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Strategies & Market Trends : Value Investing -- Ignore unavailable to you. Want to Upgrade?

To: James Clarke who wrote (8825)	10/31/1999 11:05:00 AM
From: Daniel Chisholm	Read Replies (2) \| Respond to of 78626

James, I'll admit that I am totally innocent on REITs. Part of your analysis of Penobscot that intrigued me was that you were able to put a Graham-style rock-bottom valuation on the real estate portion of the stock (IIRC you valued it as a leaky flea ridden warehouse ;-). As a result of the ongoing discussion here, I was discussing REITs with my broker recently. He said that here in Canada REITs have been traditionally targeted towards and accepted by income investors, and have therefore historically been modestly priced and generous in yield (parenthetically, he mentioned how Canadian REITs had been burned by high leverage in the past, and are now remarkably light on leverage - like 20% or so). On the other hand, he said that in the US REITs have been viewed more as speculative vehicles (an opportunity to participate in rising real estate prices), and have therefore been priced more as "growth" (read: expensive) than as an "income" asset. This didn't jibe with all that I have read here about REITs, selling at huge (>>10%) yields -- was what my broker telling me correct at some point in the near past, but there has since been a bit of a meltdown in US REIT psychology, from "go-go" to "deep value"? I have nothing against buying $1.50 of assets for $1.00, but I am intrinsically suspicious (perhaps cautious would be a less-paranoid word) of real estate valuations. Tell me that REIT XYZ is trading at 67% of the value of its holdings and I won't get too excited - what's the point of a 1/3 off sale if the merchandise is priced 300% north of sanity? Tell me an REIT is yielding 15-20% earnings or 20-25% cash flow, and I'll certainly be interested enough to dig deeper and investigate sustainability, leverage, downside (e.g. how much could SNH's rents drop), etc. I guess determining "intrinsic value" of real estate is more difficult than other things, since it is difficult to determine what another (greater fool?) would be willing to take it off of your hands for when you need to sell. So I suppose everyone must to a certain extent close their eyes to the price (ouch! sounds dangerous!), and value properties on the basis of some multiple of the or cash flow a property generates (which would be related to the level of rents that the market will bear). This is what I'd like to ask you. When you analyze an REIT, how do you develop comfort in the value of the underlying assets and that there is a real margin of safety in the book value? Or do you need to? I guess what I'm asking here is that if this is the case of a high yielding long life asset -- in which case return of original capital is not necessary in order for it to have been a good investment. (E.g., if you determine that they can sustain a certain level of cash flow (dividends) to shareholders (say, 15% a year for 20 years), and have (say) a 98% chance of not going bankrupt in that period, then recovering value from the properties or selling them at a profit 20 years down the road doesn't make too much a difference Present-Value wise) - Daniel

To: James Clarke who wrote (8825)	10/31/1999 7:21:00 PM
From: sjemmeri	Read Replies (3) \| Respond to of 78626

I've been considering buying a REIT fund also. May I ask which one was 'good enough for Mom'?

To: James Clarke who wrote (8825)	11/1/1999 5:50:00 PM
From: Allen Furlan	Read Replies (3) \| Respond to of 78626

James, are you familiar with MLN a M/L Mitts. At 10 7/16 the security is pegged to nikei at 14,153. This is an orphan that hardly moved when nikei went up into the 19,000 area last year. As a term trust Merill will not redeem until 2005 so you are at the mercy of the market on a not followed or promoted security. However the security is guaranteed by Merrill to be redeemed at no lower than 10. You get the growth of the broad Japanese market an a nice 18% discount as an entry point.