Analysts Look to Buffett to Boost REITs

Warren Buffett's recent real estate investments offer a slim ray of hope to a rather despondent sector.
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Will Warren Buffett be the savior of the REIT business? Several leading analysts, including Lehman Brothers' Steve Hash and Merrill Lynch's Eric Hemel, would sure like to think so. As soon as the news was out that Buffett had boosted his stake in MGI Properties (MGI) - Get Report and had taken a stake in Tanger Factory Outlets (SKT) - Get Report, many analysts played up the news.

"This may be the signal," says

Legg Mason's

Glenn Mueller. "It could be the time to call the bottom."

It is clear that REIT investors are looking for any ray of hope in the rather despondent sector. "People are desperate for something to cling to," says Carl Tash of

Cliffwood Partners

.

But those who know the master doubt that he's preparing some broad-based foray. Robert Hagstrom, portfolio manager of the

(FOCTX)

Legg Mason Focus Trust, longtime Buffett follower and author of

The Warren Buffett Way

, had this to say: "It would be misleading to say this is a call on REITs as a sector. He's never been too enamored with real estate because it requires so much leverage."

And, what little involvement he's had hasn't been wildly successful. "Buffett has a pretty mediocre record in real estate," says Tash.

So what drew him to two beleaguered REITs? Hagstrom thinks he knows the answer: "Buffett's a master at spotting inefficiencies in the market and exploiting them on an individual basis," he says. "That is likely what he has done here."

That description fits the MGI Properties investment to a T. Buffett indicated in an April 1 filing that

Berkshire Hathaway

(BRK.A) - Get Report

had increased its stake in MGI from 8.3% to 10.3%.

It is clearly an attempt to capture the arbitrage between the company's depressed stock price and the perceived private value of its real estate, which the company has said it intends to liquidate. "It was a good asset play, especially at its prices back in August," says Jeff Caira, who follows MGI for

Tucker Anthony

, referring to when MGI was selling around 24 a share. "The fact management was willing to liquidate the company to benefit shareholders was probably incentive for Buffett." Caira also downplays the investment as a commitment to REITs as a sector. "The set of circumstances for the investment did not make this look like an investment in REITs as a group," he says.

The Tanger investment is a bit more confounding. Late Friday, Buffett revealed in a

Securities and Exchange Commission

filing he had purchased a 5.3% stake in Tanger Factory Outlets. While Tanger is a decent outlet-center REIT, it is not typically found in the upper echelon of the industry or on the short list of REITs trading at the biggest discount to their property values, a calculation that would likely intrigue investors with Buffett's value bent.

"It's very cheap, but it certainly isn't a REIT that would jump out if asked what companies someone like Buffett might buy," says Mueller of Legg Mason.

While calls to the company were not returned, two factors may have driven Buffett's interest in Tanger. First, Buffett likes brands, as evidenced by his ownership of

Coke

(KO) - Get Report

,

Gillette

(G) - Get Report

and

American Express

(AXP) - Get Report

, as well as

Kirby

,

See's

,

World Book

and

Geico

-- all strong brand names. While real estate is difficult to brand, Tanger has done a good job in the outlet-center business of consistency among its properties and uniform marketing across the country.

Second, Buffett may like the family ownership and involvement in the company. Since Stanley Tanger and his son, Steve, took the company public in 1993, they have retained control and significant ownership, with insiders owning nearly one-third of the company. Buffett often stresses the importance of experienced and committed management. "Buffett's investment could very well be more of a personal nature," says Mueller. "He may just like Tanger and the people." Or, he may have shopped at a Tanger Outlet and liked what he found. Many who know Buffett say that's how he ended up owning

International Dairy Queen

: his love for soft-serve.

Those who remain hopeful that Buffett's interest will go beyond these two REITs point to the fact that Berkshire Hathaway Credit Corp. analyst Robert Bennett was sighted at the recent

Smith Barney

REIT conference. That may be so, but it's a pretty slim reed upon which to build hopes for a broad-based recovery.

Still, the investments represent, at least, a major psychological boost for REIT investors. "

Buffett's investment is meaningful in the sense that it signals there is interest in REIT-land," says

CRA Real Estate Securities'

Ritson Ferguson. "It's a very visible, successful investor who is making investments in the REIT world. That can't hurt."

At least it makes REIT investors feel better to think so.

Christopher S. Edmonds is president of Resource Dynamics, a private financial consulting firm based in Atlanta. At time of publication, neither Edmonds nor his firm held any position in the stocks mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. While he cannot provide investment advice or recommendations, he welcomes your feedback at

invest@cjnetworks.com.

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