Tuesday, April 8, 2008

Bottom Fishing in Commercial REIT ...

... is NOT what a rational investor would do at current prices.

Believe me now or later, it's up to you.

Kilroy (KRC) is a San Diego office building operator, reporting April 22.
General Growth (GGP) and Simon (SPG) will report on April 29.
Kimco runs strip malls, and will report May 1.

What do you think the trend is in the past 2 quarters?

1. Cash flow is DOWN.

2. Non-rental income (also known as "Tenant Recoveries") is UP in 2-3x the percentage of RENT - getting more money from charging extra to fix A/C and leaking dumpsters.

3. Local economy isn't exactly booming. Layoff is mounting in technology and already materializing in a big way in the financial / mortgage industry.

The key is to pick one operator that is most geographically concentrated, preferrably in CA, with prices north of 15x cash flow from operation (FFO).

What's a FAIR VALUE given you can choose to invest in "money good", big support AAA subprime fixed Jumbo or fixed Alt-A at 9%-12% yield as of early April? Those has the income power and none of the cashflow volatility the REITs have?

You got it : 8 - 11 x P/FFO, which implies a deflationary tendency here by 20-40% depending where the individual stock is priced by the time YOU are looking at them.

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