That REIT Sinkhole of Yours

Part 1

         At 72, one forgets his share of nitty-gritty, and sometimes when the nitty comes back, the gritty doesn’t, and you’re always coming up with some gritty when you never had any nitty in the first place.  Couple weeks ago, a valued subscriber asked why one particular Real Estate Investment Trust (REIT) was a financial, and what we shoveled out had neither nitty to it nor gritty, but we piled it on deep and stinky anyway.

         The Crime Families look upon financials as public companies holding significant paper assets, and for an REIT, those are leases.

         There.  That’s the real answer.  Leases.  Most REIT’s rent property to leaseholders.  Often, all their income comes from this paper.  This is what makes most REIT’s financials.

         Problem with financials is, Wall Street goons have the power to gangbang prices of these securities by forecasting changes in interest rates, giving the Securities and Excuses Commission (SEC) all the reason it needs to overlook the kind of flagrant concerted action it takes to rip off the public so thoroughly over nothing more than a glimmer in somebody’s criminally insane eye.  Where financial institutions earn money at longer rates than they borrow at, profits can be projected to suffer when the yield curve inverts, a thing always assumed in a profiteering monster’s argument against financials.  That’s the case with REIT’s holding leases that extend well out into the future.

         Note that the Family jibber-jabber focuses on expectations.  Profits don’t actually have to get hit.  The crooks short REIT stocks en masse, industry-wide, then print fables about why the SEC can excuse this criminal behavior, and our regulatory hotshots turn a blind eye.  Similar smears are spread about others throughout the financial sector.  Such scams have been a huge source of gangland revenue over the years.

         Generally, buy-side investment professionals wheel and deal with financials at some point near perceived interest rate inflection points, or do not hold them at all.  As the financial holocaust so clearly demonstrated, real estate paper is not exactly excluded from Crime Family attack.  In fact, at such times rental leases can be the weakest asset class in the whole sector.  Part 2 below, in addition to making its own point, touches on why.

Part 2

         Investment grade companies like Coca-Cola (KO), Johnson & Johnson (JNJ), and Procter & Gamble (PG) publish annual financial statements and unaudited interim releases reporting quarterly results.  So does every speculative-grade publicly held corporation in America.  This lets Wall Street Crime Families delude naïve investors into comparisons where there are no comparisons, and that scam pushes retail clients into reaching all the wrong conclusions.  Like saying that yields in the Real Estate Investment Trust (REIT) sector are more attractive that those of gilt edge consumer non-durable blue chips, so you should “diversify” by cutting back on KO, JNJ, and PG to make room for the ghetto strip mall operator of your choice.

         Subscribers, would you ask the United States Navy to diversify military assets by decommissioning an aircraft carrier to add a canoe?  A fleet of kayaks?  Real estate of any kind has never been anything but pure speculation, in large part because of the outrageous financial leverage involved.  (See Trump, Donald, for appropriate discussion.)  How does holding land and/or buildings in the very same way through some weird legal form suddenly change all that for you?

         In another life, your blogger spent 365 days at a public accounting firm.  It was exactly 365 days because that’s precisely what he needed to qualify for a CPA certificate, and small business in that community was so full of small-time crooks your blogger couldn’t get out of there fast enough.  The job consisted entirely of 1) cheating Uncle Sam out of pretty much all his tax dollars and 2) hiding entrepreneurial income from all the entrepreneurial girl friends, wives, partners, and sundry business associates.  Any actual accounting was ancillary, if done at all.

         Anyway, getting back on point, the first thing every successful businessman/businesswoman in that community did upon finding their success was … buy the place of business.  The facility.  It simply had to be self-owned.  Second thing was picking up that waterfront home on the Intracoastal.  With dock, of course, for the next big purchase.

         Subscribers, this means that the remaining pool of properties in that entire area excluded the real estate of successful business owners, or, put a less polite way, represented, by and large, the aggregate property of every loser in town.  Be it retail space, the riskiest small industry in America (see Wal-Mart, community impact on), hotel properties (see recession, occupancy rates during), or whatever, the kind of real estate we’re talking about when we’re talking about REIT real estate always at least starts out as suspect…. until proven otherwise.

         In some metropolitan locations, the best commercial sites are located in great big buildings, and healthy businesses do sign on there, but even then, big time real estate operators are notoriously overleveraged, and in the worst of economic times that will sink the ship anyway.  Nobody but nobody should be holding managed real estate in dire times.  Why investors have come to give REIT’s a bye on that one is beyond comprehension.

         Lastly, consider all the reasons why occupants would want to, or have to, rent instead of own, and the list gets awfully depressing awfully fast - from an investor’s point of view, that is.

         The speculator, however, sees opportunity galore, which is the whole dang point here.

         We’ve been struggling for weeks now to try and explain why real estate investment trusts deserve the drubbing they’ve been taking lately.  As financials, their yields are interest-sensitive, as are their profit margins, but the nub of it is this: in an economic downturn, the weakest elements of our economy get hurt the worst, and the Crime Families can make a bundle scaring small investors into concluding that their own REIT must be renting to the weakest of the weak – simply from the licking gangland psychopaths have been giving its stock in the market.

         In any case, that’s why the racketeers crush these targets at the first hint of a business downturn, and every capo on Wall Street gangbangs the quotes to oblivion, or as near as they can get.

         You won’t hear this when your customer’s man is selling you REIT stock, but it’s certainly on every consigliere’s mind when that consigliere gets all the customer’s men in the place setting clients up to take that inevitable crippling fall.

         KO, JNJ, and PG are gilt-edge consumer non-durable blue chips.  By comparison – if you could even make a comparison - that REIT of yours is probably a worthless pile of calamari.

         Note:  In the early hedge fund days, we remember a rush to hold property in and around the District of Columbia as well as wealthy enclaves elsewhere in the country, both considered recession-immune.  Too, the case why medical real estate falls into the same category is similarly persuasive.  We’ve always bought the reasoning behind these approaches, and consider it possible that the best of those kinds of REIT’s could be considered investment grade, but our opinion never seems to curtail their gangbanging all that much.