Tag - Reit

• TIMBER!
• Money Does Grow On Trees
• What to buy

Whether you paid your taxes early, or you’re still tearing your hair out looking for that one last receipt, there’s something aggravating about April 15^th.

To take your mind off things, I’ve dug up some information on a special kind of tax-free investment: real estate investment trusts, or REITs.

REITs are special companies that pay ZERO corporate taxes as long as they pay out over 90% of their profits to shareholders in the form of dividends. Obviously, you have to pay tax on the dividends – but as a shareholder, that’s the only tax you’ll pay. Non-REIT shareholders get dinged twice: once as an owner (corporate tax) and again as a shareholder (capital gains and dividend taxes).

Okay, I know what you’re thinking: what does a REIT have to do with commodities?

I understand the confusion: many REITs are suffering terribly from collapsing commercial real estate values. Some REITs are nothing more than large-scale landlords for other businesses, so they depend on rents and are responsible for upkeep.

I’d never want to own one of those REITs. But I’m excited about owning another kind: Timber REITs.

These companies are attractive for many reasons. The first and most obvious is the dividend. That’s something you get with any REIT. But there’s further upside for timber companies in general.

Unlike property management REITs that own buildings and are responsible for upkeep, timberland is actually an appreciating asset. They can cut down trees and sell them for cash, or they can leave the trees in the ground to grow in size and value.

On average, timberland increases 6% every year with regular old sun and rain. That’s the kind of safe, non-speculative growth you can count on.

And I expect with lumber selling for higher prices than in previous years that timber REITs will be glad to cut down some trees. We had five years of a bearish market in lumber. Like many things, lumber hit rock bottom back in March of 2009. Now prices are on the upswing.

This chart shows the price in dollars of 1000 board-feet of lumber.

You can see the big drop off in lumber prices back in 2005. That’s when housing construction really started to slow. Most people think that the sub-prime mortgage mess killed housing, but the slow-down actually started back at the end of 2005. In mid-2006, Money magazine ran a story with the headline “Housing Starts Slow: Starts of new homes, building permits both post sharp drops below expectations in latest sign of real estate slowdown.”

There’s still not a lot of bullish news in terms of new housing construction. January jobs data revealed that 40,000 construction jobs got cut. Of course, there is a lot of seasonality in construction and January isn’t a busy month.

But any positive news in construction will be bullish. The thing is: there’s not that many construction jobs left to lose. Many of the 40,000 construction jobs lost were seasonal. It’s tough to build in much of the US in the middle of winter.

When those jobs “come back” this spring and summer, I’ll look for lumber prices to get a further boost. Recent earthquakes in China, Taiwan, Chile and Haiti will buoy prices as well as more lumber will be required to rebuild. And then I expect higher prices will carry through the autumn as hurricane season continues to bolster demand.

The good news is that there are only really two of these companies that look like a buy right now:

Potlatch Corp. (NYSE: PCH) and Plum Creek Timber Co. (NYSE: PCL). Both are American companies, sitting on American timberland. Both should benefit from higher lumber prices – but can literally “grow” in value if prices get too low.

Potlatch pays a 5.4% dividend but they look a little more volatile, and Plum Creek pays a 4.1% dividend and looks to be the safer bet.

If you want to add some exposure to lumber, and collect a modest dividend, look for opportunities to build a position slowly in both companies in dips over the next few months.

Good investing,

Kevin McElroy

Editor

Resource Prospector

The stock market rally that started on February 5^th, 2010 appears to be absolutely unstoppable. Bullet-proof. However you want to say it, there seems to be very little downside to stock prices, even after a strong rally.   

Now, we are not surprised. I’ve been relentlessly bullish here in Daily Profit. Sure, I may point out some discrepancies once in a while, maybe even shoot a few holes in the financial media’s neat and tidy explanations, but I’ve had us focused on upside targets for a year now, and there’s one main reason: earnings.   

This time last year, it was brutally obvious that analysts were seriously underestimating the earnings potential for bank stocks, even after the government changed the accounting rules to encourage profitability.   

And in subsequent months, analysts continued to lowball earnings estimates. Companies kept beating them, and the market kept rallying.     

How did we know estimates were too low? Well, partly because stocks kept rallying. It was one if the worst-kept secrets in history.

Of course, common sense tells us that, eventually, analysts will get estimates right, or <gasp> overshoot. How will we know when that time is at hand? Ironically enough, hiring will need to pick up.  

Corporate expenses were trimmed to the bone during the financial crisis and recession. And since payroll additions have only recently started to be noticeable, that means corporations haven’t noticeably adjusted their cost structure for the single biggest expense they face – workers.   

So until we see some true, meaningful gains in employment, stocks will move higher.   

Or, the Fed could start raising interest rates. That would sure give us some quick downside for stock prices.   

But getting back to earnings, Barron’s ran an interesting earnings table this weekend showing earnings growth by sector, based on analyst estimates. 

Three sectors are expected to show triple-digit earnings growth in the 1^st Quarter. Those sectors are Consumer Discretionary (115%), Financials (194%) and Basic Materials (179%).   

Now, we must remember that the 1^st Quarter last year was absolutely dismal. Poor earnings helped drive the S&P 500 to 20 year lows. Last year at this time the S&P 500 was trading with a P/E of 32, and it was below 850.   

Today, it has a P/E of 23, but the forward P/E based on estimates is a reasonable 15. 

Things get interesting if analysts have once again lowballed 1^st Quarter earnings. And judging by the stock market action, investors seem to believe another quarter of beaten expectations is in the works.   

The minutes from the last FOMC meeting were released yesterday. Aside from re-committing to low rates for an extended period of time, there wasn’t much worthy of comment, so I’m just going to re-print the headline from Bloomberg: “Fed Officials Saw Recovery Curbed by Unemployment”.   

You don’t say, Ben.   

I started following the commercial real estate sector last September when I noticed breakout moves from Maguire Properties (NYSE:MPG) and a few others.  

Daily Profit readers have had a couple opportunities to make nice gains from Maguire. In fact, it looks like it has started another move yesterday when the former CEO and founder offered to buy a few buildings from Maguire.   

Maguire’s not the only one running. And April 16 may mark a launching point for commercial real estate stocks.   

That’s the day shopping mall REIT General Growth Properties (NYSE:GGP) is expected to present its plan to exit bankruptcy as a stand alone company, thereby rebuffing the buyout offer from rival Simon Property Group (NYSE:SGP).   

Now, many people think Simon will make a better offer between now and the 16^th. And if so, we may see a bidding war for a bankrupt REIT break out. On one side will be Simon, and on the other will be a group of hedge funds that has backing from the Chinese Investment Corp (CIC).   

The presence of the CIC is significant for a few reasons, but none are as important for our purposes than the fact that it has $300 billion to invest and it’s looking at U.S. commercial real estate. That much investment capital could certainly re-price a lot of impaired assets.   

To learn more about the CIC’s involvement in commercial real estate, click HERE. 

Anworth Mortgage Asset Corp. (NYSE: ANH) shares plunged after investment bank Keefe Bruyette & Woods downgraded the Santa Monica, Calif.-based real estate investment trust to “market perform” from “outperform.” Keefe said the downgrade reflects concerns that Anworth will be forced to carry excess capital due to market uncertainty, which will hurt its growth potential.

In a note to investors, Keefe Bruyette said that widening spreads on agency mortgage-backed securities has made book values come down in 2008. In January, Anworth announced a plan to raise $90 million through a common stock offering of 11 million shares.

In afternoon trading, ANH shares are plummeting 25.2%, or $2.23, at $6.62. Over the last 52 weeks, shares have ranged from $3.05 to $10.29.

U-Store-It Trust (NYSE: YSI) CEO Dean Jernigan said the real estate investment trust, which owns self-storage facilities, might benefit from the housing market turmoil. Jernigan made the statements during a morning conference call.

“Along with marriage and divorce, I’m ready to add home foreclosures as an additional life-changing event that brings us business,” Jernigan said.

The chief executive said he noticed growth in rental rates in markets with high foreclosure rates, such as Detroit and Las Vegas.

I’m not ready to say there’s a positive correlation yet, because I don’t think we have enough time under observation and I think we will do a study at the appropriate time to look back and see if we can make a positive correlation,” Jernigan said. “I think it’s quite possible.”

For 2008, the firm expects a loss in the range of $0.12 to $0.10 per share. The company expects funds from operations, the most common measure of real estate investment trust operating performance, of $0.31 per share.

“We are affirming the full-year 2008 guidance and the underlying assumptions we introduced in the December release,” CFO Christopher Marr said.

U-Store-It’s January and February rental activity has met expectations, Marr said.

After Thursday’s closing, U-Store-It reported a fourth-quarter loss of $5.9 million, or $0.10 per share, compared with a loss of $5.7 million, or $0.10 per share, a year earlier. Analysts expected a loss of $0.10 per share.

Quarterly revenue rose 13% to $56.2 million, from $49.9 million during the year-ago period. Wall Street analysts predicted $56.97 million in revenue.

“Without a doubt, Q4 was a wonderfully positive quarter for us on all fronts. Yet, I can’t help but to say, don’t doubt that we recognize that we remain actively engaged in the turnaround process,” Marr said. “We have work to do in 2008 to grow occupancy, control expenses and shore up our balance sheet.”

The firm expects to open 60 new locations during 2008, to bring the total location count to 389, Marr said.

In midday trading, YSI shares are up 4.64%, or $0.45, at $10.15. Over the last 52 weeks, shares have ranged from $7.56 to $21.69.

American Campus Communities, Inc. (NYSE: ACC) shares are increasing moderately after the real estate investment trust announced it is buying the student housing business of GMH Communities Trust (NYSE: GCT) for about $1.4 billion. The deal includes outstanding debt of approximately $963 million.

American Campus’s board approved the agreement and the transaction is projected to close at the end of the second quarter. American Campus said in a statement that the deal includes the acquisition of 64 student housing properties as well as a minority interest in eight properties held in two existing joint ventures.

In morning trading, ACC shares are up 0.6%, or $0.16, at $26.61. Over the last 52 weeks, shares have ranged from $23.18 to $31.68.