Monday, January 07, 2008

A Defensive Strategy for REIT Investors - New York Times 

A Defensive Strategy for REIT Investors - New York Times

REITS did very well this decade, posting impressive gains for investors on a yearly basis. But, 2007 was a different story. The National Association of Real Estate Investment Trusts said property REITs posted negative returns of 15.7 percent, on average.

Analysts warn that investors must now be defensive when investing in REITS.

In choosing the better REIT stocks, Mr. Harris said he looks at a company’s balance sheet, particularly at the level of debt; the quality of its portfolio, especially property location; the dividend history; management experience; and the development pipeline. (In a downturn, the fewer projects in the works, the better.)

Mr. Stewart, meanwhile, has created a ranking of so-called defensive REITs. The list of 61 companies, which initially came out last summer and was recently updated, is based on 10 criteria, including a company’s size, earnings stability and growth and dividend record. It also takes into account the duration of property leases.

Topping the list is the largest REIT by market capitalization — the Simon Property Group, which owns and operates shopping malls throughout the world. Most of the top-ranked REITs are also in the retail sector, including Kimco Realty and Realty Income, which Mr. Stewart recommends.

Entertainment Properties Trust, which owns and develops megaplex theaters and entertainment retail centers nationwide and in Canada, was also ranked highly. The chief executive, David Brain, said he was confident the company would hold up well in a softer economy. For one thing, he said, “our properties are very high revenue producers and also produce a present cash flow level of about two times the rent obligation.”

And, “as the economy gets worse, it gets a little good,” he added, because consumers are likely to be looking for less expensive entertainment options like movies. “If you go to any kind of sporting event or concert, those are $50 to $60 price points easily,” Mr. Brain said. “For a tenth of the cost, you get a very high-quality production.”

Many retail REITs are also well insulated, Mr. Stewart said, because they have both high occupancy rates and long-term leases. “If you look at Realty Income, it has one of the longest lease terms in the universe — 13 years, on average,” he said. (Entertainment Properties has some leases in the 10- to 20-year range as well, according to Mr. Brain.)

“Of course, the downside is you don’t have the same benefit in a rising economy,” Mr. Stewart said.


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