The Tycoon Report

Trick or REITs: Is it Time to Buy?

Friday, October 31, 2008 | Ethan Roberts

Since today is Halloween and since the ghosts of 1929 have been haunting the stock market for the last few weeks, I thought I would see if I could conjure up a possible treat or two for your stock-selection goody bag this week. It's certainly not easy with all of the nightmares on the Street right now, but let's see what we can do.



There are many different sectors of REITs. Some invest in commercial or industrial properties, such as shopping centers, strip malls, storage facilities, or office buildings. Others invest in hotels and motels, or residential properties, such as apartment buildings, assisted living facilities, and nursing homes.

Between 1975 to 2005, REITs actually outperformed the DOW and S&P 500, with a compounded annual total return of 13.8%.  But in 2007, the performance of REITs began to suffer, as problems stemming from the sub-prime mortgage market began to negatively impact these stocks. As values declined on residential properties, the ability of residential REITs to procure fresh capital by selling older buildings was greatly diminished, and the values of their existing assets declined. 

This created a somewhat necessary sell-off in the stocks, especially since the dividend yields on many REITs were at historically low levels. The appeal of the REIT is most often in its dividend rather than in potential capital appreciation. But with many REITs yielding less than 4-5% in dividends, the motivation for buying REITs was gone.  However, going forward, as the man wrote many years ago, "the times they may be a changing".  The recent bludgeoning of these stocks has created huge dividend yields across many of the sectors.



Most recently, the commercial REIT sector has been an absolute nightmare. With the threat of an impending recession, the fear is that vacancy rates will rise in office buildings and retail store fronts. Within the last month, stocks such as Liberty Property Trust (LRY), Parkway Properties Inc. (PKY), Boston Properties Inc. (BXP), and Maguire Properties Inc. (MPG) are all down between 30-60%. 

Hotel/Motel REITs have performed even worse over that time period, with stocks such as MHI Hospitality Corp. (MDH), Host Hotels & Resort (HST), Diamondrock Hospitality Co. (DRH), Sunstone Hotel Investors Inc. (SHO), and Strategic Hotels & Resorts Inc. (BEE) down between 50-78%! In tough economic times, families and businesses alike cut back on traveling.

Nor is there any relief to be found in the Retail REIT sector. Vornado Realty (VNO), Kimco Realty (KIM), and Simon Property (SPG) are down 35-47% in the last 30 days.

Ditto for the health care REIT group, such as Healthcare Realty Trust Inc. (HR), Nationwide Health Properties (NHP), Health Care REIT (HCN), Ventas Inc. (VTR), and HCP Inc. (HCP), which are all down 17-24% in the past month.

As for the residential REIT group, stocks such as Thornburg Mortgage (TMA), Equity Residential (EQR), Avalonbay Communities (AVB), Essex Property Trust (ESS), and UDR Inc. (UDR) are down 22-27% in the past month. Thornburg Mortgage is perhaps the scariest stock of all time, having fallen from 140 to less than two dollars in the past year! Recently, some really spooky things are going on with TMA. Last Friday it rose 43% from the dead, on heavy volume. However on Monday it was back down 20%, and once more looking quite comatose.
 

Finally, in the Real Estate Development sector, losses between 10-67% have been noted in the past 30 days. Stocks in this group are Bluegreen Corp. (BXG), California Coastal Communities (CALC), zipRealty (ZIPR), The St. Joe Co. (JOE), AMREP Corp. (AXR), and Consolidated Tomoka Land (CTO). But last week signs of life were noted in CALC and Thomas Properties (TPGI), both of which showed very large gains near the end of the week. TPGI has its third quarter earnings release due on Nov. 3.  Hmm, does somebody know something?

So from the preceding, one can see that many of the REIT sectors have put in some dismal performances, and don't appear to be rebounding any time soon. However, do not despair, as I did find one stock that looks somewhat promising. PMC Commercial Trust (PCC) is an Industrial sector REIT, founded in 1993, which has had a curious positive return in recent weeks and months, and is showing excellent relative strength versus its competitors. Over the last 100 days, it is actually up 2.4%, while others in the same sector are down anywhere from 21 to 80%! In the past 11 days, PCC is up 25%!

The dividend yield is currently about 11.5%, and the P/E is a scant 6.43. The stock trades for less than eight dollars, and has had a 52 week range of $4.51- $13.24.  According to Yahoo, PMC Commercial Trust, "originates loans to small businesses collateralized by first liens on the real estate of the related business. The company offers loans primarily to borrowers in the limited service hospitality industry. It also originates loans for commercial real estate primarily in the service and retail industries." Perhaps the loosening of credit is having a positive effect upon PMC.

For those who wish to buy REITs strictly for their lofty dividend yields, the hotel/motel sector is clearly the place to be. If you want to see some outrageous dividend yields, look at the following chart.  Just be careful, because when companies perform poorly, there is always a risk that they will slash their dividends:

HOTEL/MOTEL REIT	DIVIDEND YIELD (as of 10/27/08)
BEE	32.20
SHO	29.70
DRH	26.50
FCH	24.00
SPPR	21.70
MDH	20.70

As a group, the hotel/motel REIT sector has a dividend yield of 14% and a P/E of 15. This compares very favorably with other REIT sectors. For example, the retail REIT sector dividend yield is 9.8% and the P/E is a lofty 24. The office sector has a dividend yield of 7.1%, but sports a very high PE of 28. 

So all in all, if you are going to grab a treat, grab a REIT stock from either the industrial, hotel, or residential sectors, and leave the office and development sectors alone. They don't stand a ghostly chance in the current environment! But let's not be "goolish" (that's a made up word, short for "greatly foolish).  We need to dollar cost average in, and put in protective stops 5% below our entry points. The REIT stocks may not be at the bottom yet, so we still need to tread very carefully. 

Happy Halloween, everybody! See you next week!






Ethan Roberts
Contributing Editor
The Tycoon Report