Real Estate & REITs
Winners and Losers

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By Reitnut
June 9, 2003

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I sometimes review the REIT stocks I follow with respect to year-to-date performance and try to figure out the whys and wherefores. I am rarely successful at this (who knows what evil lurks in the hearts of investors?), yet I continue to try to understand them. But, first, let's take a quick look at sector performance according to NAREIT (I will use the Equity index only):

Through June 5, the NAREIT Equity index was up 13.5% in total return. Retail led the parade, up an average of +19.0%, while the hapless hotels comprised the only sector in negative territory, -0.8%. This doesn't surprise me, given the solid AFFO growth and predictability of retail real estate despite the current economic morass and negative job growth, while the travel industry remains firmly on its keester and hotels continue to report disappointing numbers. I am, however, surprised by the solid performance of the office and apartment REITs; one can only guess that investors are looking for a turnaround beginning late this year. I do hope they are right, but so far there's scant evidence of rising occupancy or rental rates.

Here are the returns from the various sectors, beginning with the best: Manufactured homes, +23.0% (small sample, heavily influenced by CPJ's miraculous stock price recovery); neighborhood shopping centers, +19.7%; malls, +18.7%; specialty (whatever that means), +17.2%; free standing, +16.8%; healthcare, +14.1%; and diversified, +13.7%. All of these managed to beat the NAREIT average. However, office was right at the mid-point, +13.5%.

Those sectors with below-average performance include: Storage, +12.0%; mixed office and industrial, +11.0%; industrial, +10.3%; apartments, +9.9%; and then, dwelling deep in the cellar, hotels, -0.8%. OK, let's move on and discuss the best and the worst performers within each REIT sector:

Two REITs with assets in lower-barrier to entry markets, Gables and Summit, led their peers with price-only returns of 23.3% and 16.7%, respectively. I must confess to having no explanation for this, as the Southeast and Southwest apartment markets don't look much better to me than markets anywhere else. GBP reported same-store revenue growth of -1.3%, which was better than the sector mean of -2.9%, but SMT's decline was -5.9%. Essex saved the high-barrier proponents from abject embarrassment by nabbing honorable mention (+15.6%). Note: all these figures are price-only. Poorest performers? In last place was perennial loser Associated Estate, -9.6%; its Q1 numbers were positively ugly, as same-store NOI fell 13.6%. Somebody ought to give this REIT a frontal lobotomy. Next to last was Aimco, -2.9%; they reported a butt-ugly quarter, with NOI down even more than AIV's results; the dividend will be shaved if a recovery doesn't materialize within the next quarter or two.

The manufactured home sector was led by a rags-to-riches story, Chateau, +29.7%. This REIT frog was kissed by a rich princess with lots of capital and became a charming prince to those investors lucky or wise enough to risk warts (and worse) by holding on. MHC turned in a stellar performance (+17.8%), and Sun came in third, at a still respectable +10.3%. The sector was obviously helped by the sudden interest in the dissed "mobile home park" industry by the Sage of Omaha, who is intending to take over Clayton Homes, a manufactured home manufacturer (redundant as that sounds).

In malls, Rouse seized the winning position, +21.1%; it may have been helped along by management's statement that, unlike some mall REITs we know, it would not attempt to entrench itself if a nice offer came along. General Growth, reporting splendid results and continuing to gobble up others' malls, placed, +18.1%. CBL is presently in the cellar position, but still managed to ring up a gain of 10.1%; their results look OK, but CBL's AFFO growth rate for this year and next could lag behind its peers. And Crown American did just a bit better than that, +10.9%, despite its agreement to be acquired by Penn REIT. While not a "take-under," there was no premium for this slow growing but high-yielding REIT.

Moving over to the neighborhood shopping centers...Developers Diversified topped all peers, +33.4%, as cap rates for the type of big box properties owned by DDR have, contrary to everyone's expectations, come down along with the rate on the 10-year T-note; DDR tends to own bond-like assets. It should also benefit by consumer trends towards trading down in this yucky economic environment. Smallish Equity One was a surprise to most observers, racking up a 25.2% price-only gain after swallowing IRT Property. Both stocks look very pricey to this observer, trading at 21% and 17% NAV premiums. But what do I know? I own neither. Regency, racking up a gain of only 7.3%, felt the wrath of investors resulting from GE Capital's apparent decision to sell its huge stake in the company, placing an overhang hex on the stock. Yet, it is performing well operationally, and (in the interests of full disclosure) we are continuing to buy the stock. Heritage, skating on somewhat thin ice vis-�-vis the dividend, was second-to-last, yet still up +11.4%.

Disposing of outlet centers quickly (there are only two investable companies in this sector), Chelsea again hit the cover off the ball, scoring a 27.7% price-only gain; results continue solid, and the company's foray into Japan looks better than ever despite SARs, deflation and political paralysis in the Land of the Rising Sun. Tanger, a slower-growing peer that is looking slightly better to me these days, managed a 6.2% gain and is one of the few quality retail REITs that's yielding over 7%.

In healthcare, Health Care REIT has performed best (+10.8%) by sticking to its knitting and making no egregious errors; its properties are performing satisfactorily and AFFO growth looks as though it will lead the healthcare pack this year. Healthcare Realty, stung by worries that HealthSouth's accounting fraud will spill over and impact its lease revenues, rose by just 2.9%. Many believe these fears are overdone; I do not actively follow the company and thus have no opinion. In case anyone cares, Health Care Properties seems to be acting like the Komeback Kid, and is now up 7.2% on the year, finishing the race (through June 6) in the middle of the pack; methinks the selling in the stock was way overdone, and we have been buying it � perhaps a good place to hide in the event we don't get that economic recovery, as are some other healthcare REITs as well (though we need to watch those Medicaid reimbursement issues).

Catellus, though not yet a REIT, squeaked out a narrow win in the industrial sector, +16.0%; however, perhaps like Roger Maris, there ought to be an asterisk next to its name, as it has not yet begun to pay REIT-like yields on its shares. Anyway, it is suffering from tough markets like its peers, but investors seem to like its long-term development strategy and expertise. Mission West, believe it or not, snagged the place position, +15.7%; perhaps investors are coming to believe that "Tech is Back," and assuming that demand for Silicon Valley real estate roar back also (some people will bet on anything). And, sad as it is for me to say, AMB Properties is dwelling in the cellar with a year-to-date gain of just 6.4%. I like this company a lot, and believe its stock is relatively cheap, but its near-term growth rate is nothing to write home about, while it sells off assets at nice prices (short-term dilutive) and struggles with its Bay Area portfolio. Liberty, another industrial REIT with good management, was able to score only a 6.8% price appreciation, as it, too, struggles with tough markets. But, like AMB, methinks its doing a commendable job under the circumstances.

Let's now move on to the office sector. The winner here will knock your socks off: Trizec! Some how, some way it has been able to deliver a return (price only) of +21.5%, despite reporting Q1 occupancy of just 87% and NOI shrinkage of �5.3% (below the peer mean of �4.1%). Can Tim Callahan be that popular with investors, even as Peter Munk is not? Anyway, looking at a 2-year chart on the stock convinces me that TZH was just beaten down too badly, and had nowhere to go but up; score one for deep value investors. Arden and Kilroy were the second and third best performers, up 19.4% and 18.7%, respectively. The primary reasons are the relative strength of the Southern California office market � it's not as bad here as elsewhere � and their high dividend yields haven't hurt.

The woes of office owners can be seen most clearly in suburban markets, particularly in low barrier to entry locations, and this was probably responsible for the poor operating performance of Great Lakes and Highwoods �GL's occupancy is falling faster than rainfall on the East Coast, down to 81% and dropping, while HIW's same-store NOI fell 11.1% last quarter. GL's shares are off �4.7%, although HIW's stock almost managed to break even (-1.9%) despite a dividend cut. There isn't too much doubt that GL will also have to cut their dividend if they cannot find a buyer for the company. Tsk, tsk.

Public Storage greatly encouraged investors with a stronger than expected Q1; although results remained ugly as it bails itself out of a management-induced snafu (helped along by a lousy economy and a strong housing market), the shares managed to rebound from early-year losses and are now +11.0%. Sovran, saddled with a management team that I gave up on a long time ago, brought up the rear of this small sector but still managed a 7.0% gain.

Finally, at last...the hotels. Starwoods, a non-REIT, managed to win the stakes, +28.2%, and this despite continuing to report stunningly bad results, e.g., same-store ebitda fell almost 19% in Q1. Maybe investors are looking only at the company's stock symbol ("HOT") and figure they need to be on board? It's that kind of market these days, isn't it? Host Marriott somehow managed to deliver a 7.7% gain, despite a Q1 5.5% RevPar decline; maybe quality assets are popular this year, and investors are looking at the glass as being half full; I like the company long term, but see the glass as only one-quarter full. Alas, poor Felcor, I know him not well, and that was fortunate for my portfolio. FCH took a 25.6% dump, most likely due to a sickening drop in operating margins, more RevPar declines, a reduction in earnings guidance, the suspension of its dividend and the need to sell assets to reduce leverage. Other than that, things are going quite well at Felcor

Well, enough of this madness. Sorry if I stepped on anyone's toes.


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