Why Mortgage REITs Deserve Some Love in 2014 – Bloomberg 01-15-14

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Mortgage REITs yield 13 percent versus 3.8 percent for T-Bonds.

In 2013 mortgage REITs lost 3 percent on average even after factoring in double-digit dividend yields – versus 30 percent for the S&P 500.

Michael Widner at KBW Bank said the average mortgage REIT trades at a 20 percent discount to book value, and expects mortgage REITs to return over 20 percent in 2014. Widner does no expect the stock market replicating its 2013 returns in 2014.

David Cohen at the Eudora Fund is not concerned about higher rates because mortgage REITs are not really bond funds, but are businesses that use complex hedging strategies to protect themselves from rate increases.

The spread between long-term rates and short-term rates determine a mortgage REIT’s profitability, and not a single interest rate, because REITs borrow short-term and buy long-term bonds. Cohen said the yield spread between 3-month Treasuries and 10-yr T-notes has almost never been wider in the last 35 years.

Any rise in long-term rates that results from Fed cutting QE would increase the yield spreads mortgage REITs can earn. Homeowners tend to pre-pay their mortgages when rates are low, which hurts mortgage-bond investor returns, while rising long-term rates discourage refinancings.

Read the full article at http://www.bloomberg.com/news/2014-01-15/why-mortgage-reits-deserve-some-love-in-2014.html

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Mall Owner Stocks Go From First to Last as Spending Slows – Bloomberg 09-13-13

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The Bloomberg mall REIT index has fallen 5.4 percent in 2013, the worst performing part of US property stocks, on sluggish retail sales and limited opportunities to expand, after posting the biggest increases from 2009 through 2012. Hoteliers and self-storage landlords are the top-performing REIT sectors in 2013.

Mall REITs reported the smallest increase in tenant-sales growth in 3 years in Q2 after strong growth since the credit crisis let them increase rents.

Benjamin Yang at Evercore Partners said fundamentals are good but slowing, and there appear to be more-attractive, better-accelerating core growth stories in some of the other sectors.

Keith Bokota at Principal Global Investors said the fundamentals are strong and results have been positive for mall REITs overall, but are overshadowed by the potential impact of rising borrowing costs on property valuations. Bokota said there continues to be robust demand for these high-quality and scarce assets.

Rich Moore at RBC Capital Markets said high-quality malls are so lucrative that they rarely come on the market, with publicly traded landlords owning most of the best-performing centers.

Cedrik Lachance at Green Street Advisors said mall owners may be cushioned from the impact of their tenants’ slowing sales because occupancies are as high as they have ever been.

Reis said regional mall vacancies fell to 8.3 percent in Q2 and rents rose to $39.62 a square foot.

Rich Moore at RBC Capital Markets said even if J.C. Penney got into more serious trouble, the impact on mall REITs would be minimal, and it is highly unlikely it will disappear. Moore said most landlords would love to get their J.C. Penney box back.

Craig Guttenplan at CreditSights said outlet centers are performing better than other retail-property types as consumers like bargains and are still cautious on spending.

Read the full article at  http://www.bloomberg.com/news/2013-09-13/mall-owner-stocks-go-from-first-to-last-as-spending-slows.html

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American Homes 4 Rent Shares Little Changed After IPO – Bloomberg 08-01-13

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Investors are cooling on the fledgling US homes-for-rent industry. IPO American Homes 4 Rent was little changed in its first day of trading after raising almost 44 percent less than estimated in its initial prospectus in June and at the low-end of the offering range. The two other REITs that have gone public are trading below their offering price.

Dave Bragg at Green Street Advisors said it is uncertain whether single-family owners can make money over the long-term on par with other types of landlords.

Shares of other public single-family rental REITs have fallen as the companies have failed to show a profit, in part because they are acquiring houses faster than they can fill them with tenants.

Read the full article at  http://www.bloomberg.com/news/2013-07-31/american-homes-4-rent-raises-705-9-million-in-u-s-ipo.html

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Retirement of baby boomers at risk – Bankrate.com

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Baby boomers are retiring at the worst time in a generation or more, as bond yields and stock dividends have tumbled to 2 percent, and the cohort never saved like their parents and grandparents. Pension plans have largely disappeared from the private sector, home values are the same as 10 years ago, and Medicare is a perennial target of budget cutters in Congress.

David Blanchett at Morningstar Investment Mgmt said it will cost more to retire and retirees face more risks today than in past generations. Blanchett said that in 1990 an annuity guaranteeing a lifetime income for a 65-year-old man required an investment of $9 for every $1 it paid back, versus $15 for every dollar in 2010.

Research Affiliates said someone retiring in 1980 with $355,000 in 60 percent stocks and 40 percent bonds would have received an average annual return of 6.9 percent over 30 years. Withdrawing 4 percent every yea, the portfolio would still have grown to $1.3 million by 2010. That portfolio today would run out of money in 25 years; sooner if inflation and interest rates rise as they did from the 1960s to the early 1980s.

Jack VanDerhei at the Employee Benefit Research Institute said a sudden hospitalization or extended stay in a nursing home will take down most couples and make them short on money. VanDerhei says the growing gap between what people are saving for retirement and what they actually need, including income to pay for uninsured health care costs, grew from $4.6 trillion in 2010 to $4.8 trillion in 2012.

The Bureau of Economic Analysis said the personal savings rate has been on the decline for the past 30 years: to 4 percent of disposable income today versus more than double that in the 1970s and 1980s.

Chris Brightman at Research Affiliates said the baby boom generation spent almost entirely what they earned during their peak earning years, and face 30 years of retirement and a drop-off in lifestyle.

Remedies:

  • Retire a few years later. The Center for Retirement Research at Boston College estimates that 65-year-olds will need to stay at work for another 5 years to ensure a successful retirement.
  • Take advantage of catch-up contributions.
  • Diversify away from the same low-risk investments that everyone else is chasing. Blanchett says to invest beyond stocks and bonds and add REITs and commodities and foreign bonds.
  • Talk to your kids, they may have to take care of you.
  • Get financial professional help in deciding on whether to retire

Read the full article at  http://www.thefiscaltimes.com/Articles/2013/07/17/Boomers-May-Run-Out-of-Money-in-Retirement.aspx#page1

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Property Crushes Hedge Funds in Alternative Markets – Bloomberg 07-10-13

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Hamilton “Tony” James of Blackstone Group said stocks were a fool’s game compared with alternative investments. and investing in alternatives makes sense even when they underperform. James said the return from these idiosyncratic investments are very uncorrelated to the broader markets, so portfolio volatility falls.

Hedge funds have been disappointing investors for years. Virtually every alternative investment category crashed in the financial meltdown of 2007 to 2009, none more severely than property, with housing and commercial real estate prices falling as much as 40 percent.

Bloomberg Markets says over the past three years to March 28, 2013:

  • REITs gained more than any other alternative category: large-cap REITs returned 17.3 percent annualized versus private equity which returned 15.2 percent.
  • The best-performing unconventional investments ranged from corn, 33.8 percent annualized, and silver futures, 20.5 percent annualized, to a Chateau Pavie Bordeaux and a 1957 Ferrari 250 Testarossa.
  • Among the worst-performing alternatives were hedge funds, 3.3 percent, and funds of hedge funds, which lost money.
  • The S&P 500 returned 12.7 percent annualized.
  • For investors in real estate and REITs, valuations fell further and faster than other assets and have in the past three years jumped higher than the S&P 500.
  • REITs that invest in shopping malls boasted the best performance with an annualized return of 25.3 percent. REITs that invest in self-storage units, industrial plants, health care, retail and Asian real estate produced 20 percent-plus gains.
  • Hedge-funds invested in mortgage-backed securities gained more than 20 percent annualized
  • Overall commodities returned 3.1 percent, but corn futures returned 33.8 percent.
  • Classic cars and coins gained more than 15 percent annualized.
  • The poor performance of macro funds has been a reason for hedge funds’ overall mediocre 3.3 percent return.

  • Fund-of-funds have lost an annualized 3.8 percent over 3 years, while more than 600 funds of funds, or 25 percent of the total, have gone out of business since 2007.

Bob Rice at Tangent Capital Partners said things that are way down are going to come back, while central banks have given people a prevalence of cheap money to borrow and get back into alternatives such as real estate. Rice says you are starting to see more and more REITs that are borrowing to pay their dividends; a yellow flag to those chasing the asset class right now. Rice says private equity offerings to small investors is the next wave of alternative offerings.

REITs are a growing asset class in Europe and Asia.

Brian Hargrave at ZAIS Financial said the single biggest advantage of REITs is that they’re required to distribute at least 90 percent of their taxable earnings to shareholders as dividends.

The real estate moguls whose heavy borrowing helped fuel the 2008 financial crisis are back at it, taking advantage of Fed-driven low interest rates to amplify their returns through leverage.

David Fann at TorreyCove Capital Partners said real estate has been a huge beneficiary of QE so when central banks finally start raising interest rates, that could quickly end the new property boom and curtail the longer-term appeal of real estate investing. Fann said many of the large private equity deals that were undertaken during the boom period got salvaged because of quantitative easing.

Carl Friedrich at Piermont Wealth Mgmt said hedge funds in aggregate will more and more like the broader market as their asset base continues to grow.

Paul Ashworth at Capital Economics says corn and other agricultural commodities are a bubble which will burst in the next few years – low interest rates to buy farmland and higher yields for corn per acre.

Private equity, aka leveraged buyouts, has benefited greatly from the post-crisis low-interest-rate environment.

Preqin says global private-equity holdings surpassed $3 trillion of assets under management in 2011 for the first time and have continued to grow. KKR owns companies that employ 980,000 people. Blackstone’s more than 730,000, and Apollo’s 370,000.

David John at Brookings says if private equity offerings to small investors start to take hold, there needs to be either licensing, a seal of approval or some level of higher oversight so people don’t find that they are investing in unsuitable for their stage of life.

Read the full article at http://www.bloomberg.com/news/2013-07-10/property-crushes-hedge-funds-in-alternative-markets.html

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REIT Rout Seen Curtailing Deals as Rising Rates Cut Share Sales – BLoomberg 06-27-13

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Property purchases by U.S. REITs are likely to be curtailed as a tumble in share prices makes a key source of capital costlier.

Jim Sullivan at Green Street Advisors said for most property types, we have hit the pause button and expect REIT executives to be very careful with respect to new acquisitions.

Purchases completed by US REITs through June 27 were double the year-earlier period.

A Green Street index of prices has recovered all of its losses from the real estate collapse and as of May was 4 percent higher than the previous peak in August 2007.

REITs attraction as an investment alternative with higher and steady returns is disappearing with rising interest rates, and their dependence on the equity and debt markets to raise money for acquisitions makes them vulnerable to jumps in interest rates.

Craig Guttenplan at CreditSights said REITs will be reluctant to take on debt as a replacement for stock sales because they won’t want to boost leverage and make themselves even less attractive to investors, whereas asset sales would be a better source of new capital.

Single-tenant and health-care REITs have been attractive to investors because of the stable cash flows offered by the long duration of their tenants’ leases, making them comparable to bonds, but since the slide in REIT shares began, the two sectors have been hit harder than other types of landlords.

Paul Adornato at BMO Capital Markets said the REITs will sit on the sidelines and it will take time for the dust to settle to see where they stand relative to the broader market and what the implications are for the cost of capital.

Sam Lieber at Alpine Woods Capital Investors said health-care and single-tenant REITs historically have grown through acquisitions to boost dividends and since their return is the spread between the cost of raising capital and the yield from property purchases, share-price declines and rising interest rates tend to increase the cost of capital, reducing returns. Lieber said they don’t offer a lot of growth.

Single-tenant and health-care REITs have less flexibility to raise rents because of their lease lengths, making other REIT types more attractive to investors. Paul Curbo at Invesco Ltd favors apartment, industrial and regional-mall properties because they have a greater ability to raise rents and grow internally.

Raymond Torto at CBRE Group says demand from investors across the commercial real estate industry remains strong and doesn’t see sellers changing their prices because there are 10 guys in line with the cash.

Sheila McGrath and Nathan Crossett of Evercore Partners say rising interest rates would be the result of an improving economy, which would benefit REIT shares, and says the recent selloff is a buying opportunity.

Read the full article at http://www.bloomberg.com/news/2013-06-28/reit-rout-seen-curtailing-deals-as-rising-rates-cut-share-sales.html

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Armour Biggest REIT Share Loser as Fed Weighs Exit – Bloomberg 05-31-13

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Jason Stewart, an analyst at Compass Point Research & Trading Interest rates moving higher and Fed talk about tapering QE much earlier than the market thought have sent mortgage REITs lower.

Michael Widner at Keefe, Bruyette & Woods said the bond markets have over-reacted to Fed comments, and mortgage REITs have over-reacted to the bond market. Widner recommends buying while prices are low, but says the whole episode highlights risks and difficulties in predicting impacts of QE.

Merrill Ross at Wunderlich Securities said the exiting its eight-month domination in the agency mortgage market is not quite as straightforward for the Fed as entering the fray back in September 2012.

Christopher Donat at Sandler O’Neill expects reductions in dividends rather than increases in the next few quarters, and warned of risks of over-reactions and real risks to the stocks because so much of the ownership is made up of retail investors.

Read the full article at http://www.bloomberg.com/news/2013-05-31/armour-biggest-reit-share-loser-as-fed-weighs-exit.html

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Asian Stocks Plunge as Japan’s Topix, Nikkei 225 Tumble – Bloomberg 05-30-13

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Soichiro Monji at Daiwa SB Investments said selling is feeding into more selling on underlying concern about the Fed’s early exit.

Angus Gluskie at White Funds Management said it is difficult for the market to keep rallying as further moves from Japanese equities need to be fundamentally driven.

Ng Soo Nam at Nikko Asset Mgmt Asia said there could be some knee-jerk reaction to rising US bond yields, which is not good for yield stocks such as REITs.

Read the full article at http://www.bloomberg.com/news/2013-05-30/asian-stocks-drop-as-japanese-exporters-decline-on-yen.html

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Warehouses Win Investors as Unsung Internet Heroes – Bloomberg 04-15-13

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The growth of Internet shopping in Europe is luring investors to warehouses, where yields are beating showy storefronts and sleek offices amid a space shortage.

Jones Lang LaSalle say Europe needs 296 million square feet of new distribution and storage warehouses in the next 5 years, 11 percent of existing modern space, to keep up with Internet sales growth, while a lack of construction in the US has helped rents at “big box” assets above 250,000 square feet outperform the rest of the industrial market since 2009.

Remy Vertupier at the Logistis fund says warehouses generate annual income 2 percent higher than offices and shops in Europe relative to their value, and a lack of space will lift prices.

Axa Real Estate estimates that 90 percent of retail growth in the UK, France and Germany will come from online shopping in the next 4 years.

Forrester Research says internet retail sales in Europe will grow 50 percent through 2017.

Rental returns from warehouses are beating other types of real estate and outpacing assets that typically attract pension funds and insurers. Investment Property Databank says annual rental income from UK logistics centers equaled 6.8 percent of building values in 2012, versus 5.8 percent for stores and 5.5 percent for offices.

Prologis says warehouse tenants like Amazon.com typically want little more than four walls and a roof with loads of doors and a deep truck court. Davis Langdon says that means building warehouses costs an eighth as much as offices and a fifth of the price of shopping malls.

Tidjane Thiam at Prudential said investors such as life insurers and pension funds are looking to buy infrastructure such as warehouses because the income generated fits well with obligations like paying out pensions.

JPMorgan Chase says growing online sales may lead to mergers and acquisitions in the warehousing industry, and Europe’s retail-focused REITs should buy logistics property companies so they can offer tenants both stores and warehouse space to supply Internet sales.

However, Jones Lang says Europe’s income-producing warehouses sold at yields of 7.5 percent at the end of 2012 versus 7.4 percent a year earlier, indicating a decline in prices, while yields for office buildings fell to 5.2 percent from 5.3 percent and shops declined to 5 percent from 5.1 percent.

Read the full article at http://www.bloomberg.com/news/2013-04-15/warehouses-win-investors-as-unsung-internet-heroes.html

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Camp Floats Biggest Tax Shift to Partnerships in 60 Years – Bloomberg 03-21-13

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Congress is debating the biggest rewrite of US partnership rules in 60 years, which may increase taxes for real estate and finance businesses or prompt them to restructure operations to avoid new costs.

The Camp proposal would change the rules for businesses such as partnerships that don’t pay taxes at the corporate level and pass their income through to their owners’ individual tax returns.

Victor Fleischer at University of Colorado said pass-through entities have increasingly been used to facilitate aggressive tax gamesmanship.

CBO says pass-through entities accounted for 38 percent of business receipts in 2007 versus 14 percent in 1980. The IRS says 48 percent of partnerships in 2010 were in real estate, rental and leasing industries, and finance and insurance partnerships reported 48 percent of net income.

James Brown at Willkie, Farr & Gallagher said the proposal leans too far toward pushing people into an S corp structure that growing businesses don’t often use and make partnerships look too much like S corps, with their disadvantages.

Andrea Whiteway at McDermott Will & Emery says the transition rules will be absolutely impossible and crazy, and crazy for S corps.

Karen Burke at University of San Diego said if you get rid of special allocations, people would have to recreate them in other ways.

Read the full article at http://www.bloomberg.com/news/2013-03-21/rewrite-of-partnership-tax-rules-could-shake-real-estate.html

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