Going Against The Grain With Commercial Property

Commercial property investments have managed to weather the worst of the financial beating, despite widespread misgivings over the industry’s health heading into the future. The outlook for real …

Commercial property investments have managed to weather the worst of the financial beating, despite widespread misgivings over the industry’s health heading into the future. The outlook for real estate investment trusts is optimistic, given their inherent stability and renewed purchasing power. See the following article from Money Morning for more on this.

Of all the independent institutional research that I receive, some of my favorite comes from Justin Mamis, a veteran of all the financial wars we’ve seen over the past five decades.

Although he’s steadfastly bearish, no matter the climate – like those codgers you see wearing heavy coats on sunny days in Florida – the Canadian analyst has lasted so long because he’s quick with colorful phrases, and his research is amusing and insightful.

Just last week, Mamis recounted a conversation he had enjoyed years ago at the table of his new boss, the legendary analyst/historian/portfolio manager Don Coxe: “At dinner, [Coxe] would lean back in his chair in that professorial manner of his and “remind” the guests that the Sanhedrin, the Hebrew Court of Law, had a rule that if every member voted the same way, the decision went the other way,” Mamis wrote. “Unanimity had to be misguided.”

That story got me thinking: What is one investment theme that the public and/or pros could agree on today?

It’s a totally subjective question, meaning everyone will have a different answer. But I figured that would be a great “thought exercise” and came up with three statements I’ll bet virtually everyone would agree with. They are:

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  • U.S. healthcare reform will fail.
  • The U.S. budget is out of control.
  • China will dominate this century.
  • Commercial real estate is still a disaster waiting to happen worldwide.

The odd thing about that last statement is that – across the board – commercial real estate stocks have been among the strongest performers over the past few months. But it’s been a very quiet move, generating little in the way of attention.

Coming off a hellacious decline, these stocks are now enjoying solid uptrends. Although not quite as cheap as they were a year ago, these stocks are still well off their highs, and feature still-low valuations. Add in their expected income streams and it’s understandable why these stocks are still the “go-to” choices for a lot of fund managers.

These stocks make a lot of sense. Unlike manufacturers who are dependent on hit products and flaky vendors, most real estate owners have long-term contractual obligations that have offered surprising stability in this tough economy. For instance, take SL Green Realty Corp (NYSE: SLG), the largest owner of office real estate in New York.

As you may have heard, that’s a city where a lot of too-big-to-fail financial companies reside.

Since real estate is such a capital-intensive industry, it is battered during the sort of capital famine seen last year. But the credit bull market is enabling companies with good collateral to refinance their debts, a transformation that’s helped real estate investment trusts (REITs) to raise more than $17 billion since the start of 2009. The REITs have used this infusion to shore up their balance sheets and to acquire properties from less-adroit owners. As part of its recent earnings reports, SL Green has reported that the government’s direct aid to banks has directly it to maintain a high occupancy rate and steady rents.

I talked about this a lot in the summer, and will stick to my guns: There’s no reason that REITs like SL Green can’t get back to their share-price levels of September 2008 at minimum over the next year or two. For SL Green that would require a return to an $85 share price – a 78% return from Wednesday’s closing price of $47.70.

The REITs are not yet back to paying the big dividends for which they used to be loved — which is why oil-and-gas master limited partnerships (MLPs) like our Linn Energy LLC (NASDAQ: LINE) have become so popular. But those REIT payouts will return.

I recognize it’s still tough out there for property owners: My office lease in downtown Seattle is up, and the owner offered me twice the space in a better building (with an awesome Puget Sound view) for nearly the same amount I’m paying now – if I agreed to take a longer contract. I’m taking them up on the offer, recognizing that’s the kind of deal-making going on now to get the real-estate industry through 2009-2010 rough patch.

But don’t get hung up on what’s happening now. Investors should be valuing REITs on their prospects for 2011-2012 prospects. For now the vote is that they’ll be much better.

We’ll discuss this more as the New Year advances. In the meantime, if you are a commercial property lessor, lesee, broker or developer, I welcome your thoughts.

This article has been republished from Money Morning. You can also view this article at
Money Morning, an investment news and analysis site.


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