off half his staff.
Here is the entire report on real estate and construction from the Beige Book. It is a dismal report:

Real Estate and Construction
Residential real estate activity continued to weaken in nearly all Districts. Boston, Philadelphia, Cleveland, Richmond, Atlanta, St. Louis, Kansas City, and Dallas reported that home sales were weak or had declined. San Francisco reported that despite some pickup in recent months, home sales continued to be quite slow in most parts of the District. In the New York District, the market for new homes continued to weaken in New Jersey, and the higher-priced housing markets nearest to New York City were characterized as especially weak. While the Minneapolis District reported that late December saw an up-tick in residential sale activity in the Minneapolis-St. Paul area, it was reportedly driven by foreclosures and short sales. Increased home sale cancellations were common in a few Districts. Contacts in the Dallas District reported that home sale cancellations remained prevalent, in some cases outpacing sales. Elevated cancellation rates and weak showroom traffic in the Chicago District led developers to remain cautious about expanding inventory levels, and some building contractors in the Cleveland District reported increased inventories because of take-backs from home sales that fell through. Boston, Philadelphia, Atlanta, Kansas City, and San Francisco reported that home prices continued to soften or fall. Median selling prices declined in and around New York City and were reported to have edged down in the Dallas District. Richmond, however, reported that home prices remained steady.

Reporting Districts generally saw a decrease in homebuilding. Atlanta reported that homebuilders continued to pull back on home construction. The Philadelphia and Chicago Districts noted that residential building continued its decline. Residential construction was down in the St. Louis District, remained weak in Cleveland, and was quiet in Minneapolis.

Commercial real estate markets deteriorated in most Districts. Contacts in the Boston District described the commercial real estate market as grim and depressing, and market conditions continued to deteriorate in Richmond. In the Minneapolis District, a contact noted that the market remained in a downturn that has now lasted more than a year. Commercial real estate transactions in the Dallas District have reportedly ground to a halt. Leasing activity was minimal in the Boston District, continued to fall in the Philadelphia District, and was assessed as ranging from slowing to frozen in the Richmond District. Contacts in the Chicago District reported increases in sublease space. Office and industrial leasing is expected to remain steady through the first half of 2009 in the St. Louis District, but San Francisco reported that conditions in their commercial office market remained exceptionally weak. The New York District reported that Manhattan's office vacancy rate climbed to its highest level in two years. Contacts in the Chicago District noted elevated vacancy rates, and contacts in the Kansas City District expected higher vacancy rates going forward. Contacts in the Atlanta District also anticipate that more commercial space will become available.

Reports about commercial construction activity also were downbeat. In the Philadelphia District, commercial construction activity continued to fall. Cleveland reported that construction backlogs have declined for some contractors. Commercial contractors in the Atlanta and Chicago Districts reported declines in building activity and noted that more projects were cancelled or postponed. In St. Louis, contacts in commercial and industrial construction predicted a challenging environment in early 2009. San Francisco reported that commercial construction activity was very limited. Construction-related manufacturing contacts in the Dallas District reported that demand from commercial construction is shrinking rapidly.
gatorman

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Post by tadamsmar » Wed Mar 04, 2009 12:09 pm

Is it bad or good for sector investors when firms in a sector are going private?

Seems like the investors might get less than book value for the sector, no chance for a stock that drops below book to bounce back if a firm goes private.

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Post by saurabhec » Wed Mar 04, 2009 1:52 pm

tadamsmar wrote:Is it bad or good for sector investors when firms in a sector are going private?

Seems like the investors might get less than book value for the sector, no chance for a stock that drops below book to bounce back if a firm goes private.
Well they will probably have to pay public investors at least some modest premium to take them private so in that way it is a good, but long-term it means they see private real estate as having better returns than public real estate. TIAA has a real estate fund that is structured as a variable annuity so that might be an option for some if there is a big disconnect between public and private. However right now that fund is probably lagging the public market in marking down its holdings and NAV.

I think that at some point public REITs could be setup to provide for good returns even if the top talent takes their REITs private, but not if there is a massive change in the composition of the public REIT asset class in terms of both properties and management.

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Post by gatorman » Wed Mar 04, 2009 7:22 pm

The new Fed Beige book came out today. Here is the summary for real estate:
Real Estate and Construction
Residential real estate markets remained in the doldrums in most areas, with on scattered, very tentative signs of stabilization reported. The pace of sales remained very low in most areas and declined further in some; most Districts reported small declines, but New York cited a sales drop of 60 to 65 percent in Manhattan compared with twelve months earlier. By
contrast, Cleveland, Richmond, Dallas, and San Francisco each reported a rising or better-thanv expected sales pace for existing or new homes in some areas, attributed largely to falling prices and improved financing terms for some types of home mortgages. House prices continued to
decline, reportedly at double-digit paces in some areas, with little or no signs of a deceleration evident. Builders in various Districts generally remain pessimistic regarding recovery prospects this year, and consequently the pace of new home construction declined further in most areas.
Demand for commercial, industrial, and retail space fell further during the reporting period, with some evidence of more rapid deterioration than in preceding periods. Vacancy rates rose and lease rates declined on a widespread basis; New York noted that commercial real estate
markets “weakened noticeably,” while Atlanta described reports on commercial real estate that were “decidedly more negative” than in previous periods. Construction activity has declined commensurately, and assorted reports suggest that market participants expect this weakness to
continue at least through the end of 2009. Cleveland noted that public works projects have shown stability of late, although they declined in the San Francisco District as a result of the budgetary struggles of some state and local governments there. Credit constraints and uncertainty were reported to be a drag on commercial construction and leasing activity in the Philadelphia, Chicago, Dallas, and San Francisco Districts.
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Stay away from REITS

Post by SmallHi » Wed Mar 04, 2009 8:17 pm

Hopefully this > 75% downturn in REITS has showed people that :

a) REITs are riskier than stocks (they have higher standard deviation than the S&P 500 since the Wilshire inception in 78 )
b) REITS have more concentration risk (its just one industry, how much wealth the world holds in real estate is not an excuse)
c) they don't necessarily have low correlations to stocks and bonds when you need them most (see 1990, 1998, and 2008 for examples: the 00-02 period was the exception and not the rule)
d) they don't have higher expected returns than stocks (they've underperformed the S&P 500 since the Wilshire inception in 78 )
e) they are not a replacement for Large Value or Small Value strategies, or tilting away from the market in general
f) if you want to introduce tracking error to a portfolio -- get something for it...whether thats the lower risk of bonds, the diversification benefit of foreign, or the higher potential returns of small and value.

Hopefully we can all get over this REIT fad and go back to portfolios of stocks and bonds, where the main stock decision is how much US vs. Int'l and how much to tilt to small cap and value. Everything else is just noise.

sh

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Re: Stay away from REITS

Post by saurabhec » Wed Mar 04, 2009 9:52 pm

SmallHi wrote: f) if you want to introduce tracking error to a portfolio -- get something for it...whether thats the lower risk of bonds, the diversification benefit of foreign, or the higher potential returns of small and value.
sh
I have recently been studying the historical returns of REITs and much to my surprise did find them to be more volatile than I suspected, far more equity like than I had previously assumed.

In fairness though I think most investors look to REITs as equity with better inflation hedging characteristics than other equities rather than as vehicles that will go down less in recessions than equities. Coming out of the 1973-74 bear market REITs did significantly outperform large-cap US stocks during a period of unexpected high inflation. Granted, small cap stocks had a golden run during this period as well, so tilting to small would have had similar results.

Intuitively the inflation hedging characteristics of REITs are more understandable than small cap stocks and for investors who need the dividend income (such as retirees) they do have some things to recommend themselves. My personal view however is that if one is very concerned about unexpected inflation then TIPS are the first vehicles investors should turn to, before REITs, and they offer interest income as well.

Right now it is a distressed asset class and that in itself is causing me to follow them because there is always a chance that they might get so beaten up that they might actually offer a better risk-reward tradeoff than stocks going forward.

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Re: Stay away from REITS

Post by rokid » Wed Mar 04, 2009 10:12 pm

SmallHi wrote:Hopefully we can all get over this REIT fad and go back to portfolios of stocks and bonds, where the main stock decision is how much US vs. Int'l and how much to tilt to small cap and value. Everything else is just noise.sh
Not according to David Swensen.

In addition, my data show REITs with a somewhat higher volatility than the S&P 500, but with higher average and geometric returns since 1978. Kind of what you would expect - more risk, more return (eventually). Finally, the S&P 500/REIT correlation is lower than the S&P 500/MS EAFE correlation for the same period.------Jim

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Post by supertreat » Wed Mar 04, 2009 10:58 pm

saurabhec wrote:
supertreat wrote:I couldn't wait any longer and am now buying REITs. I don't see how you can lose with them at this point if you're going to hold them long term...
I have been watching the REITs fairly closely - don't have even an initial position in them yet, but want to take a long-term position of 5-10% of portfolio). I would urge caution, things are at an inflection point. Most REITs I think are still assuming modest low single-digit growth in NOI, which is probably not going to happen.

If you looked at my admittedly simplistic analysis you should be able to see that what might seem like small declines in revenues can really hammer FFO because of their largely fixed cost structure (at least in short-run). This in turn will lead to reduced dividends and hence reduced stock prices.

I suspect you are tempted by dividend yields. To me however it looks like the value trap that hurt a lot of legendary investors in financials. This bear market is quite unique and one has to consider worst case scenarios. Also remember that many REITs are now paying dividends in stock as noted by another poster. When a REIT will pay a stock dividend its stock price will theoretically decline by the same amount (this should hold true for cash dividends as well, but I think in the real world stock price more sensitive to former mode of dividend payments).

It's not like buying stock in some cylical industrial with a 4%-5% current dividend yield, that might still be able to make dividend payments if they have a low payout ratio before the downturn hit. It would not surprise me at all if REITs cut dividends in half or something drastic like that. Remember they their rents and occupancy levels are more levered to unemployment than anything else and that statistic is still rising.

The way I look at it, I would rather risk my missing the bottom and investing 15%-20% up from the bottom rather than risk another 35%-50% decline. I think the latter is a real possibility and could result in fundamental changes to the public REIT asset class in terms of both perception as a legit asset class as well as result in a situation where best public REITs choose to go private, so you are left with mediocre REITs.
I appreciate the concern. I haven't put in much money-just the minimum buy in as I am just beginning my career and retirement portfolio. We'll see what happens in the next couple quarters with respect to your analysis. I hope we don't see another 50% decline in REITs but if we do... I'll be buying more at that point.
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Re: Stay away from REITS

Post by Valuethinker » Thu Mar 05, 2009 12:08 pm

rokid wrote:
SmallHi wrote:Hopefully we can all get over this REIT fad and go back to portfolios of stocks and bonds, where the main stock decision is how much US vs. Int'l and how much to tilt to small cap and value. Everything else is just noise.sh
Not according to David Swensen.

In addition, my data show REITs with a somewhat higher volatility than the S&P 500, but with higher average and geometric returns since 1978. Kind of what you would expect - more risk, more return (eventually). Finally, the S&P 500/REIT correlation is lower than the S&P 500/MS EAFE correlation for the same period.------Jim
The volatility is a function NOT of the volatility of real estate as an asset class (which is below that of stocks: leases last a long time) BUT the leverage of quoted REITs.

So an unquoted RE partnership like TIAA RE should have lower volatility than the stock market (and lower long run returns)

HOWEVER I suspect TIAA RE is due a significant downgrade in NAV as it lags the quoted REITs.

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Post by plake15 » Thu Mar 05, 2009 12:23 pm

VG REIT fund is down if you include today's -5% drop,about -43% YTD...

talk about just getting absolutely slammed wow

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Re: Stay away from REITS

Post by JasonR » Thu Mar 05, 2009 1:11 pm

SmallHi wrote: Hopefully we can all get over this REIT fad and go back to portfolios of stocks and bonds, where the main stock decision is how much US vs. Int'l and how much to tilt to small cap and value. Everything else is just noise.
I'm there. Transferred my entire REIT (VGSIX) postion (5% of portfolio) back into VISVX yesterday. Plugged it into M*star and my asset allocation seems pretty much the same. I lost my faith that REITs would come back as quickly or completely as the broader small/mid cap world. Stock/bond ratio remains unchanged. Good luck all.

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Post by G12 » Thu Mar 05, 2009 1:20 pm

Not according to David Swensen.

In addition, my data show REITs with a somewhat higher volatility than the S&P 500, but with higher average and geometric returns since 1978. Kind of what you would expect - more risk, more return (eventually). Finally, the S&P 500/REIT correlation is lower than the S&P 500/MS EAFE correlation for the same period.------Jim
One has to take into account how cheaply commercial RE could be acquired after the S&L debacle and RTC disposition of assets, and, then into the 2000's with absurdly low interest rates for leveraged deals continuing to drive valuations while dividends shrank to anemic levels. That is the crux of valuation matters when buying any asset. For those looking at interest rates and property valuation who bought and continued adding in and after 2000, then sold in 2006 and/or through mid-2007, great returns were realized. REITs at one time were more than 20% of my equity holdings until selling in late 2006 and into 2007. Those that started buying REITs in 2006 and afterward and have continued buying may be waiting until hell freezes over to recover. I would say the outsized returns on REITs which were averaging over 20% during the run in the 2000's has greatly skewed the longer term returns and lures many investors into the sector. Maybe after the current CRE devaluation runs its course REITs become attractive again, but in the meantime I 100% concur with those espousing conservatism.

I have found that selling a sector fund is much easier than selling positions in holdings such as US total market, total international, etc. Don't know why this is, maybe its false expectations of greater protection from assumed equity diversification of the holdings, but it has cost me, and I assume many others, dearly. I also quit contributing to SCV months ago due to high concentration in financials.

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Post by White Coat Investor » Thu Mar 05, 2009 1:24 pm

G12 wrote:
Not according to David Swensen.

In addition, my data show REITs with a somewhat higher volatility than the S&P 500, but with higher average and geometric returns since 1978. Kind of what you would expect - more risk, more return (eventually). Finally, the S&P 500/REIT correlation is lower than the S&P 500/MS EAFE correlation for the same period.------Jim
One has to take into account how cheaply commercial RE could be acquired after the S&L debacle and RTC disposition of assets, and, then into the 2000's with absurdly low interest rates for leveraged deals continuing to drive valuations while dividends shrank to anemic levels. That is the crux of valuation matters when buying any asset. For those looking at interest rates and property valuation who bought and continued adding in and after 2000, then sold in 2006 and/or through mid-2007, great returns were realized. REITs at one time were more than 20% of my equity holdings until selling in late 2006 and into 2007. Those that started buying REITs in 2006 and afterward and have continued buying may be waiting until hell freezes over to recover. I would say the outsized returns on REITs which were averaging over 20% during the run in the 2000's has greatly skewed the longer term returns and lures many investors into the sector. Maybe after the current CRE runs its course REITs become attractive again, but in the meantime I 100% concur with those espousing conservatism.

I have found that selling a sector fund is much easier than selling positions in holdings such as US total market, total international, etc. Don't know why this is, maybe its false expectations of greater protection from assumed equity diversification of the holdings, but it has cost me, and I assume many others, dearly. I also quit contributing to SCV months ago due to high concentration in financials.
You may be right; it sounds like you certainly have been so far (all standard internet forum caveats apply of course). Perhaps REITs are exactly what tech stocks were in 2000. After dropping 80 or 90%, they've only grown at what, about the general growth rate of the broad market? I noticed reading some books that came out in the late 90s that many of them recommended a 5-15% position in tech and telecom. Sound familiar?

Perhaps REITs WON'T return to the mean and you'll do just as well with your moola in TSM or in SCV.

At this point though, it seems a bit too late to get out of REITs. I mean they're already down 75%. I think they're probably a pretty good buy now (of course I said that when they were down 50%.)
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Post by JasonR » Thu Mar 05, 2009 1:31 pm

EmergDoc wrote: Perhaps REITs WON'T return to the mean and you'll do just as well with your moola in TSM or in SCV.

At this point though, it seems a bit too late to get out of REITs....
Every day you own them is just like buying them all over again. You gotta ask yourself, am I better off buying REITs with this money, or TSM or SCV?

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Post by Opponent Process » Thu Mar 05, 2009 1:34 pm

G12 wrote: I would say the outsized returns on REITs which were averaging over 20% during the run in the 2000's has greatly skewed the longer term returns and lures many investors into the sector.
this is the main criticism of any tilt. it's all based on recency (even 100 years is recent). once the tracking error shows up, people dump the idea (at precisely the wrong time). I'm not so much unimpressed with the academic apologetics of tilting as I am with the idea that someone, ANYONE, would actually hold any tilted portfolio (adjusted for risk over time of course) for any reasonable amount of time (20-30 years). for that matter, I think very, very few people could even maintain a simple portfolio strategy (TSM/TBM) for any reasonable amount of time. humans are just too fickle, but IMO the only rational portfolio to hold is one that is capable of being held, and this is what young investors should meditate on. and this obviously goes for simple stock/bond allocation too.

slicing up portfolios just to sell off parts as they become cheap is ridiculous.
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Post by JasonR » Thu Mar 05, 2009 1:43 pm

Opponent Process wrote: slicing up portfolios just to sell off parts as they become cheap is ridiculous.
Depends what you buy with the proceeds, doesn't it? Buying other cheap equities seems reasonable.

Great point about the only resonable portfolio is the one you can live with.

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Post by jeffyscott » Thu Mar 05, 2009 2:02 pm

EmergDoc wrote:At this point though, it seems a bit too late to get out of REITs. I mean they're already down 75%. I think they're probably a pretty good buy now (of course I said that when they were down 50%.)
I've stopped adding, but not getting out just yet. However, it would seem to me that if getting out means putting the money into stocks, then it is only "too late" if the expected return of REITs exceeds that of stocks or if you expect them to recover more quickly than stocks. As far as the expected return, if m* is to be believed, it is not any higher for REITs than it is for stocks. M* has expected return of IYR at about 27% and SPY at 30%.
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Post by G12 » Thu Mar 05, 2009 2:04 pm

this is the main criticism of any tilt. it's all based on recency (even 100 years is recent). once the tracking error shows up, people dump the idea (at precisely the wrong time). I'm not so much unimpressed with the academic apologetics of tilting as I am with the idea that someone, ANYONE, would actually hold any tilted portfolio (adjusted for risk over time of course) for any reasonable amount of time (20-30 years). for that matter, I think very, very few people could even maintain a simple portfolio strategy (TSM/TBM) for any reasonable amount of time. humans are just too fickle, but IMO the only rational portfolio to hold is one that is capable of being held, and this is what young investors should meditate on. and this obviously goes for simple stock/bond allocation too.
I agree. It's easier if one has very stable long term employment, many of us do not. Estimating personal long term risk is very difficult, if not impossible. With that said, some long time RE investors are saying RE acquired over the next 2-years is where money in RE will be made over the next 25 years. Maybe it is, maybe it isn't. I'm not throwing stones at those buying REITs, it's just that a better investing time frame may be well into the future instead of now and why not hold available funds in something where risk is mitigated and still gives one the ability to invest later.

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Post by 3CT_Paddler » Thu Mar 05, 2009 4:28 pm

G12 wrote:
this is the main criticism of any tilt. it's all based on recency (even 100 years is recent). once the tracking error shows up, people dump the idea (at precisely the wrong time). I'm not so much unimpressed with the academic apologetics of tilting as I am with the idea that someone, ANYONE, would actually hold any tilted portfolio (adjusted for risk over time of course) for any reasonable amount of time (20-30 years). for that matter, I think very, very few people could even maintain a simple portfolio strategy (TSM/TBM) for any reasonable amount of time. humans are just too fickle, but IMO the only rational portfolio to hold is one that is capable of being held, and this is what young investors should meditate on. and this obviously goes for simple stock/bond allocation too.
I agree. It's easier if one has very stable long term employment, many of us do not. Estimating personal long term risk is very difficult, if not impossible. With that said, some long time RE investors are saying RE acquired over the next 2-years is where money in RE will be made over the next 25 years. Maybe it is, maybe it isn't. I'm not throwing stones at those buying REITs, it's just that a better investing time frame may be well into the future instead of now and why not hold available funds in something where risk is mitigated and still gives one the ability to invest later.
When it comes to sophisticated investments outside of stocks and bonds I plead ignorance. I don't really understand the long term investing value of REITs. The underlying asset is real estate which does have real value, but long term with the exception of maybe the last 20 years real estate has done no better than inflation. (I don't have any figures to back this up I have just read this in a couple different places.) It looks like that recent uptick in valuation has taken a significant dive and may settle back to near historical levels. Long term how can real estate do much better than inflation? I guess there are the benefits of tax efficiency. I just don't see REITs from an investment standpoint as safer than bonds or with as much long term potential as stocks. Looks like the worst of both worlds. Of course I would say the same thing about commodities. Anybody have any light to shine on this?

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Post by tutaloo » Thu Mar 05, 2009 6:55 pm

xx
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REITs

Post by nick22 » Thu Mar 05, 2009 8:40 pm

I still believe in real estate as an asset class, but obviously in a credit crunch/financial meltdown all leveraged entities are sinking together. This appears to include all corporations and consumers, with severe pain to financials and overleveraged REITs. My real estate holdings might sink too, but I have my RE money in the TIAA RE account, which at the very least should not be overleveraged. For the year it is down 4%, and the last time I checked its liabilities were only at 10% of its assets. I do get a little uneasy though, since right before the credit crash they held a proxy that allows them to go to 30% leverage. Hope they avoided that genius move.
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Re: REITs

Post by Valuethinker » Fri Mar 06, 2009 6:57 am

nick22 wrote:I still believe in real estate as an asset class, but obviously in a credit crunch/financial meltdown all leveraged entities are sinking together. This appears to include all corporations and consumers, with severe pain to financials and overleveraged REITs. My real estate holdings might sink too, but I have my RE money in the TIAA RE account, which at the very least should not be overleveraged. For the year it is down 4%, and the last time I checked its liabilities were only at 10% of its assets. I do get a little uneasy though, since right before the credit crash they held a proxy that allows them to go to 30% leverage. Hope they avoided that genius move.
Nick

The problem here is 'stale pricing'.

The commercial RE market is going down, but the fund will only reflect that with a lag.

I can't speak to their leverage, but falls in NAV are likely because US commercial RE indices are falling (based on transactions values). Redemptions could then lead to forced sales of assets at below NAV and further dilution of remaining shareholders. They might even have to block redemptions. This is what happened to similar structured funds in Europe.

Quoted REITs anticipate moves in RE valuations (exaggerated by financial leverage, up and down) but TIAA RE will lag it.

So there is a danger here. In the long run you should be alright and I would never want to panic someone out of a long term strategy.

However we have had many threads discussing this problem.

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Post by supertreat » Sat Aug 08, 2009 2:07 pm

supertreat wrote:
saurabhec wrote:
supertreat wrote:I couldn't wait any longer and am now buying REITs. I don't see how you can lose with them at this point if you're going to hold them long term...
I have been watching the REITs fairly closely - don't have even an initial position in them yet, but want to take a long-term position of 5-10% of portfolio). I would urge caution, things are at an inflection point. Most REITs I think are still assuming modest low single-digit growth in NOI, which is probably not going to happen.

If you looked at my admittedly simplistic analysis you should be able to see that what might seem like small declines in revenues can really hammer FFO because of their largely fixed cost structure (at least in short-run). This in turn will lead to reduced dividends and hence reduced stock prices.

I suspect you are tempted by dividend yields. To me however it looks like the value trap that hurt a lot of legendary investors in financials. This bear market is quite unique and one has to consider worst case scenarios. Also remember that many REITs are now paying dividends in stock as noted by another poster. When a REIT will pay a stock dividend its stock price will theoretically decline by the same amount (this should hold true for cash dividends as well, but I think in the real world stock price more sensitive to former mode of dividend payments).

It's not like buying stock in some cylical industrial with a 4%-5% current dividend yield, that might still be able to make dividend payments if they have a low payout ratio before the downturn hit. It would not surprise me at all if REITs cut dividends in half or something drastic like that. Remember they their rents and occupancy levels are more levered to unemployment than anything else and that statistic is still rising.

The way I look at it, I would rather risk my missing the bottom and investing 15%-20% up from the bottom rather than risk another 35%-50% decline. I think the latter is a real possibility and could result in fundamental changes to the public REIT asset class in terms of both perception as a legit asset class as well as result in a situation where best public REITs choose to go private, so you are left with mediocre REITs.
I appreciate the concern. I haven't put in much money-just the minimum buy in as I am just beginning my career and retirement portfolio. We'll see what happens in the next couple quarters with respect to your analysis. I hope we don't see another 50% decline in REITs but if we do... I'll be buying more at that point.
Well looks like I won the bet! I bought VGSIX for 3000$ on 3/3/09 current value is $5592 - that's a nice little run!
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Post by jeffyscott » Sat Aug 08, 2009 2:23 pm

EmergDoc wrote:At this point though, it seems a bit too late to get out of REITs. I mean they're already down 75%. I think they're probably a pretty good buy now (of course I said that when they were down 50%.)
As things have turned out, you were correct. $10,000 in REITS on March 5 would be worth about $19,500 today vs. under $15,000 for S&P 500.
Time is your friend; impulse is your enemy. - John C. Bogle

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A Classic Series of Posts

Post by Bill Bernstein » Sat Aug 08, 2009 2:47 pm

Hi All:

This thread needs to printed out and reread at intervals by all long-term investors.

The arguments against REITS in March seemed unassailable: the companies were horribly overleveraged, and they were all going to disappear into private equity via bankruptcy. The entire asset class was going to disappear.

Hang around long enough, and you'll realize that these sorts of doomsday arguments against an entire asset class send a message: This might not be a bad time to rebalance. We saw the same sort of sentiment against precious metals stocks in the mid-90s, against emerging markets stocks, and, ahem, REITS, in the late 90s.

Now, the biggest problem the REIT investor has is dealing with the overweight position in his or her portfolio.

When it comes to asset class sentiment, history does more than merely rhyme.

Best,

Bill

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Re: Stay away from REITS

Post by jeffyscott » Sat Aug 08, 2009 4:50 pm

SmallHi wrote: c) they don't necessarily have low correlations to stocks and bonds when you need them most (see 1990, 1998, and 2008 for examples: the 00-02 period was the exception and not the rule)
d) they don't have higher expected returns than stocks (they've underperformed the S&P 500 since the Wilshire inception in 78 )
As these points indicate, the REIT story was always about supposed low correlations. Never has it ben claimed that one should expect higher absolute returns from them, than from stocks. If they do not actually have low correlations, then there is no real reason to own them (unless, perhaps, they happen to be at depressed prices...more depressed than alternatives).

Just read a recently updated M* fund report for my REIT fund. They say that "the category's performance is becoming increasingly more correlated with small-value stocks, indicating that the early-decade diversification benefits may have really only been from avoiding the tech and dot com boom-and-bust cycle".
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Post by Rob't » Sat Aug 08, 2009 5:28 pm

Hi All:

This thread needs to printed out and reread at intervals by all long-term investors.
Thanks Dr Bernstein. Your point is well taken. I've saved it to favorites and put in a folder titled "Read When Confused."

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Post by White Coat Investor » Sat Aug 08, 2009 8:46 pm

jeffyscott wrote:
EmergDoc wrote:At this point though, it seems a bit too late to get out of REITs. I mean they're already down 75%. I think they're probably a pretty good buy now (of course I said that when they were down 50%.)
As things have turned out, you were correct. $10,000 in REITS on March 5 would be worth about $19,500 today vs. under $15,000 for S&P 500.
The night is always darkest before the dawn. Too bad I rebalanced in January rather than March. I think I'm actually still a little underweight in REITs.
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Post by bobcat2 » Sat Aug 08, 2009 9:25 pm

In each of the last four quarters the Vanguard REIT index fund has been up or down more than 30%. I think that extreme volatility is a very good reason not to own this stuff as a separate asset class. Why should commercial real estate holdings exhibit volatility that would make emerging market small cap value green with envy?

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