From the January 2009 issue of Boomer Market Advisor • Subscribe!

Bargain hunting on REIT Street

The mortgage market's in the tank. Real estate is at depressed levels not seen in 40 years. Is now really the time for boomers to invest in a real estate-based product?

Several weeks after the beginning of the market meltdown, Barbara Steinmetz is in buying mode again. "The world," observes Steinmetz, CFP and principal at Steinmetz Financial Planning in San Mateo, Calif., "is on sale right now."

As a real estate broker and fee-only financial planner, Steinmetz says she is eyeing the real estate market closely, searching for bargain investments for her clients. One area of her focus is real estate investment trusts, especially for boomer clients interested in investing in the real estate market but either aren't liquid enough to buy tangible real estate directly or aren't interested in taking on the responsibilities of a landlord. Last fall, as tangible real estate and real estate investment trusts were losing value amid a full-blown global market meltdown, Steinmetz says she opted to pull her clients out of most of their REIT positions, at least temporarily.

"We made some serious money on those positions -- global REITs mostly," Steinmetz says. "When I saw the market going south, rather than sit and ride it all the way down, we pulled out, because I felt like we needed more positioning in cash."

The dust hasn't settled from the financial crisis, but Steinmetz is again readying her clients to become REIT buyers. "In a diversified portfolio," she says, "REITs intuitively have appeal because they provide exposure to a non-correlated asset class. I pulled people out of their REIT positions, but that doesn't mean we will stay on the sidelines. I think it's almost time for us to jump back in."

"It seems to be a good time to be a [REIT] buyer," echoes Richard Robb, CFP, AIF and partner at Capital Management Partners, a financial management firm in Peabody, Mass. "There's been some deflation, and that tells me you can find good prices out there."

Those buying opportunities were coming to light as REITs were enduring a difficult fourth quarter on the heels of a relatively strong performance in the previous three months (see sidebar on page 56). As of mid-November, the MSCI U.S. REIT Index, a measure of REIT prices, was down almost 44 percent for the quarter, roughly double the decline experienced by the S&P 500 during the same period. In the bigger picture, however, MSCI's REIT Index was outperforming the major stock indices -- Dow Jones Industrial, S&P 500 and NASDAQ -- over five- and 10-year periods on a compounded basis, according to

That indicates to Anatole Pevnev, a REIT specialist and founder of, that REITs are fundamentally well-positioned to rebound, perhaps more quickly than other types of assets, because they tend to be relatively liquid and thus, better able to meet short-term cash demands and to access capital. "REITs are not banks, they are not brokerage firms and they are not investment houses," he says. "They really are very stable because they typically don't have issues with cash flow."

Still, some REITs are weathering the financial crisis better than others. Advisors who are scanning the REIT market for bargains would be wise to "check under the hood [of the trust] thoroughly," cautions Robb, before committing client dollars to a particular vehicle.

What to look for under the hood? In the current economic landscape, the best-positioned REITs are those with adequate liquidity and access to capital, Fitch Ratings indicates in its latest quarterly REIT report. On the other hand, it says, "REITs with assets in markets that have been disproportionately affected by the housing downturn, as well as those REITs exposed to markets with low barriers to entry and weakening economic and employment bases, are at greater risk for declines in net operating income growth and occupancy levels."

A conservative structure and approach protected certain REITs (and their shareholders) from losing much ground during the recent crisis while other more highly leveraged trusts slipped dramatically, chiefly because of dwindling access to capital, explains Byron Carlock, president and CEO of CNL Lifestyle Properties, a non-listed REIT whose holdings are concentrated in the lifestyle and recreation sectors. "On the structural side," he says, "we have a significant amount of cash -- in the range of $230 million to $250 million -- plus a low [funds from operations] pay-out ratio and a strong balance sheet."

Those financial factors are among the key variables to consider in attempting to identify sound, solid investments in today's REIT market. Here are few other considerations that, according to REIT experts, should weight heavily in an advisor's evaluation:

  • Look for companies with a strong balance sheet and a low leverage ratio. "The better companies still have a capacity for borrowing -- they have access to a large line of credit," says Pevnev.
  • As the global financial crisis is underscored, it's crucial to find trusts that have shown an ability to maintain strong performance under a variety of market conditions. "Look for a proven ability to weather the storm," advises Pevnev. In difficult markets, adds Carlock, it helps if a REIT has close relationships with the tenants in which it has a stake.
  • Learn all you can about the REIT's management approach. "You want a management team you're comfortable with strategically," says Pevnev, and according to Steinmetz, "you need to believe in the philosophy of the company." In cases where a potentially large client investment hangs in the balance, adds Robb, it behooves the advisor to meet with members of the REIT management team. Even if the pending investment isn't huge, it makes sense for the advisor to talk with REIT management via the phone or e-mail.
  • Look for shrewd operators whose r?sum? shows they're good at identifying quality buildings, picking quality locations that attract quality tenants, and adding value to the buildings they buy, recommends Robb.
  • Seek diversification. Look for a diversified REIT or invest in a range of REITs representing different sectors of the market. "What you want to do is pick out the best of breed in each of the sectors -- office, industrial, hotel, retail, residential," says Pevnev.
  • Do your research. "REITs are not all created equal," says Steinmetz. "It requires a tremendous amount of additional research and knowledge to make sure you know what you are getting." Ratings services such as Fitch and S&P keep close tabs on the REIT market; a wealth of information is also available on Pevnev's site ( as well as on, the Web site of the National Association of Real Estate Investment Trusts.
  • Determine the role intended for the REIT in the client portfolio: is the main goal to generate income or appreciation, or both?
  • Evaluate sectors. Steinmetz likes the prospects for REITs focused on assisted living/care facilities. Fitch Ratings reports that storage and healthcare properties performed best among North American property types in the third quarter, with year-to-date returns of almost 34 percent and almost 17 percent, respectively. Of late, Steinmetz adds, equity REITs have performed better than mortgage REITs (not surprisingly). Carlock says REITs of the net lease and diversified varieties have done well lately. He also suggests investors look at REITs that focus on recession-proof types of properties -- CNL's REIT, for example, which invests in "drive-to" leisure and recreational destinations. Robb says he favors REITs that use mezzanine debt strategies. For income, he suggests looking at REITs with an industrial orientation.

Once you've identified a REIT worth investing in based on the above criteria, move decisively. The bargains won't last forever.

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