Real Estate Investments

Real Estate Investments: How to Buy Dollars for 67 Cents

by Floyd G. Brown, Advisory Panelist, Investment U
Monday, April 28, 2008: Issue #789

Who wouldn’t want to buy $10,000 of real estate investments for $6,700… especially when you could also enjoy fat, regular dividend checks while you wait for the price to rise?

Buying real estate isn’t a popular view right now. But that’s what being a contrarian is all about.

To be sure, real estate investment pain surrounds me. I see it everywhere. Empty buildings are in neighborhoods around the country. In my own neighborhood, I can look down the street and see a beautiful 3,500 square-foot home stand empty. The owners left in September of 2007. Their realtor doesn’t even stop by anymore. The flyer bin has been empty for months. The lawn is a mess. And I can’t imagine what else goes unattended.

James B Rogers, Jr. says this is “one of the worst [recessions] since World War II.” Stocks with exposure to the credit markets have been crushed. Consumer-dependent stocks such as retailers are reeling.

Occasionally we see a relief rally, but smart investors see these as bear traps. One has to wonder if we are at the beginning of a drawn-out grinding bear market, or if the goldilocks economy will reappear on the horizon…

Consumer Sentiment Hits Lowest in 26 Years

The University of Michigan consumer sentiment index, the most widely quoted barometer of public feelings about the economy, fell in early April to 63.2, its lowest level in 26 years.

High food and gasoline prices, as well as rising unemployment, have made consumers pessimistic about the future. Financial hardships are influencing Americans’ pocketbooks more negatively than at any time since 1980.

The real estate and housing markets are in the dumps. It is lower than even the battered stock market. The worst performers by a mile are the firms with interests in real estate. Many economists see parallels with 1977, which saw inflation coupled with stagnation.

I don’t buy into their views.

Ben Bernanke and his friends in the United States Congress are doing everything they can think of to lower mortgage rates and resuscitate real estate.

As a result, I think we could be closer to the end of the bear market in real estate, than the beginning. This doesn’t mean we are out of the woods yet, but its time to start scouting for under-priced values in real estate investments, especially in the commercial sector…

The Commercial Real Estate Investments Bargain Bin

In my view, commercial real estate investments have been unfairly beaten up by the residential sub-prime lending mess.

As a contrarian, that’s a perfect time to buy.

At some point (though we don’t know exactly when) foreclosure signs will slowly be replaced by sold signs. Empty buildings will be filled with new businesses, and you want to be buying now so you can be a seller once prices head higher.

This is the difficult part of being a contrarian:

It is hard to make the switch from being bearish to bullish when everyone around you is still bearish.
You do not want to wait and start buying once the recovery is well under way…
Because you will miss some of the most profitable price moves.

Instead of hiding from the market in cash accounts yielding 1% to 2%, I encourage you to research some of the screaming values in the commercial real estate sector most affected by the downturn…

Buying Real Estate Investment Trusts or REITs

We’re talking about Real Estate Investment Trusts, or REITs. Because of their unique tax status, they are required to distribute earnings to shareholders, often paying fat dividends. And with the recent correction, many of these firms’ share prices are trading below the value of the real estate they own.

One REIT I particularly like is HRPT Properties Trust (NYSE: HRP):

It traded as high as $13.40 in 2007. The huge drop in its share price since then does not change HRPT’s assets.
Today you can own it for $7.34.
At this price, it trades at 67 cents on the dollar of its book value, and yields over 11%.

You are buying HRPT’s 351 office properties and 153 industrial properties for less on Wall Street than you could directly, even in the depressed real estate market.

In short, commercial real estate is on sale on the NYSE right now. And with HRPT, you’ll be buying $1 of real estate for 67 cents. Not bad.

Good Investing,

Floyd

Today’s Investment U Crib Sheet

The National Association of Realtors (NAR) reports that demand for commercial rental space is increasing. The average rental rates are expected to rise, too, by 5.3% in 2008. Here are five other REITs on sale right now…

REIT	Share Price	Discount to NAV
ING Clarion Real Estate Income (IIA)	$11.39	(7.62)%
LMP Real Estate Income Fund (RIT)	$15.90	(2.45)%
DWS RREEF Real Estate Fund (SRO)	$13.23	(8.44)%
Nuveen Real Estate Income Fund (JRS)	$16.71	(5.70)%

Be careful of REITs trading at a discount. Some of these REITs trade at a huge discount for a reason. Be aware that the greater the discount the greater the risk you take on.
Real Estate Investment Trusts can be an integral part of a long-term portfolio. You make money in three ways: income, price appreciation and diversification. For more high-income ideas, see Investment U Issue #779, Exchange Traded Funds: 4 Ideas For Income Investors in which Alex Green recommends two tax-free funds and two ETF’s with a little more pop.

Special Feature: Bill Miller (Cautiously) Calls the Bottom

Our philosophy on market timing is simple: It doesn’t work.

Trying to predict the outcome of innumerous economic variables is almost always futile… even for Wall Street’s most seasoned money managers.

But there’s one in particular we take notes from…

Bill Miller, the Chairman and Chief Investment Officer of Legg Mason Capital, is one of the most successful value investors in America. At one point, Miller’s Legg Mason Value Trust (LMVTX)** beat the S&P 500 for 15 straight years.

Last week, Miller delivered some promising words for stock investors. In his first-quarter letter to shareholders on Wednesday, Miller clearly believes the worst is over…

“The collapse and rescue of Bear Stearns, an event that I believe (though no one knows) ended the panic phase of the credit cycle. The economic consequences of curtailed credit, increased risk aversion, deleveraging, lost jobs, falling house prices, and negative equity returns remain, and are likely to take some time to play out. All of those issues have been front-page news for some time, and I believe they are well discounted by the market, which is why stocks have risen since Bear’s collapse…”

“For planning purposes, here is my forecast: I think we will do better from here on, and that by far the worst is behind us.”

According to Miller, “the wild card” is commodities.

“If commodities break, or even just stop their relentless rise, equity markets should do well. If they continue to move steadily higher, they have the potential to destabilize the global economy…

“Despite moving higher over the past month, the U.S. market and most others around the world are down for the year, and fear and risk aversion still predominate. Yet valuations in general are not demanding, interest rates are low, and corporate balance sheets, especially in the U.S., are in excellent shape. That sets the stage for what should be an improving environment for investors in stocks and in spread credit products, if not in government bonds where risks are high and opportunities low, in my opinion. With most investors being fearful, I think it makes sense to allocate some capital to the greedy side of that pendulum, and that means putting cash to work in equities.”

To read Miller’s entire letter to shareholders, just go here.

*Note* The Legg Mason Value Trust (LMVTX) has been in the Oxford All-Star Portfolio since February 2005. To learn more about the Club’s portfolios, including all of Alexander Green’s growth-stock picks, here’s how to join.

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