Get Data Before Buying Stocks : Investments: Study real estate company’s annual report to learn as much as possible about underlying properties, experts advise.
Real estate stocks suffered their 41st consecutive month of decline in July. The experts say this suggests one of three possible scenarios for the future:
With a slowing economy, these stocks will decline further. Or, these stocks are on the brink of a rebound. Finally, there’s the chance that they’ll stay just where they are.
So much for the experts.
In fact, real estate and stock mavens alike aren’t making any predictions these days. The market is just too questionable.
Optimists may quickly observe, however, that some people manage to make money even in the midst of great uncertainty. Investors hoping to do just that are advised to study each potential stock very carefully. Understanding the stock market and understanding real estate trends are equally essential.
First things first, though. What is a real estate stock? The answer depends on which expert you ask; each one has a slightly different answer.
Kenneth Campbell, president of Audit Investments Inc. and editor of Realty Stock Review in Montvale, N.J., keeps close tabs on 198 real estate stocks. About 105 of these are Real Estate Investment Trusts (REITs).
These trusts (discussed July 22 in the first of this series) invest in real property, mortgages, real estate joint ventures, other REITs, other real estate stocks, plus Real Estate Mortgage Investment Conduits (REMICs) and Collateralized Mortgage Obligations (CMOs). (These two investment vehicles were discussed Aug. 5 in Part 2 of this series).
Non-REIT real estate stocks include merchant builders, which essentially develop properties and sell them off immediately--such as home builders--and investment builders. Examples of the latter include long-term owner/builders such as the Rouse Co., Forest City and Kroger Properties.
Campbell also tracks the performance of prefabricated housing manufacturers, a few mortgage bankers and construction suppliers.
Finally, there is a miscellaneous collection of companies such as MCA Inc., which has vast and valuable land holdings and a development subsidiary based in Universal City.
Not everyone agrees on just how to define a real estate stock. Most analysts do agree, though, on some essential guidelines for investors.
First, it’s important to closely review the underlying assets of the real estate company in question. What kind of properties are involved? How long have these properties been on the books? Are the properties generating net operating income? What kind of experience do the managers have? Do the managers have a sizeable stake in the future of the company? Where are the properties located?
Many of these simple yet essential questions are answered in the company’s annual report. There are also research reports available through many stock brokerages which present a thorough--albeit sometimes dated--analysis of individual stocks and industry sectors generally.
“Read the annual report and read it carefully,” Campbell advised. And, he added, review stock performance over a five-year period. “Portfolios change slowly.”
Geographically focused real estate companies will generally outperform competitors with properties spread throughout the country, Campbell noted.
Managers who put their energies into one region and/or one particular type of property--such as retail centers--are far more likely to succeed at creating value for stockholders, he said.
Weingarten Realty, for example, has managed to do well even in otherwise troubled Texas by staying focused, Campbell said. “They’ve been able to grow in an otherwise lousy market.”
Similarly, Federal Realty has done well by buying retail centers in older neighborhoods, while New Plan Realty has carved out a niche for itself in buying retail centers in small towns.
This kind of specialization, say real estate experts, is the key to a healthy bottom line.
Finally, investors should learn how various economic indicators relate to real estate performance.
Office building stocks are closely correlated with gross national product (GNP). Retail center stocks follow disposable personal income (DPI). And, property prices in the Southwest are closely linked to oil prices. Recent increases in oil, say real estate observers, may bode well for properties in Arkansas, Texas and other Oil Patch states, while depressing real estate in other parts of the country.
One of the newer trends emerging in real estate stocks is what’s known as a partnership roll-up. Many so-called private-label limited partnerships and publicly traded master limited partnerships (MLPs) are rolling into more liquid, publicly traded REITs.
By rolling up, these partnerships hope to leave behind the stigma associated with syndicated partnership deals and instead operate more as mainstream corporations.
“The typical syndication of the 1980s was a bad deal,” however, said John Moran, a portfolio manager for PRA Security Advisors of San Francisco, an institutional money management company specializing in real estate securities. “Rolling up a limited partnership into a REIT won’t make a good deal out of a bad deal.”
Many of the partnerships ran into trouble because they were too highly leveraged. As soon as the economy softened, the managers found operating income insufficient to cover debt service. For this reason, Moran advised real estate stock investors to seek out companies with very little leverage. The more equity a company has, he said, the better.
Stan Ross, partner at accounting firm Kenneth Leventhal & Co. in Century City agrees. But, he added, roll-ups may provide a good buy if the underlying properties are well-maintained and generating a healthy cash flow. REIT investors generally should limit themselves to yield investments, advised Ross. Equity-oriented REITs which fail to provide positive investment yields, he said, are best left alone.
Also questionable are finite-life real estate investment trusts, also known as FREITs. “Their history has been checkered, to say the least,” observed Barry Vinocur, editor of Stanger’s Investment Advisor of Shrewsbury, N.J.
The six open-ended and one closed-ended real estate mutual funds that currently exist also continue to post questionable results. In the last year, the best performance recorded was 9.53%, the worst was -18%. The mean performance was about -5% to -7%.
Some investors have done and will continue to do very well in real estate stocks, observed Vinocur. For most individuals and portfolio managers, however, “this has been a tough time for real estate stocks.”
For a detailed primer on real estate securities, what options are currently on the market, and an analysis of their investment returns send $2.50 and a postage-stamped, self-addressed envelope to Ron Galperin c/o Real Estate News Group, 1505 E. 17th Street, Suite 211, Santa Ana, Calif. 92701. Make checks payable to Real Estate News Group. Please do not send cash. Your primer--including glossary of real estate security terms--will be sent within three weeks.
REAL ESTATE SECURITIES PERFORMANCE
Year Number Second to of Quarter Date Sector Companies 1987 1988 1989 of 1990 1990 Shopping Centers 10 3.73% 19.32% 9.71% -2.58% 0.89% Office Buildings 6 -9.16 23.22 2.17 -4.82 -11.86 Commercial Mortgages 5 -8.80 -3.87 -23.42 -17.47 -26.20 Land Development 8 -33.51 30.24 -20.73 -31.92 -24.74 Industrial Buildings 3 -21.64 11.26 -15.40 9.16 -5.39 Hotels 8 -24.71 17.11 -5.51 -7.79 -15.45 Health Care Facilities 8 -1.50 6.48 12.76 -0.96 -2.14 Residential Mortgages 4 -21.78 -6.95 -7.28 15.06 6.06 Average/Total 52 -12.61 13.91 -3.71 -7.30 -10.07
Total Market Capital- ization (in Sector Yield millions) Shopping Centers 8.62% $3,477 Office Buildings 8.37 1,628 Commercial Mortgages 13.69 316 Land Development 2.18 541 Industrial Buildings 13.33 173 Hotels 15.84 1,108 Health Care Facilities 10.38 1,559 Residential Mortgages 18.79 346 Average/Total 10.52 9,148
Note: Data is based on 52 public real estate companies followed by Cohen & Steers Capital Management Inc. of New York. An estimated 224 real estate companies with total market capitalization of $27 billion are currently publicly traded. These include REITs, MLPs and other real estate-related stocks.
