This Day On The Street
Continue to site right-arrow
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Stocks Under $10 with 50-100% upside potential - 14 days FREE!

How Neat Are REITs? These Web Sites Will Help You Decide

The year's best-performing real estate investment trusts , or REITs, have been those with holdings in lodgings and resorts, up nearly 36%. Industrial real estate REITs are up more than 32%. Apartment complex REITs are up some 26%.

I found this out not from some press release but on the Web site of the National Association of Real Estate Investment Trusts, where aggregate performance stats are refreshed monthly. (The ones I cite are from Sept. 30.) As you'll see, it's one of a handful of spots on the Web where you can comparison-shop and perform due diligence on REITs.

For the uninitiated, REITs are asset-management companies that own real estate -- everything from trailer parks to prime downtown office buildings to state prisons. Another species of REITs holds mortgage debt. For tax purposes, REITs are organized a little like limited partnerships. Instead of paying taxes on their profits, they pass them along to shareholders in the form of dividends. However, unlike limited partnerships, REITs trade just like stocks.

REITs fared poorly during the recent tech-stock boom. In 1999, for example, the average REIT returned a negative 6.48%, according to NAREIT. Back then, investors scoffed at the 7% to 10% annual yields. After all, you could buy an Internet stock in the morning and make 33% on it by noon. But, alas, the world has changed. This year, REITs have outperformed the major indices, returning more than 21%, on average, through Sept. 30.

No surprise that in this bear market, REITs have garnered lots of attention. Last month, for example, TSC chief markets columnist Brett D. Fromson wrote favorably about Annaly Mortgage Management (NLY), a mortgage REIT yielding close to 15% as of midweek.

But some analysts worry REITs may become overbought. That was the fear TSC Contributing Editor Christopher Edmonds relayed in his column earlier this month. That issue also came up in a REITs roundtable discussion , which Edmonds reported on this week. One fear is that momentum investors searching for a safe place to stash cash until tech stocks bottom will park their money in REITs and drive up prices.

That's a little like what occurred in 1996. Back then, yields averaged around 6% and total returns topped 30%. As a result, REITs became a magnet for growth investors. Knowing they needed to grow their companies to meet shareholder expectations, REIT managers turned to the equity markets for capital -- a big mistake, as it turned out, says Ralph L. Block, author of Investing in REITs (Bloomberg).

"A lot of REITs issued too much equity in '97-'98," says Block. Some REITs issued so many new shares in the spring of '98, he says, they grew their market cap by more than 40%. Fearing further dilution, investors took flight. And share prices plummeted.

Could the same thing happen again? Who knows? But it always pays to shop around. At last count there were 195 REITs to choose from, as well as dozens of mutual funds focusing on the sector.

Betting on an individual REIT demands considerable judgment on your part. The following examples are not meant as recommendations, but rather to illustrate some of the choices you'll face. REITs that invest in mobile-home parks, such as Sun Communities (SUI), aren't very glamorous, but they're consistent cash producers. That's because once folks park their homes on sites, they tend to stay put, even if rents rise.

By the same token, if you invest in a prison-owning REIT such as Correctional Properties (CPV), you can be pretty sure the tenants won't up and leave. Still other investors prefer REITs like Boston Properties (BXP) or Vornado Realty Trust (VNO). Both focus their holdings in specific regions. Theoretically, REITS like these should be able to consolidate their services and leverage their local knowledge.

Once you've settled on one or more categories of REITs, you need to understand how Wall Street evaluates them -- and how it doesn't.

Breakup value doesn't work because REITs' main assets -- the buildings themselves -- can take years to sell. Some analysts prefer net asset value , which factors in the value of a REIT's management team, along with bricks-and-mortar assets, then subtracts liabilities and obligations. But as a measure, net asset value may not take into account such things as when each building was appraised or how much it may have increased or declined in value since the appraisal.

Most analysts gauge a REIT's health using something called funds from operations , or FFO. To calculate FFO, start with net income. Subtract out any extraordinary gains, like proceeds from the sale of a property. Then add in real estate depreciation. REITs are often valued at 14 to 15 times projected FFOs, for the 12 months going forward. You also have variations on FFO, such as adjusted funds from operations (AFFO), which take into account mandatory improvements to the properties that won't necessarily enhance their value -- things like new carpet in the hallways.

Don't expect to see an FFO figure come up when you enter a REIT ticker symbol at a financial Web site. If you really want to deconstruct a REIT issue, you'll need to visit a site dedicated to REITs.

Here's a short list. Good hunting.

  • National Association of Real Estate Investment Trusts . The trade group publishes its own index of REIT stocks with monthly updates, plus lots of useful background information.

  • Realty Stocks . The best of the REIT sites: Read breaking news, monitor stock prices, compare yields. And it's free. Pay $25 to $39 per year and get more robust screening features.

  • REITNet . Here you'll find background articles, breaking news stories, comprehensive REIT listings, plus useful links. A bare-bones search engine lets you screen REITs and find, for example, all REITs that trade on the NYSE or all those that invest in strip malls. There's also a list of REIT-focused mutual funds. Additional analytical tools are available for $10 per month.

  • Green Street Advisors . This leading REIT stock research firm also operates a trading desk specializing in REITs. Here you can download sample research on topics like merger and acquisition activity in the REIT sector.

    Mark Ingebretsen is editor-at-large with Online Investor magazine. He has written for a wide variety of business and financial publications. Currently he holds no positions in the stocks of companies mentioned in this column. While Ingebretsen cannot provide investment advice or recommendations, he welcomes your feedback at mingebretsen@onlineinvestor.com.

    TheStreet.com has a revenue-sharing relationship with Amazon.com under which it receives a portion of the revenue from Amazon purchases by customers directed there from TheStreet.com.

    Select the service that is right for you!

    COMPARE ALL SERVICES
    Action Alerts PLUS
    Try it NOW

    Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

    Product Features:
    • $2.5+ million portfolio
    • Large-cap and dividend focus
    • Intraday trade alerts from Cramer
    • Weekly roundups
    TheStreet Quant Ratings
    Try it NOW
    Only $49.95/yr

    Access the tool that DOMINATES the Russell 2000 and the S&P 500.

    Product Features:
    • Buy, hold, or sell recommendations for over 4,300 stocks
    • Unlimited research reports on your favorite stocks
    • A custom stock screener
    • Upgrade/downgrade alerts
    Stocks Under $10
    Try it NOW

    David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

    Product Features:
    • Model portfolio
    • Stocks trading below $10
    • Intraday trade alerts
    • Weekly roundups
    Dividend Stock Advisor
    Try it NOW

    Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

    Product Features:
    • Diversified model portfolio of dividend stocks
    • Alerts when market news affect the portfolio
    • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
    Real Money Pro
    Try it NOW

    All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

    Product Features:
    • Real Money + Doug Kass Plus 15 more Wall Street Pros
    • Intraday commentary & news
    • Ultra-actionable trading ideas
    Options Profits
    Try it NOW

    Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

    Product Features:
    • 100+ monthly options trading ideas
    • Actionable options commentary & news
    • Real-time trading community
    • Options TV
    To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
    Submit an article to us!

    Markets

    DOW 17,778.15 +421.28 2.43%
    S&P 500 2,061.23 +48.34 2.40%
    NASDAQ 4,748.3960 +104.0840 2.24%

    Brokerage Partners

    Rates from Bankrate.com

    • Mortgage
    • Credit Cards
    • Auto

    Free Newsletters from TheStreet

    My Subscriptions:

    After the Bell

    Before the Bell

    Booyah! Newsletter

    Midday Bell

    TheStreet Top 10 Stories

    Winners & Losers

    Register for Newsletters
    Top Rated Stocks Top Rated Funds Top Rated ETFs