Saturday, February 20, 2010

New York Times Shills for Commercial Real Estate

In Real Estate Looks Risky, but Less So for Bargain Hunters, the Times presents in a news section (page B5) and posts online a thinly-disguised advertisement for commercial real estate. Here is one assertion, for example:

“We think REITs are trading roughly at the net-asset value” of the properties they own, said Thomas N. Bohjalian, a portfolio manager at Cohen & Steers, a real estate investment firm. “And that is not the ceiling; it’s the floor.”

What is more significant than stock price, he said, is Cohen & Steers’s prediction that dividends on REIT stocks will grow by an average of 12 percent over each of the next five years. REITs are legally required to pay out 90 percent of their taxable income annually. In flush times, they were paying out a good portion of their cash flow as well. As income from REIT-owned properties rebounds, so will the dividends.

CAUTION All these investment ideas are predicated upon patience and a healthy stomach for risk. With REITs, for example, Mr. Bohjalian said he did not expect double-digit dividend growth to start until 2011.

The "Caution" is almost no caution at all. At today's near-zero one year interest rates, the idea that double-digit interest growth will not begin till next year is more a come-on than a caution. And the implied presumption is that the double-digit dividend growth will be sustained, and that inflation will raise the nominal net asset value of the underlying properties. A much more balanced article would have pointed out the anyone working at Cohen & Steers is horribly conflicted, that the REIT business model is very risky for investors as the lack of retained earnings means that growth comes from selling stock which dilutes out prior shareholders, and that REIT stocks are very high-priced.

An example of that is the leading mall REIT, Simon Property Group (SPG). The yield on SPG is 3.1%. That means its P/E is abou 30X. Why is it not a much, better deal to buy McDonald's at about a 3.4% yield and a roughly equivalent amount of retained earnings, and about half the P/E?

The article begins with the statement that:

EVEN a cursory glance at recent events in commercial real estate would make you think the next big collapse is upon us.

It then goes on to say the following:

Yet in the midst of this, financial advisers are telling their wealthy clients that there is tremendous opportunity in real estate.,


But what’s bad for an owner may be good for an investor.

These are classic tricks of writing designed to set up a straw man and then largely knock it down.

Readers who still trust the mainstream media may not be on guard for an article designed to get them buying REITS and the like.

About a year ago, SPG bottomed around $24 per share. It is currently at $77.

Where was this sort of article in the Times when the price of REITS was less than half the current price?

Think for yourself.

Unlike the Times, which perhaps in desperation has become a mouthpiece for the financial community in New York, with even Gretchen Morgenson accepting the "need" for all the bailouts, most bloggers are unconflicted.
And their advice is at worst worth what you pay for it.

Copyright (C) Long Lake LLC 2010

1 comment:

  1. I have left many comments that do not appear due to your insistence on verifying them!!!!!

    No one else does!!!!