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

To: Spekulatius who wrote (33727)	3/7/2009 9:33:52 AM
From: Dale Baker	1 Recommendation Read Replies (1) \| Respond to of 78753

Since you follow REITs so closely, one question - the few where I hold preferred stock have all organized their debt maturities such that they don't face anything much until 2011 or 2012. Their cash flow more than covers their secured and preferred interest obligations; common share dividends are likely to be paid partly or mostly in stock. We saw the mortgage REITs get wiped out because they relied on short-term warehouse financing. What is the threat to REITs with no major maturities for a couple of years?

To: Spekulatius who wrote (33727)	3/7/2009 7:11:50 PM
From: Tapcon	Read Replies (1) \| Respond to of 78753

I don't "mind your preaching"! You raise legitimate issues. I should have looked around to find the link online so you could review the article yourself. online.barrons.com Your primary question was on what metric is Cohen saying cheap by what metric. From the full article, it appears that Cohen and Steers does make NAV estimates: "...The market has discounted REIT shares to levels that anticipate a drawn-out period of deteriorating fundamentals. They are trading at steep discounts to asset values, even using our reduced estimates of value, historically high dividend yields and low price-to-cash-flow multiples. The single most important factor affecting a recovery will be the course of the economy. Fortunately, in this cycle there hasn't been a great deal of overbuilding, which would have worsened the outlook considerably, as it did in the early 1990s. We expect the record fiscal and monetary stimulation being put in place worldwide to at least stem the economy's decline. We should start seeing evidence of this by the end of 2009, when economic statistics begin to suggest a bottom. REITs tend to be early-cycle stocks, so they could start to perform well sometime between now and then. Meantime, it is hard to imagine valuations getting much worse. So the worst is over? It is likely things will get a bit worse before they get better. When you are going through a recession, sentiment is always bad, and things always seem worst near the bottom. The "it's never coming back" chorus is getting louder. On the other hand, there has never been more fiscal and monetary stimulus thrown at the world's economies. Mortgage rates are down. Mortgage refinancing is up. Spreads are starting to narrow between different grades of securities. But it is going to take time because the economic and financial crisis is just too big. How has all of this affected your business? Our assets under management have declined considerably. But because of our strong financial position-no debt and lots of cash-we have seen no reason to retrench or reduce our commitment to the sector. On the contrary, this is an extraordinary opportunity to gain market share and to participate in an industry recovery. The one fact of life that we need to reconcile is the extreme volatility REIT shares have experienced. Daily moves of 5% to 10% or more have become routine. Much of this volatility is due to industry participants using options, ETFs [exchange-traded funds] and other derivatives -- and in a market that is less liquid than many other industries. Once confidence is restored, a strong bid will appear that will dampen downside volatility. Have you had many redemptions? There have been modest, if any, redemptions from mutual funds, and almost no loss of institutional assets. The decline in assets primarily has been the result of asset depreciation. The client or two that we may have lost was obligated to fund another commitment or just needed cash. Has demand finally caught up with supply in the office market? Supply and demand were in pretty good balance until recently. Vacancy rates in the New York office market and elsewhere have begun rising at alarming levels. We don't have the major overbuilding that occurred in other cycles, which is positive. You won't see new construction for a long while because builders can't get financing. And in this economy, even if they could get it, landlords wouldn't be able to get the rents to justify new space. If there is vacant space that can be leased at $80 a square foot, why would you build a building where you need $120 to break even? Existing owners are operating under a "rent umbrella," or a gap between market rents and required rents on new buildings. You won't see construction for several years...." Basically, his premise is that retail and commercial REITs now are discounting very high default levels. There is no new building of either commercial or residential real estate, unlike previous downturns characterized by overbuilding. His recommendations are for companies he reckons are well-capitalized and will be able to continue paying the divvies. But then...he does anticipate everything turning on the economy. Gotta go. Read the full article, linked above.