Real Estates Vs. REITs – What's In It For You?

Why do you have to go through the trouble of buying and selling actual properties while you can own real estate shares via Real Estate Investment Trusts (REIT)?  If you hear this from your spouse or friends, you are not alone.   A piece of actual real estate is not as liquid as stocks, which you can buy and sell in a matter of minutes after you have done your homework on the company.  However, you will have the opportunity to choose a particular investment property in terms of location, size and condition and style while REIT is a broad investment in properties.   REITs give no more visual stimuli than stocks of manufacturing, energy, medical or waste management businesses.  From the perspective of an artist, designer or architect, it is boring.  Once you have a place of your own, you can put your artistic, designing and constructing spin on it.  To some, nothing beats that, regardless of a landlord’s challenges. 

Owning a piece of actual property is different from having shares of REITs even from financial and investing perspectives.  REIT does not proportionally represent real estate weight in the S&P 500 as real estate rentals and leasing has significantly bigger presence in GDP.  Even when real estate is generally in demand like now, you may still find the one that makes economic sense to you, or the one that you are willing to pay, but it is not feasible to do it this way with REITs.  Buyers may be more willing to pay for the properties than the company that own them or vice versa.  In 2015, REITs are lagging behind home builders and the broader stock market, and are expected to have further uncertainties if the Federal Reserve raises interest rates.  The REITs index that had a great run since 2008 was finally down a high single digit percentage in 2015.  A good time to invest in REIT?

Let’s take a look at Federal Realty Investment Trust (FRI) which is an equity real estate investment trust (REIT) with a Market Cap of 8.9B and is engaged in the ownership, management, and redevelopment of retail and mixed-use properties of residential and commercial, located primarily in the Northeast and Mid-Atlantic regions of the United States and California.  On Sept 11, 2015, FRI, with 69.13M shares outstanding and a 10 day average trading volume of 327,128, opens at $126.59 with a previous close of $126.73. At this point, it is 15.38% off its 52 week high of 151.11, and 9.76% off its 52 week low of 116.5.  It has a dividend yield of 2.97% (as price goes down, dividend yield goes up).  FRI’s EPS is 2.27, and its P/E ratio, 55.9.  Stocks that are trading at relatively high multiples do not necessarily mean they are overpriced.  One reason can be investors’ willingness to pay a higher price for the company’s future growth.  But REIT stocks are not perceived as awfully cheap at this point.

Why do REITs remain an investment option?  Although REIT, such as Vanguard REIT (VNQ 144), iShares U.S. Real Estate ETF (IYR property & mortgage), MSCI US REIT Index (143) or Dow Jones US Select REIT Index, is a broad index investment vehicle, there are options for investing in concentrated areas with individual REITs, such as, apartments (Equity Residential EQR), multifamily communities in metropolitan areas (AvalonBay (AVB), shopping malls (Simon Property Group SPG), hotels & resorts (Host Hotels & Resort HST), self-storage spaces (Public Storage PSA) and medical facilities (Health Care REIT HCN) as well as buildings that average investors may not get access to like Empire State Building (Empire State Realty Trust ESRT).  The payouts of REIT stocks can also be attractive to investors.  REITs shares are publicly traded and are required to pay at least 90% of their corporate income to shareholders in the form of dividends, which is typically taxed at a higher ordinary income rate rather than the lower dividend rate.  REITs may be held in an individual retirement account or 401(k) for tax reasons.  Investors may consider REITs for the purpose of diversification although you most likely have had some exposure to REITs via your index funds.

.

Paper Money vs. Hard Assets - Should You Have Owned Buffalos Instead?

The limit prices for purchasing 5 stocks were set almost a month ago ranging from 15% to 50% down, which seemed almost impossible to reach at the time.  It shows the level of my willingness to buy these stocks at that time, but today, I am not so sure if I am willing to buy them with the set prices.  When I finally had a chance to open up my brokerage account, it was too late.  It was almost scary to see what has happened. 3 out of 5 stocks on my buying list automatically went from “open” to “complete”.   Should I hold off or drop price on the 2 left?  I immediately thought.  My confidence level in investing in these stocks has dropped since, but why?  I am mostly a long term investor, and these are mainly solid companies with a solid balance sheet.   The companies on my wish list are what I always want to buy - the more, the better, and I have just been waiting for the right moment like a ferocious tiger.  On a day like today, my hunger is somewhat replaced by fear.

The stock market has experienced a roller coaster ride in the last ten days.  DJIA dived to a new low of 16,058 on the 1st day of September, after plunging another 469.68 points or 2.84% since its significant fall on Aug 20, 2015to 16,991 after plummeting 358.04 points or 2.06% on that day.   You may argue your stocks or paper money (they are not even on paper at this digital age) are backed by hard assets of those companies.  On a day like today, you may feel you need something tangible that you can see and touch.  

Ted Turner, the founder of the Cable News Network (CNN), the first 24-hour cable news channel, and a pioneer and visionary in TV broadcasting, is one of the largest private landowner in the United States.  His land is mostly used for ranches to re-popularize bison meat for his Ted's Montana Grill chain, amassing the world’s largest herd. Turner Broadcasting System, Inc. merged with Time Warner, Inc. on October 10, 1996, and on January 11, 2001, Time Warner was purchased by AOL to become AOL Time Warner.  The burst of the dotcom bubble hurt the growth and profitability of AOL, which in turn dragged down the combined company's performance and stock price, where he lost his operational role as well.  It is estimated that, as Time Warner's biggest individual shareholder at the time, he lost approximately $7 billion when the stock collapsed in the wake of the merger.   It was reported that, when asked about buying back his former assets, he replied that he "can't afford them now".  Maybe he will if he manages to raise a few more buffalos on his cumulated land.

You may wonder if you should have owned buffalos instead.  Let’s not forget Warren Buffett, one of the richest men on earth, who has made his marks through the financial system that we live in today.  When you think of him, it almost makes owning the land and cows absolutely obsolete and totally 17th century.  He does own a 400-acre farm outside Omaha and a commercial building in Manhattan, but they play no significant roles in his holdings.  Let’s also not forget that shareholders of Enron almost lost everything, and even shareholders of companies like AT&T once lost a significant amount that they had never expected.  The financial guru’s advice to his trustee is to put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund, and he suggests Vanguard's.  A close friend of mine, who does not eat red meat except bison, happens to be also a believer in diversification via mutual funds. The concept of diversification still stands, at least for some of us, and you just need to find your own comfort zone of investing.  A stock owner may also consider owning a few patches of land and raising a few cows among others including mutual funds.

.

How Do You Feel about the Largest Company in Your State?

Larger is not always better, but size does matter to a degree.  Here is the largest company in every state, and how do you feel about the largest company in your state?   

.

Is China's Warren Buffett Possible? And China's Berkshire Hathaway?

China Can ‘Never’ Have a Warren Buffett If Beijing Props Up Stocks, Property Mogul Says.  Read on...  China's Fosun Thinks Big in Overseas Deals Push.  Company Aspires to Be China's Berkshire Hathaway.  Read on...

.

Troubling Lessons in China’s Crumbling Stock Market

Chinese stocks crumbled another 6% Friday, despite the government throwing everything but the kitchen sink at engineering a rebound.  Read on...  And your comments?

.