Oases of Value in the Real Estate Desert

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"Pride of the peacock angel
Under the feather veils
Dark tresses under the black light"
-- Mr. Bungle, "Desert Search for Techno Allah"

If you are a real estate investor, it must feel as if you are wandering through an infinite desert. Stocks in the sector performed so well for years on the basis of heavy leverage and a misguided belief that real estate prices would rise forever; but now, the entire sector seems barren, with little hope in sight. No one in their right mind will claim that real estate is going to come back immediately, but with the complete destruction in real estate stocks, perhaps there are some value stocks to keep an eye on. In particular, maybe it's time to seek out some high-quality real estate investment trusts (REITs) selling in the bargain bin.

Now, you may be wondering what the above song lyrics have to do with REIT investing. On the surface, they likely make no sense unless one takes the time to dig deeper. Similarly, at first glance, investing in REITS probably makes no sense. However, after digging a bit deeper, I think quality REITs might be a very good investment in 2009.

Of course, that's not to suggest that you wade in blindly. Industry heavyweights such as Vornado Realty Trust (NYSE: VNO) and Simon Property Group (NYSE: SPG) have heavy debt loads and scary exposure to commercial real estate in markets that might still be in a bubble. Yet, maybe there are others out there that have been punished unfairly and present investors with considerable value.

In order to search for our desert oases, let's use the CAPS screener to find REITs that appear to be going on the cheap and that have low levels of long-term debt. We'll use three criteria in our search:

• Long-term debt-to-equity ratio less than 1.6
• Stock trading more than 50% below its 12-month high
• Price-to-book ratio less than 1

Here are some of the results:

Company	CAPS Rating (5 max)	Price-to-Book	LT Debt-to-Equity	% Below 12-mo. High
Agree Realty Corp	*	0.65	0.74	63.8%
Colonial Properties Trust (NYSE: CLP)	**	0.15	1.54	86.6%
HRPT Properties Trust (NYSE: HRP)	****	0.31	1.31	63.4%
Jones Lang LaSalle (NYSE: JLL)	*****	0.58	0.50	79.9%
Kimco Realty Corp (NYSE: KIM)	*	0.50	1.03	83.2%
Medical Properties Trust (NYSE: MPW)	****	0.34	0.96	75.0%
Winthrop Realty Trust	****	0.35	0.96	73.7%

Data from Motley Fool CAPS.

One of these companies, Winthrop Realty Trust actually trades significantly lower at $7.00 than its cash per share figure of $11.42. Of course, some of these stocks might end up being nothing more than mirages, teasing us with illusions of value. For instance, purchased property is carried on the books at cost. If the value is later determined to be less than historical cost, the balance sheet and income statement will both take a hit.

That's why the CAPS screener is merely the first step in finding value stocks in the market. It's important to do some due diligence before diving in, and The Motley Fool's CAPS community is a great way to see the thoughts of other investors on these companies. 

REIT-related Foolery:

• 1-Star Stocks Poised to Plunge: Simon Property Group?
• A Real Estate Stock With Healthy Potential
• Dream Stocks for Real Estate Investors