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NYT: REITs Are 'Attractive Option' to Halt Portfolio Bleeding

NYT: REITs Are 'Attractive Option' to Halt Portfolio Bleeding
(Dollar Photo Club)

By    |   Thursday, 22 October 2015 08:02 AM

Certain real-estate investment trusts “are quickly becoming an attractive option” for investors “frantically seeking anything that can stop the bleeding in their portfolios,” the New York Times reports.
 
Fitch Ratings has reported a surge in the number of REITs planning stock buybacks through the rest of 2015 and into 2016 to prop up their beaten-down prices, the Times reported.

“The companies are signaling there’s a big disconnect between the current valuation in the public market and where private market real estate values are,” Thomas Bohjalian, an executive vice president at Cohen & Steers, which holds shares in REITs, told the Times.

REITs trade at a 15 to 20 percent discount on average to the value of their underlying properties, according to Michael Knott, a managing director at Green Street Advisors, a REIT research and advisory firm in Newport Beach, Calif.

REITs, by their nature, offer higher-than-average dividend yields. Under REIT rules, companies must distribute at least 90 percent of their taxable income to shareholders as dividends to avoid paying most corporate taxes, the Times said.

The average REIT dividend at the end of September was 4.4 percent, according to the National Association of Real Estate Investment Trusts.

The buyback program and dividend yields make REITs a tempting alternative for investors trying to escape market volatility. "Jittery investors could park cash in REITs, enjoy stock-price gains from the buybacks, and collect a hefty dividend while riding out the geopolitical storm," the Times explained.

“To the extent that someone is looking at a cheap entry point into owning good real estate, this is a very good time,” said Anthony Paolone, an executive director at JPMorgan Chase.

But REITs, like other investments, come with risk.

"And experts caution investors not to blindly jump into those that promise the biggest buybacks or the frothiest yields," the Times reported.

"Investors need to scrutinize an individual REIT’s debt, cash flow and credit rating to ensure that a buyback program will not push a company’s leverage — debt and preferred stock — into dangerous territory and that its dividend is not at risk of being cut."

To be sure, many Joe Public investors may be unaware of the esoteric traps of REITs.

"One thing many investors don't realize is that many of the normal metrics we use to analyze stocks aren't useful when applied to REITs," warns Motley Fool Contributor Matt Frankel.

"Specifically, earnings per share and associated metrics like a price-to-earnings ratio are not good indicators of a REIT's profitability," he said.

"A better metric to use is funds from operations, or FFO. When earnings are calculated, standard accounting practices allow companies to depreciate the value of assets (such as real estate) over a long period of time and deduct this amount from their earnings. However, this depreciation doesn't cost the REIT a dime – if anything, the value of its properties should increase as time goes on."

However, Jon Gray, global head of real estate at Blackstone Group LP, the largest private equity investor in property worldwide, said stock investors are too bearish on U.S. real estate.

The market’s decline probably will lead to more takeovers of publicly traded landlords, along with asset sales, he told Bloomberg.

(Newsmax wire services contributed to this report).


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Certain real-estate investment trusts "are quickly becoming an attractive option" for investors "frantically seeking anything that can stop the bleeding in their portfolios," the New York Times reports. Fitch Ratings has reported a surge in the number of REITs planning...
reit, real estate investment trusts, new york times, invest
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2015-02-22
Thursday, 22 October 2015 08:02 AM
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