Public REITs took a beating this week, which got me thinking. Analysts are still claiming that REITs are undervalued...but their value reflected in their stock price continues to fall. It seems like the trend for REITs is that the weak performers get privatized (Crescent) and strong ones remain strong. However, one of the stronger performing apartment REITs, Archstone-Smith Trust, announced last week that they are considering an offer to be purchased by Tishman Speyer Properties and Lehman Brothers, throwing a wrinkle into the "only the strong survive" mentality.
Quick refresher: A REIT is a company that invests in all sorts of properties, usually within a certain sector. For example, sectors can be commercial properties, residential properties, hotels, etc. Sort of like a mutual fund for real estate. Public REITs sell shares in the open market, like the New York Stock Exchange (NYSE). One of the advantages of a REIT is that its earnings are not taxed as long as the REIT distributes those earnings to its shareholders every year.
So are REITs undervalued? Why are they experiencing sharp declines in their stock price? Those are good questions with many different answers, depending on who you listen to. I am still developing my theories but if you have one of your own, please comment.
I still think there is room right now for an all green REIT, a REIT that invests only in LEED-certified properties! LEED properties are grabbing the attention of potential tenants, especially in the commercial property market. Buildings are more efficient, operating costs are lower, employee satisfaction is up, architecture is cutting-edge, communities want them, skylines benefit from them, local governments want well-designed and well-publicized structures...which all lead to tenant interest, demand, and ultimately occupancy. Healthy balance sheets containing appreciated assets occurs over time as a result of building a real estate portfolio with strong properties that have low vacancy rates, low operating costs (relative to built to code buildings), strong management teams and great designs. I will keep noodling the Green REIT idea...
General Growth Properties Inc.
SL Green Realty
Liberty Property Trust