Bob,
Thanks for the compliment, but I am far from an expert. I do have a strategy, and most of it is either trading ranges with the REITs that I want to own, or buying just before a dividend when it a REIT is near the low end of the trading range. I like to buy a small percentage for the long term, but for the last year the odds of making more than 10% is limited to 5 or 6 equity REITs out of 200. When they become in favor, I'll hold a few more, but I have made about 10-15% more than the market by trading for the last 4 years. I am up about 11% through the end of July, while the average REIT mutual fund was about even so far this year. Long term I hope to get 20-25% average a year, while most REIT funds should be able to return 10-15% over a 10-20 year time horizon.
I believe DOM is some sort of utility royalty stream, and as such I don't follow it. I don't know if it's resources are being depleted, not what effects weather, inflation, and competing energy sources would have on the stock price. Though they obviously own some real estate, it is a very different animal from commercial real estate leased out for a set of period of time with a predictable income stream.
KPA is in one of the 2 sectors of REITs that are most out of favor, Hospitality, along with health care. When a sector is out of favor, it is a long term buying opportunity, but short term results can look ugly. Anyone buying a quality pharmaceutical company, like MRK, LLY, PFE, etc. in the last few months is likely down 10-30% and may take another 10-30% hit, before they recover. KPA is likely to be able to maintain their dividend long term, but competition is fierce as companies like Extend Stay and another one that I can't recall, have been building like crazy for the last year or two. KPA was on CNBC a few weeks ago and rebounded while the REITs continued to fall, so now that the novelty of the publicity is over, it may retest 8-3/4 to 9. I will buy some at those levels.
The most important factor assuming good management in a REIT is consistent (Funds from operations) FFO growth. FFO adds back depreciation and certain amortizations, since most buildings that are maintained are worth the same or more each decade, due to location and inflation. Industries like office buildings, self-storage, manufactured housing sites, retail, and apartments will generally increase the rents steadily over a 10 year time span, even with business and overbuilding cycles. Hotels can have wild swings, poor locations may stagnate. This assumes that the principals don't use too much leverage and expose themselves to down cycles financing crunches. We have had a favorable interest rate environment for 10 years, but if a huge percent of the debt is called in one year and interest rates have climbed, then the REIT could be exposed to a huge swing in cash flow.
Health care was the best sector and the safest for years, but is in the dog house now, as legislation is trying to rein in medical costs and the operators are being hurt so badly, that many can't meet the lease obligations. This will wash over at some point, as the politicians will lose their positions if they don't respond the inequities that are driving the businesses bankrupt, forging a huge gap in medical and elderly care for the poor and elderly. When the imbalances are corrected, this is the sector that I would advise to invest the heaviest in. Demographics suggest there will be significant growth in medical care demand for the next decade and longer.
Now we have specialty REITs like auto dealership locations, golf courses, prisons, movie theaters, restaurant locations, etc. Each of these can be a great opportunity, but each can have it's own version of overbuilding and business cycles, creating supply and demand problems.
Hope this was a useful introduction.
reitnet.com
is a site for the novice REIT investor
undiscoveredmanagers.com
is written weekly by Ralph Block, who also has a great book about REITs which I heartily recommend.
Richard |
