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

To: Tapcon who wrote (33736)	3/7/2009 8:20:02 PM
From: E_K_S	1 Recommendation Read Replies (1) \| Respond to of 78774

Hi Paul - The way I see these REITs is that if you can come out with one or more of the survivors, these assets should do quite well in an inflationary environment. With the huge amounts of debt the US is accumulating, I expect significant inflation and much higher interest rates five years out. Owning real property should be one way to hedge this long term risk of high inflation. I currently have a small exposure to REITs in my portfolio but I am thinking of building up a sizable position as I believe the current valuations are very attractive. This is a once in a decade type trade so I am trying to develop an appropriate trading, hedging and exit strategy if things go very sour. First, I have tried to identify the best of breed and plan to buy a basket of only preferred series issues. Second, I plan to carry a trading position that I will sell with any 30% pop and take the short term gain. I have a lot of carryover short term losses that I need to offset with short term gains. Typically I never enter a trade to sell short term, but this is a Bear Market and I do not like round trip trades. Third, to hedge the position w/o selling the preferred equity, I will look at shorting the common if (1) the common dividend is omitted or (2) if dividends are paid in stock rather than cash. You can also buy Puts on the common to protect the downside. There is very little option activity on these REITs so by watching the volume and open interest a red flag should be raised if this activity picks up. A lot of the metrics have already been discussed. The one that catches my eye is Book Value. Many are selling at a significant discount to Book Value (some at 20% of BV). The key for their survival is maintaining current rent rolls with limited new tenant vacancies. Most of the preferred defaults arise out of the company declaring BK. Some companies have different types of work outs plans. For example, Thornburg Mortgage forced their preferred shareholders to take $5.00 per preferred share (when par was $25.00) plus three shares of common (selling for pennies). Therefore you want to try to avoid such a land mine. I believe there is significantly value in REITs now but higher than normal risk for REIT defaults and/or BK's. As an investor, I have evaluated both my exit strategy and hedging options more closely especially for these REIT investments. Thank you for posting the Barron's article. It seems to verify my view of the risks and value that REITs currently offer. EKS