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!

REITs On The Street: The Bargain Basket Is Growing

NEW YORK (TheStreet) -- Debt leverage in real estate is no different from leverage in other investments; the more debt you use, the greater potential for gain or loss. When we buy stocks on margin, we are simply leveraging investment returns with debt. Mortgage REITs and other assets carried on high margin involve substantial risk, since a small decline in the asset's value will cause a much larger decline in principal.

Mortgage REITs are especially sensitive to fluctuating market conditions and interest rates as they employ leverage from 5-times to 9-times and require constant repurchase agreement financing. As a result, mortgage REITs must hedge their portfolios using a variety of instruments (IOs, swaps, swaptions) and hope the hedges behave and perform as expected.

Although a modest amount of debt is not terribly dangerous, using too much is not prudent. The most risk-averse REITs have been able to utilize modest leverage when it doesn't compromise the strength of their balance sheet. Essentially, a weak balance sheet (marred by excessive leverage) is simply like an unconditioned athlete and that's why the strongest survive.

As an intelligent REIT investor, it's my duty to persuade investors to avoid dangerous investment strategies and adopt sound ones that are designed to preserve and maintain their hard-earned capital; that's why I called it "sleep well at night" investing.

'Margin of Safety' Forming

As a self-described "value investor" it's my primary goal to preserve capital and controlling risk in your dividend portfolio should be an essential element to your investment process. As the acclaimed investor and author, Howard Marks, explains (from "The Most Important Thing"):

"...there are two main risks in the investment world: the risk of losing money and the risk of missing opportunity. You can completely avoid one or the other, or you can compromise between the two, but you can't eliminate both. One of the prominent features of investor psychology is that few people are able to (A) always balance the two risks or (B) emphasize the right one at the right time. Rather, at the extremes they usually obsess about the wrong one... and in so doing make the other the one deserving attention."

Today we are seeing the return of the bear market in REIT-dom. Unlike the REIT bull market we experienced early in the summer (when most REITs hit all-time highs), the REIT markets are now moving back down and for a value investor, the most beneficial time to buy is when the market is falling.

After all, a market downturn is the true test of an investment philosophy so whenever the financial markets fail to fully incorporate fundamental values into securities prices, an investor's "margin of safety" is increased. As Benjamin Graham believed, buying companies trading below intrinsic value leaves a cushion for error, thus giving you a "margin of safety" in case your analysis of the stock's value is too high.

1 of 2

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!
DOW 17,098.45 +18.88 0.11%
S&P 500 2,003.37 +6.63 0.33%
NASDAQ 4,580.2710 +22.5760 0.50%

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