I have been very bearish on Commercial Real Estate names in general but I just want to elaborate more on this and further explain my beliefs. I began building short positions in January, on FRT, MAC, and KIM, while being long the SRS (2x inverse of Dow Jones Commerical Real Estate Index) for some extra “juice”. I covered all of my shorts and sold the SRS towards the end of February and am just about ready to go again.
One of the biggest reasons I don’t like REITs is their dividend policy. The IRS has allowed the REITs to pay 90% of their dividends, in the form of stock. This is obviously a way to help the REITs conserve cash; however, some REITs have such high debt levels, it may not matter. In addition, if I owned a REIT, why would I want to get stock as a dividend, when most of the commercial real estate stocks have plunged 50-70%? In addition, what about the dilution of stock ownership? Even though these dividends may yield 8-10%, the dividend payment is in the form of stock. VNO is one of the REITs that has done this and I truly believe it would be better (for the investor) if the REIT would reduce the dividend. I believe SLG did this to conserve about $90 million in cash. I expect this trend to continue since commercial real estate continues to weaken and as the policy deepens; I personally believe that many investors will dump these REITs.
Another reason why I don’t like REITS is due to the heavy debt load that many REITS carry on their balance sheets. Many firms like GGP were highly levered and had very low cash levels, compared to their debt outstanding. I don’t have the numbers if front of me but I believe GGP had $140 million in cash but $24 billion in long-term debt…not good! In addition to this, refinancing much of this debt is incredibly hard to do right now. The CMBS market used to fund $150-250 billion each year and now the market has very little activity, if any. REITS may be forced to sell “prized” assets to get cash because of the weak CMBS market; however, they will have to sell at depressed prices and buyers may be difficult to find. Free cash flow and liquidity will be “key” for these REITs, in order to withstand this terrible market.
With that being said, there are several types of REITs: Industrial, Retail, Office, Hotel, Diversified, Healthcare, Senior Living, etc. I pulled together a list of REITs that are having serious problems and will set up for a nice play via short selling or put buying. However, this is “Part 1” and I will post a stock list tomorrow in “Part 2”.
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I read an article a few weeks ago talking about this stock dividend policy. I agree with your views. It's incredible to see the high risk profile of these Real Estate Investment Trusts. In the past, these trusts used to be safe havens. If I find the article, I will e-mail it to you. By the way RF, I really enjoy this blog.
ReplyDeleteNice job.
RF,
ReplyDeleteWhat is your view on Treasuries? That interesting statement from China came out yesterday, which kind of makes me what to get short here..
Charles - Thanks for the note, send it my way if u find it.
ReplyDeleteAnonymous- Great question. Here is my take, for what it is worth. There is clearly a bloated bubble in Treasuries that has yet to pop and will pop. Timing is the key to the trade though. Personally, I don't think its time yet, for two reasons. One being the Fed. If the Fed decides to buy Treasuries, it will kill the short position and the Fed has more money than any hedge fund (or at least I hope so haha). Secondly, is possible deflation. If you think we will enter deflation, long Treasuries may be a investment for many. For example, if you get 3% on the Treasury and CPI drops 2%, you are getting a 5% real return, that is risk-free. That is tough to be beat in this environment.
However, if you want to short, the way to play it is by getting long TBT, short TLT, or buy puts on the TLT.
Thanks for comment.
RF:
ReplyDeleteNice piece dude. The CMBS market is bad. CR companies are not raising any equity these days, compared to the past 3 years. I'll be back to check the names tomorrow.