'REITs HAVE BEEN SUCH WOEFUL UNDERPERFORMERS THIS YEAR'
Mike Kirby is a co-founder of Green Street Advisors, which is an independent research organization based in Newport Beach, Calif. It specializes in real estate investment trusts (REITs). Founded in 1985, Green Street Advisors has 11 analysts who serve a customer base of more than 200 institutional investors.
ON THE APPEAL OF REITs
"REITs have been such woeful underperformers this year that any [investors] with any contrarian blood in them at all have to think they might be interesting."
STRATEGIES TO PURSUE
"More than ever, real estate investing is a stock-picking game. REITs that just buy properties without a plan in mind for adding value to them are pursuing a strategy that doesn't make sense in a fully priced real estate market awash with capital. Growth for the sake of gaining efficiencies can make sense if you have top-notch management able to take advantage of efficiencies. Sam Zell's Equity Office Properties Trust (EOP) and Equity Residential Properties Trust (EQR) are the best examples of that. REITs with plans for developing properties make a lot of sense. In many property sectors, we don't have supply at quite the level needed."
FAVORED STOCKS
"Bay Apartment Communities (BYA)
and Security Capital Pacific Trust (PTR)
both have terrific development stories in California. A development story in the office sector is CarrAmerica Realty Corp. (CRE). In the retail sector, Taubman Centers (TCO)
is very aggressive and has a very healthy development pipeline queued up."
ON REIT UNDERPERFORMANCE
"Concerns about possible legislation impacting the REIT industry hve put something of a cloud over the sector. There's an increasing perception that we're overbuilding in some markets, which has some merit but doesn't tell the whole story of why REITs are underperforming so badly.
"A lot of quirky technical factors, such as the debut of REIT unit investment trusts (UITs), have taken away from the demand side for REIT stock. An awful lot of new capital flowing into the REIT industry this year has been in the form of UITs, which buy stock directly from REITs in the form of new issuance, rather than adding demand by buying it on the floor of an exchange. There have been about $3 billion in REIT UITs done so far this year, and that eats up a lot of demand for REIT stock. Last year, that $3 billion would have been traded on the floor of an exchange. "
ON REIT UNIT INVESTMENT TRUSTS
"Unit investment trusts take discipline out of the market. A lot of the UITs done to date have been done by investment banks, who pick to include in the UIT the REITs that are their investment banking customers on the corporate finance side of their business. Investors have to ask whether that's how they want their money allocated. Recently, a Cohen & Steers UIT got around that problem by having Merrill Lynch raise $1 billion and having Cohen & Steers place the money.
"The nice thing about UITs is that the investor doesn't pay a load. The REITs issue stock at a discount, and brokers get paid out of that discount. Suddenly, REIT UITs are the flavor of the day, and you could argue that we've had too many of them, too fast. There's nothing inherently wrong with the idea."
ON POSSIBLE LEGISLATION
"The National Association of Real Estate Investment Trusts is negotiating with, and educating, Congress, about REITs. I expect a two- to three-year process before any real legislation passes. Regulatory issues do exist, but I'd put my money on the bet that the industry as a whole will not see anything detrimental happen. The small subset of the market that has 'paired share' REITs, however, will."
Return to main story
| 
