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

To: Tapcon who wrote (33726)	3/6/2009 10:08:13 PM
From: Spekulatius	Read Replies (2) \| Respond to of 78752

REITS - cheap by what metric? just because todays prices are much lower than the prices 2 month ago does not mean that prices are cheap. Valuation based on NAV Net asset value? Some brokerages estimate those. Reits nowadays trade at substantial discounts to those estimates. The problem is that there are no transactions that can validate those estimates. So we need to think a while what this means. In reality there is always a buyer for an asset like real estate, if the price is low enough. the fact that there are no transactions (which could support NAV) means that the spread between the Bid and Ask is too high. Why is it high - because the seller and the buyer disagree on the value of the properties. This is the same situation that happened when the housing boom ended - transaction volume dried. it is now accelerating (due to foreclosures) which is a sign of a bottom. the same thing seems to happen with commercial RE. Valuation based on FFO. The problem with that one is that it does not account for leverage. If the REIT still has cheap financing from old loans than the FFO can be pretty good until the debt needs to be rolled over. Once the debt get's rolled over the lender will only borrow up to a certain % of the NAV of the property. That can and will be a problem for many REIT's. Even in the best case, the cost of capital will sharply rise which is going to crimp FFO. EBITDA/EV The best valuation metric I have found is EBITDA/ EV. EV includes both equity value and the debt. it is a truly leverage adjusted metric and you will find that many REIT's you have listed that have cheap shares are heavily indebted and may even trade at premium to less leveraged REIT's in terms of that metric. My example for that is CLI and BDN both NE office REITs (similar geography) but CLI is much less leveraged. Based and EBITDA/EV CLI is cheaper than BDN. The other thing to consider is that the Enterprise value of an entity like a REIT is layered. The top layer is the equity layer (value of the common stock), then comes the preferred, then comes unsecured debt and then comes secured debt. if things go bad the equity layer is wiped out first, then comes the preferred, next unsecured debt and last secured (mortgaged debt). As an equity holder you need to be aware that everyone else in the soup chain get's to eat first before it's you turn. So that's enough for now. I hope you don't mind my preaching. I believe based on the little I know that many REITs won't make it through this cycle without wiping the equity layer clean, or at least substantial dilution. I think that some of the REITs you mentioned are survivors (AVB, BXP and to a lesser extent SPG) but that does not mean that shareholders will prosper.

To: Tapcon who wrote (33726)	8/6/2009 11:21:23 AM
From: E_K_S	Read Replies (1) \| Respond to of 78752

Hi Paul - I was re-reading your post on March 6, 2009 ( Message 25473417 ) where your wrote:"...EKS, I'm wondering if this downgrade of REITs today marked a bottom, or close to it. I've been watching several REITs closely since Marty Cohen's Feb 2 Barron's article identified some of his favs that he thought would survive.... ". You also pointed out :"...In the article, Cohen said: "I have never seen REITs cheaper than they are today. The three largest REITs I recommend are SPG, BXP and AVB...all three are well-capitalized, in the S&P500, extremely well managed, well positioned from a property standpoint and with a lot of capital so they aren't going to be caught in a liquidity crunch." He did identify MAC as in a group with greater financial and operating leverage, and noted there is no guarantee they will make it through hard times. DDR he put in the same class....". Here are the Friday Jan 30 prices from the Feb.2nd Barron's article with the Mar. 6th closing prices in ()AND now Today's prices five Month's later from your post. SPG 44.44 (26.19) $66.32 up 156% BXP 44.26 (31.73) $60.48 up 91% AVB 54.68 (42.14) $67.80 up 61% MAC 15.85 ( 7.17) $25.04 up 249% DDR 4.81 ( 1.52) $ 7.94 up 422% =========================================================== DDR has had a good run this week as it seems to be the last one to rally from it's lows. Perhaps it is because their business is focused on retail properties and this is the sector with the most perceived risk from a deep recession. I continue to hold several of the preferred series and some common shares for HRP, BDN and FR. finance.yahoo.com Good post and with hindsight we should have backed up the truck and mortgage the farm to load up on these. But this was March 6, 2009 and the market was in "melt down" mode and everybody was heading for the door. EKS